“Other people and things can stop you temporarily. You are the only one who can do it permanently.” — Zig Ziglar
I'm going to provide the 30-second version of the 1986 tax reforms affecting commercial real estate and why they are important to you as an investor today. There is an instructive lesson looking back at history.
A lot has been said over the years about commercial real estate and income tax savings. Prior to 1986 many people would invest in all sorts of commercial real estate properties just because of the money they would save on taxes. The savings at that time were so accelerated that many high-income investors would literally get their down payments back in 1 – 2 years based on income tax savings.
…In steps the government…Out goes the perks, and in comes the Resolution Trust Corporation (RTC).
This change made thousands of properties go belly up because now the properties actually had to cash flow. What a concept! I say that tongue-in-cheek, of course because before that, it did not matter to many investors if they cash flowed. The tax savings and loan structures were so liberal that even a property that was losing money would ‘make' money because of the investor's tax situation.
After the tax law changes many people lost their shirts – and much, much more! The RTC was created to sell all of the repossessed properties back in the late 80's. There were so many repos that a separate corporation was needed to sell them all. Wow! This meant some investors got some great deals, pennies on the dollar which is another discussion for another time.
Much has changed, and arguably for the better. Now a property has to ‘naturally' cash flow. I say naturally because the cash flow is not dependent on tax savings, or government incentives.
The lesson in this 30-second overview of the 1986 tax changes is to invest in a property because it stands as a winner on its own. What I mean is that the Net Operating Income not only carries the property itself, but provides YOU, the investor, a healthy profit, as well. Do not, do not, do not use these types of tax savings in your property analysis.
Some may claim that you should include tax savings into your investment analysis, but be sure that you do not fall for this. Always remember that tax savings is simply a side benefit and NOT the sole reason to buy an investment property. If an owner or another investor is touting tax savings over and over again it probably means that it DOES NOT cash flow that well – if at all.