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Archive for the ‘General Opinion’ Category
I´ve never been a big fan of using everyday expressions and phrases to describe selling property.
I´ll admit they can be handy tools for getting an affirmative nod from the person listening to you, but I always end up feeling that the salesperson is talking on automatic.
The ones I hear most at exhibitions and conferences include terms like: “you get what you pay for”, “it´s a buyer’s market”, “the clock is ticking” & “it´s a no brainer”.
However I think one of the most used and abused terms of all over the past few years (and I´ve been guilty of using it myself), is the ubiquitous “cash is king”.
How about it folks - any other real estate professionals out there who´ll join me in a pledge to cut down on these outdated buzzwords?
Regards
Colin
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There is quite a lot you can predict about how a market will move, especially if prices are bottoming out.
A high net rental yield, free of gimmicks, is one of the simplest and easiest ways to establish if a property is over or underpriced.
During equilibrium, you can expect a 3-5% yield, depending on the area. During a bubble, yields are very low (1-3%) mostly because speculation causes prices rise faster than rents. When a market bottoms out and rent rates increase before house prices do, you can get 7% and above.
A you can see from the summary underneath, we still have 5 units in Siesta Lago (Orlando) on sale below construction cost and yielding over 8% net of all overheads. This availability is as of 10th March 2011.
The ratio of renters to house prices is another indicator of a balanced market. Over the long term the average should be 100 and if a market is oversupplied, the ratio will be very high.
For example, the two biggest property bubbles, in Spain & Ireland, had ratios of 160-180 in 2006-2007, which was ludicrously high. Of the four best known property crashes (US, Spain, Ireland and Britain) only the USA is back to its long term average of 100.
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Before the recession, only pension funds and other institutional investors tended to purchase large amounts (i.e. billions of dollars) of property without financing. Now, probably for the first time ever, regular people with $50,000+ in savings are doing it too.
The great benefit of buying a cash positive property with your own money is that you will be insulated against rising mortgage interest rates as well as inflation.
I have written many blogs, newsletters and press releases illustrating how local markets like Orlando have bottomed out. The availability of high rental returns (8%) and high quality properties below construction cost represents a unique opportunity to hedge against inflation and protect you and your family’s wealth.
Our role is to find the properties that match these criteria. If you´d like to learn more, please browse through our website, send us an email or give us a call.
Regards
Colin
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Controlling inflation is going to be a nightmare for governments and central banks over the next 5 years, especially if it happens when interest rates are still low.
Inflation can be a bit like a drunken visitor - once you let them into your house it´s very hard to get rid of them. If you´ll forgive the extension of a crude pun, the drunks will be banging on a lot of doors soon.
China, India and Brazil are already battling with inflation as is Britain. The jury is still out on the USA in the short term, but I think higher inflation is inevitable. You´ll find all manner of predictions (from wildly optimistic to doomsday) on the internet regarding the course of US inflation once the Fed Reserve starts to unwind it´s gargantuan quantitative easing program.
Inflation: Winners and losers On the one hand, high inflation can cause a lot of damage to people holding (non commodity) stocks, government bonds, variable rate mortgages, bank deposits and unprotected pensions. A huge amount of people fall into his category.
On the other hand, you don´t need to be Paul Volcker (famous US central banker who tamed inflation in the 80s) to know that the higher the rate of inflation, the more expensive everything will become. That includes property prices and rental rates.
To clarify - if inflation is high, the value of your property will increase and the rent tenants pay to their landlords will increase. Looking at figures for the last 40 years (i.e. not just the recent boom), property prices have consistently outpaced the rate of inflation. |
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(Note: NCREIF is an index of properties owned by pension funds & NAREIT is an index of publicly traded real estate investment trusts)
Regards
Colin |
“The price of copper has increased by 50% in the last 9 months“ probably isn´t something you´re likely to hear in your local pub on a Friday night.
You would if you were stuck with a nerd like me, but as far as investments are concerned, people are much more likely to be talking about the price the house around the corner was sold for and the estimated loss/profit that the seller made.
Property is unique in many respects, and the fact that people gossip about it more than any other investment is just one of them. It is also unusual in that prices are set by local transactions - one absurd bid on a house can push up the value of every other property on the same street.
Culture also has a major influence (Germans like renting, Americans like owning), as do property taxes (very high in Spain, reasonably low in Britain). The lax property laws and politics of Ireland´s outgoing government made a hefty contribution to the recent boom (and was a major reason the incumbent Fianna Fail party were hammered in recent elections).
Less obvious factors like demography (a steadily increasing population has always underpinned US housing investment from institutional buyers) and geography (limited space in Hong Kong, lots of space in Phoenix) can also have dramatic impacts over time.
You can push, but you can´t direct it (Bono)
Efforts to control the property market can often have unintended side effects. Spanish first time buyers have always had to deal with very strict mortgage lending laws, and yet the same banks that were required to ask for 25% deposits were given free rein to finance rampant speculation on behalf of developers. On the other hand, German banks who couldn´t lend to local developers invested in subprime mortgage bonds in America instead.
Go figure.
Regards
Colin
During the boom times, I used to attend 15-20 property exhibitions per year. I can´t remember anybody at these shows advocating a buy and hold strategy. It was all about buying offplan and then selling for a big profit shortly after completion. Many a taxi driver, publican and dinner party host could be heard advocating a “buy now before prices go even higher” approach.
In hindsight, that turned out to be a pretty risky way to try and make some money. It was also miles away from the traditional methods advocated by old hands.
Somewhat ironically, it is easier to make money purchasing real estate now even though many might instinctually prefer to wait until the opportunity has passed.
While I´m convinced that making a profit by buying real estate is both easier and safer than it was 5 years ago, it doesn´t happen quickly and it certainly doesn´t involve borrowing lots of money.
There´s no great secret here, the strategy couldn´t be simpler. Here goes: buy a highly discounted property with cash (no interest rate risk), in an established location, earn a nice income, treat your tenants well, and hold onto it for as long as you can. Consider selling only when the statistics and your gut tell you the market is showing signs of another property bubble.
I´ll be the first to admit that this isn´t a particularly exciting plan, but you know what? It works. Very well. Just look at the table below. All I´ve done is illustrate the net income that can be earned from any half decent three bed condo in Florida.
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Purchase Price 2011 |
$100,000 |
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Annual Net income (increases by 3% per year) |
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Year 1 |
$8,000 |
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Years 2-5 |
$34,473 |
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Years 6-10 |
$49,237 |
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Years 11-15 |
$57,080 |
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Total net income |
$148,790 |
Apart from earning 150% of your purchase price, you still own a property outright with no mortgage that you bought for 35 cents on the dollar.
Before any of you young guns reading this dismiss such as strategy as unsuitable, consider what the great American economist Paul Samuelson said, “investing should be more like watching paint dry or watching grass grow. If you want excitement, take $8,000 and go to Las Vegas“.
Let the numbers tell you when to buy and let the numbers tell you when to sell. I know a large bulk of our readers do this instinctually. A high rental yield with no gimmicks is one of the surest signs that a property is well priced.
The opposite is also true - a low rental yield probably means it´s overpriced. If it´s a combination of low rental yields and high capital appreciation - watch out, because you´re probably in the middle of a property bubble.
How do we know when the supply / demand balance is in our favour?
Taking Orlando as an example (because that´s where my company is most active), I think it is reasonable to assume that a good time to buy is when a supply glut has moved towards balance and the local house prices don´t reflect that yet.
Guess what? It´s happening now. According official figures from the Orlando Regional Realtors Association, the supply of available properties is now at a 5 year low. Unlike 2007, 2008 and 2009, average sales prices actually went up in 2010 across Orlando. I wrote a blog about this recently.
It´s a perfect storm (but the forecast says it´ll brighten up soon)
I´ve never seen conditions more perfect for buying real estate in the US. In the areas we sell - prices are reduced by 65-70% compared to what they were 4 years ago - way below construction cost. Supply was extremely high, but it is reducing fast.
Recent figures from the Census Bureau and The Economist (see graph opposite) confirm that homeownership rates have decreased from 70% in 2004 to 66.5% today - that means more renters. In fact, there are more renters now there has been for almost 6 years. When the number of renters is increasing faster than the supply of properties, rents should increase.
According to a Marcus & Millichap report (they´re one of the largest brokerages in the USA), exactly that has happened. The shift from homeownership to leasing should boost the local market’s average apartment asking rent to $864 by year’s end, a 2.2 percent increase. In the best middle class neighbourhoods it will increase by considerably more.
What are you thoughts on the Buy and Hold strategy?
Regards
Colin
I´m a curious person by nature and have always been fascinated by how public opinion changes with the times.
Investors and high flying property developers used to be respected and admired.
Getting a letter from the bank saying insufficient funds used to mean you´d no money left. Now it´s just as likely to mean they´ve no money left.
Politicians who you wouldn´t trust to run a bar in central Dublin suddenly lined up outside radio & tv studios to tell us about bondholder priorities, liquidity ratios and capital injections.
Like many of our readers, my attitudes to the people mentioned above have changed considerably over the past 3 years.
My attitude to property investment hasn´t really changed at all however, and while that might mean I´m in a minority, experience with clients and newsletter readers has convinced me that it is a sizable minority.
Before the recession, I didn´t like the idea of buying property when prices were rising at 20%+ per annum. I was never a fan of buying offplan because I always worried that they wouldn´t get built. I never flipped a property. Never agreed with 100% mortgages. As I don´t take holidays very often, the idea of buying a vacation home and renting it out when I wasn´t using it had little appeal.
During the recession, I thought buying property was a great idea and said so to anyone who would listen. Myself and my business partners identified a profitable market niche at a time when many agents and investors were running for the hills.
We´ve promoted a fairly wide variety of real estate deals in Florida over the past 3 years and I think it´s reasonably fair to say that we´re better than most at sniffing out a bargain. Siesta Lago is one example, Sabal Point is another. If you click on those links and complete the enquiry form, an information pack on each will be sent to you automatically within 10 minutes.
How has your attitude to investing changed over the past few years? I´d love to hear from you.
Regards
Colin
I´ve had a few clients ask me recently for my views on whether now is a good time to start looking for property bargains in the French or Spanish markets. Below you´ll find a summary of my answers to them.
France
Unfortunately my knowledge regarding the French market is very limited. I can tell you that they didn´t have a large property boom like Spain did and they certainly don´t have an overbuilt coastline. France has always been a stable market – and prices increased quite gradually during the boom times as most buyers were purchasing holiday homes for personal use rather than pure investment.
France is quite a segmented market – you have the big cities, the ski destinations, the famous coastal towns/beaches and the quiet villages. Financing has always been available for foreigners at reasonable rates. Prices have probably fallen 10-20% from peak, depending on the area, and are likely to hold reasonably steady over the next 5-7 years.
While it´s a very safe and stable market, it is outside our area of expertise and I can´t see Torcana ever getting involved in it directly. www.french-property.com is one of the bigger portals and would be a useful starting point for your research.
Spain
I am quite familiar with the Spanish market as I live in Madrid, I keep a close eye how the market is changing and I spent several years targeting Spanish property agents and developers in the early 2000s when I worked for a big property magazine and exhibition company.
My advice here is quite simple – hold off for a few years as I think prices have a long way to fall. I´ve said as much to my own parents who were considering a purchase.
Firstly, rental yields are nonexistent at the moment, especially on the eastern and southern coasts. Secondly, very high closing costs mean that a 10% price increase is necessary just to break even. Thirdly, I can´t see an average coastal property purchased in 2011 being sold at a profit for 6 years and possibly longer.
Just consider Japan - property is cheaper now than it was in the early 1990s. My view is that to buy now instead of a few years time effectively means overpaying by 10s of thousands of euros.
The Spanish property market is due a massive heart attack quite soon, but nobody knows exactly when. While we all wait for it, my advice is to simply spend some time renting luxurious properties in all the hotspots until you find somewhere that feels like home.
Among many other things, Spain still has a great climate, great infrastructure, world class culture, cuisine and history, so there´s plenty to enjoy. I wrote a detailed article on the Spanish market in November, which you can read here:
http://archive.constantcontact.com/fs035/1102520706095/archive/1103980746634.html
Hope this helps. All comments welcome.
Regards
Colin
That´s it from me for this year folks - many many thanks for all your support during the year.
Wherever you are, and on behalf of all the Torcana team, I hope you have a very Merry Christmas and a successful New Year.
I´ll leave you with a few useful Christmas quotes for those awkward moments when you´ve ran out of things to say.
The Supreme Court has ruled that they cannot have a nativity scene in Washington, D.C. This wasn”t for any religious reasons. They couldn”t find three wise men and a virgin. Jay Leno
Larry Wilde
Warm Regards
Colin
Let´s get the bad news out of the way first. The views I expressed on Ireland and Spain in the Xmas newsletter in December 2009 have not changed one iota. Both are high risk - low return investment destinations and I can´t see that changing in the near term (it will eventually). I also wrote a detailed overview of the Spanish market last month which you can view here.
Brazil will get a lot of attention next year from property investors. Most of the overseas interest will be in the (relatively) high end coastal properties and holiday resorts dotted along the north eastern coast. I´ve absolutely no interest in that though.
However, the second round of a huge social mortgage program (MCMV2 if you want to google it) is quite interesting. Millions of middle income Brazilians are purchasing homes for the first time with government backed mortgages, and there are a several ways international investors can get involved. It wouldn´t be for the faint hearted and it´s still early days as far as my research is concerned. I might have something in 3-4 months though.
Renewable Energy investments will continue to increase in importance in 2011. I´ve been on a steep learning curve with them this year as they are deceptively complex products that come in a very wide variety of structures. I think solar is best suited to regular €50,000 - €150,000 investors and we´re looking forward to promoting these in the new year.
Wind, hyrdro and biomass are more suitable for high net worth individuals. The low entry level (€20,000) forestry products such as teak, bamboo and agarwood strike me as a fad. I´ve looked into about half a dozen of them, some promoted by companies I respect, and I just don´t like the concept. My gut tells me to stay away.
Warm Regards
Colin
When the financial crisis first hit in 2008, the economic and political collaboration between Europe & America was unprecedented. That isn´t happening anymore.
Europe´s citizens (UK included) are now enduring massive spending cuts while the USA is still stimulating its economy.
Or, to put it another way, Europe has checked itself into rehab while the USA wants to inject steroids a little while longer.
Why?
Setting aside the theoretical pro´s and con´s, a big part of the reason is that the US Dollar is the world´s reserve currency and the USA is the only country that can print it. A very large portion of global imports and exports, including crucial commodities like oil, are all based in dollars.
On the one hand, that makes quantitative easing a lot easier, but on the other, countries that hold US dollars (particularly major oil exporters and China) are not too happy about how those actions are diluting their existing reserves.
In the short term however, these tax breaks and stimulus packages should ensure the US Economy has a healthy 2011. It might even continue to be fine in the medium term, but they´ll have to address the debt situation eventually, because it is clearly unsustainable.
Real long term recovery does not involve the US government pumping money into the economy for years on end - that is a once in a generation activity. It is far more important that the private sector figures out new ways to produce goods and services that US citizens and other countries want to consume.
Warm Regards
Colin
