Look before you buy! The pitfalls of buying property sight unseen
One time I bought real estate without even laying eyes on it. It was a small property. I ended up earning a decent return on my investment. I was lucky. I’ve> READ MORE
One time I bought real estate without even laying eyes on it. It was a small property. I ended up earning a decent return on my investment. I was lucky. I’ve> READ MORE
Cornelius Vanderbilt might have been the greatest capitalist in history. When Cornelius was just 16, in 1810, he borrowed US$100 from his mother. Using that money,> READ MORE
In my decades in finance and real estate, one thing I’ve learned is this: the core underlying principles of investing rarely change. You see,> READ MORE
One of the life lessons that has struck me time and again, is the importance of listening. The primary ways that information enters our brains is either through> READ MORE
Many people shy away from owning investment real estate. They worry about the hassle and risk. Tenants can sometimes be a pain in the neck. Or you can face periods> READ MORE
A few years ago, a group of us were having lunch during a ski trip to the French Alps. One of the guys leaned across the table and showed me some photos on his> READ MORE
Elon Musk, the man behind the Tesla electric car, is also involved in pioneering private ventures into space. Recently, his space exploration company has been> READ MORE
If you want to be successful in real estate investing, you absolutely must get one thing right. I have invested in all types of real estate over some 40 years: and> READ MORE
One time I bought real estate without even laying eyes on it. It was a small property. I ended up earning a decent return on my investment.
I was lucky. I’ve lost count of the number of friends and acquaintances of mine who’ve been badly burnt by buying real estate that looked good on paper – what was something else entirely in reality.
This happens a lot in Asia. Investors in this part of the world are ripe for the picking for developers in cities like London, New York, San Francisco, Vancouver, and Sydney. Asian buyers are cash rich, and love luxury new-build property.
Investors in Asia real estate – full stop. And many Asian real estate investors like to buy properties in countries that have lower political and legal risk than they experience at home.
Asian buyers are also used to closing a deal quickly. Hong Kong property investors will sign sales and purchase agreements within an hour or two of a viewing.
Often, they’ll sign there on the spot. I once bought four apartments on my American Express card in such a situation. Overseas developers and agencies love to tap into this trait.
Cities in Asia are constantly hosting agents and developers flogging shiny new properties “off plan”. The numbers of advertisements I see in the local press touting projects in London, Sydney or some other favoured destination says a lot about the conditions in that market.
Advertisements for London property are the most numerous. London is a valued “rule of law” country, and viewed by many Asians as the most important financial centre in the world. It is also known to be more tax and regulation friendly than the U.S. For decades it has been the preferred destination for people from all over Europe, the Middle East, Asia wanting to buy and hold some real estate as a hedge against conditions in their own countries.
Investors may have a general idea of the area they are buying into, but many don’t. They become victims of what can be a sophisticated sales exercise.
On paper, you can’t see the smoke belching factory just down the road, or the noisy freeway running past the end of the block, or the rail line rattling past the back window. Or that soon-to-be high rise next door that just received planning permission.
A number of people I know have recently been tempted into buying brand new properties off plan in a certain area of central London. This area is undergoing a regeneration, a rebirth that has been more than twenty-five years in the making, and which is getting off the ground now.
It sounds good. The only problem, though, is that the number of new apartments that will be hitting the market over the next three to five years is unprecedented for central London.
Oversupply is a certainty. And with it, prices and rentals are going to come under pressure.
Yes, it will be a successful regeneration – over the next generation or so. In the meantime, prices will fall… and, but only with time, recover.
My guess is that it will be a decade, maybe more, before the market for these properties reaches today’s levels.I say this having experienced a similar cycle in London myself.
The people who have asked me about investing in this area of London may have some knowledge of the city. But have not been and visited the area where they are looking at buying.
They are simply unaware of the massive amounts of building going on in the area, and the impact that this is likely to have on property values.
And of course, the developers and agents do not want to come forward with this kind of information.
Just think about it. Why is the developer peddling his new building off-plan to buyers located thousands of miles away? Simple. He doesn’t want you to visit the site – and he thinks overseas buyers will buy what his local buyers won’t!
Why else go to all the expense of advertising his London or New York property in Hong Kong, Singapore, or Beijing? He reckons that overseas buyers will pay a price that the domestic market won’t – because they’d check it out and know better.
This is particularly true of London, where thousands of new high-rise apartments are springing up and being sold all over Asia, the Middle East, Eastern Europe. Why? Well the simple fact is that London folks really do not like living in high-rise developments. It does not suit them. Maybe they’ll get used to it, but that would be a slow process.
In the meantime they prefer low-rise living, with greenery on the side.
Asians, on the other hand in fact prefer high-rise living. They like the feeling of security that living in a safe, well managed apartment block can bring. The “lock up and leave” aspect of high-rise housing also has attractions.
Judging by London property advertisements I see in the local media in Asia, I’m amazed at just how big “Prime Central London” has become!
Remember… if it looks too good to be true, it almost always is….
Cornelius Vanderbilt might have been the greatest capitalist in history.
When Cornelius was just 16, in 1810, he borrowed US$100 from his mother. Using that money, he went on to build a fortune of around US$100 million. That would be worth over US$200 billion today. And it was roughly equivalent to 50 percent of the holdings of the U.S. Treasury at the time.
This kind of wealth was unheard of back then. It made Vanderbilt one of America’s richest men.
But within just 50 years of Cornelius’s death, the Vanderbilt family fortune was completely gone…
Cornelius started his shipping business by buying a passenger boat, which he expanded into a small passenger fleet. Eventually, he moved into the steamboat business. And having made a small fortune in shipping by his 50s, he turned his attention to building a railroad empire, which was his focus until his death.
Cornelius had a natural talent for business… handling the money, the competition, the costs and revenues, the deals and the relationships with everyone from the top to bottom of the food chain. He was a fervent believer in the merits of free competition, laissez faire (that is, letting things take their own course without interfering) and that government should play a minimal role in commerce. The entire Vanderbilt corporate life was built and operated under these beliefs.
For example, when he got into shipping, the industry was dominated by companies that had been granted monopoly rights on certain routes. Cornelius took them on with ferocious competition – cutting costs, reducing fares to almost zero and building and deploying faster ships. Almost without fail he prevailed, driving numerous incumbents either out of business, or into his arms. His opponents simply could not keep up. He brought this same mind-set into railways.
After his death in 1877, Cornelius’ son William took over the portfolio. Rather incredibly, William doubled the value of the Vanderbilt fortune to US$200 million by the time he died in 1885.
Then the rot set in…
William’s family inherited the Vanderbilt fortune and proceeded to squander it. They lived a lifestyle that their grandfather would never have contemplated. They built grand houses in locations frequented by the rich and famous… including ten palatial houses in Manhattan. These were all playthings, vanity projects to satisfy egos.
Within 30 years of Cornelius’ death, no member of the Vanderbilt family was among the richest in the U.S. And within 50 years of his death, the fortune was completely gone.
When I look at this story, I have to conclude that while Cornelius might have been the greatest capitalist on the planet, he was not a great investor.
Yes, we can lay the blame for the demise of the family fortune on later generations. But Cornelius essentially laid the foundations for this decline by his own hand.
First, practically all of his wealth was tied up in railroad and shipping stocks. There was little diversification across other industries, or across companies. It worked for him personally because he was intimately involved in running and managing these companies. But later, these companies were run and controlled by someone else. And as we’ve shown you before, having all of your wealth in one or two industries can destroy your portfolio if disaster strikes.
And having an entire fortune tied up in shares that can be sold at the drop of a hat made it all too easy for his heirs to say “I want to build this grand house for myself — let’s sell some shares today”. I think this was a key part of the demise of the Vanderbilt fortune. I am convinced that having an entire wealth tied up in shares allows undisciplined owners to react to whims and short-term pressure. Having a mix of assets, that perhaps cannot be sold on the back of a phone call to a broker can guard against short-term temptations and whims. We’ve always stressed the importance of diversification and have written about how to make sure your eggs aren’t all in one basket, here.
The second major fault in the Vanderbilt portfolio was that it held very little in the way of hard assets. It did not include much land or real estate. And he owned zero investment properties, mines, or large farmlands.
Yes, Cornelius built a nice house for himself, and had some offices and some commercial space for his businesses. But he never invested in the most spectacular urban growth story of the century. He was running businesses in the financial heart of the country, a city that was growing by leaps and bounds… but he never bought land in New York City for development into commercial buildings. He loved dividends but didn’t see the cash flows that would come from investing in New York’s burgeoning real estate market.
Just think of what the family fortune might have looked like if Cornelius had parked 20 percent of his shipping and railway generated earnings over the years into land and buildings in what has become a pre-eminent global financial centre.
And an added bonus of real estate would have meant less liquidity. It’s easy to sell traded shares on a whim, but it’s a lot more difficult to dispose of an office tower. Lower liquidity might have prevented such a rapid demise of the Vanderbilt fortune, simply because it would have been more time-consuming and difficult to sell assets.
Vanderbilt wasn’t the only family dynasty spawned in the 19th century. Two other families I am familiar with built up massive fortunes during this time. And both of those dynasties are still thriving 150 years later. I’m talking about the Jardine family (which co-founded the Hong Kong-based conglomerate Jardine Matheson (Singapore Exchange; ticker: JM), and the Swire family (which founded the London-headquartered Swire Group (Hong Kong Exchange; ticker: 19) conglomerate).
Both of these family companies started out in concentrated businesses – but diversified into a range of different businesses. Jardine started out selling opium, cotton, tea and silk. Today, the company is involved in motor vehicles, property investment and development, food retailing, home furnishings and luxury hotels, just to name a few sectors. There are more.
Meanwhile, Swire started out in the textile trade. Today, it’s involved in property, aviation, beverages and food, marine services and trading and industrial industries.
Real estate also became a vital core business of both companies. Both invested in Hong Kong back when it was a proverbial backwater. Today, it’s the Asian equivalent of New York.
These families did the two things that the Vanderbilts did not. And today, many generations later, both of these families are still worth billions of dollars.
The two things to take away from this story are that diversification and a core of “hard assets” should be guiding principles for all of us – even if we will never come close to mimicking Vanderbilt’s wealth.
With a well-diversified portfolio that includes hard assets like real estate, you can survive just about any crisis… and grow your wealth for years to come.
In my decades in finance and real estate, one thing I’ve learned is this: the core underlying principles of investing rarely change.
You see, the fundamentals aren’t new. Technology, computing, speed of information dissemination and transparency… sure, these have all helped change the game.
But throughout the span of recorded human history, the same lessons are there in plain sight, again and again… they are timeless.
So if you want to learn to be a successful real estate investor, just look back at the greatest real estate deals of all time.
For example, consider the Louisiana Purchase…
The “Mighty” Mississippi River is born a mere trickle in Lake Itasca, some 1,500 feet above sea level in the northern U.S. state of Minnesota.
From there it meanders its way south, gathering volume as the increasing flow from tributaries swell it into the 15th largest river in the world (and fourth longest, at 2,320 miles).
The river creates some of the most fertile agricultural terrain in America, along with navigable rivers, forests, prairies and mineral riches.
These bounties led France throughout the 17th century to explore the Mississippi River valley creating settlements across the region.
By the middle of the 18th century, the French held sway a length of terrain from New Orleans in the south, to Montana in the north.
To be clear, this “Louisiana Territory” was enormous… covering some 828,000 square miles.
Photo: Gateway New Orleans
The territory came to be, as historian George Herring puts it, a “pawn on the chessboard of European politics”.
France ceded control to the Spanish at the culmination of the Seven Years’ War in 1762 under the Treaty of Paris… however, Napoleon Bonaparte regained ownership from Spain in 1800 under the secret “Third Treaty of San Ildefonso” between the French and Spanish.
Around the same time, President Thomas Jefferson demonstrated considerable foresight and downright smart thinking by agreeing to increase American presence in what was a politically unstable area of North America.
However, he was concerned that political instability in the area could undermine efforts to occupy these lands and lead to further conflict with the American state.
Word filtered that that France had entered into a secret agreement with the Spanish to take back control of the Louisiana Territory.
Soon after Napoleon’s France was facing revolutions across its colonies, most notably Haiti and Hispaniola, where French forces suffered thousands of casualties from war and yellow fever.
Napoleon’s visions for the French colonies in the western Atlantic were in tatters.
His plans to use the Mississippi basin as a base for food production and trading activities to support French colonies in the region now made little sense.
The colonies were breaking… and French forces would be inadequate to protect the Louisiana Territory.
Moreover, plans were afoot for conquests closer to home in Europe. But he needed money to fund those military adventures.
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Jefferson offered to purchase some of the territory from Napoleon. Specifically, they were prepared to pay up to US$9.375 million for New Orleans and its surroundings.
Napoleon countered, offering Jefferson a deal of incalculable value…
He proposed the sale of the vast Louisiana Territory… in its entirety… for US$15 million (roughly a quarter billion dollars today).
The Americans couldn’t believe their luck. The offer was completely unexpected. They were stunned.
In a single stroke the newly emerging America could almost double its total land area. And at a cost of less than 3 cents per acre.
Signed in Paris on the 30th April 1803, and aptly announced to the American public on the 4th of July, this deal became known as the Louisiana Purchase.
America went on to become the most powerful and wealthy nation on earth… as predicted by founding father Robert Livingstone, who said at the time…
“We have lived long, but this is the noblest work of our whole lives…From this day the United States take their place among the powers of the first rank.”
What we can learn from the Louisiana Purchase
Bear in mind, the Louisiana Purchase was more a political deal than an outright real estate one.
But still, there are a couple of major lessons that still ring true today…
Regardless, a motivated seller usually gives you negotiating power… in other words, the opportunity for a lower price.
And hopefully, you can pounce… which brings me on to the next lesson…
Had the Americans not acted so quickly, who knows what could have happened.
We do know that Napoleon’s two brothers were trying to talk him out of the sale!
Some of the best real estate buys I’ve made have been done quickly… sometimes completely on the spot.
Combining a speedy transaction with a motivated seller will give you a better price. Period.
Maybe there are structural issues, a leaky roof, asbestos… a new sewage plant to be installed close by! You get the picture…
The final lesson from the Louisiana purchase is this:
He frittered the entire proceeds on senseless wars and military incursions, squandering one of France’s greatest financial and economic assets.
Some time later Napoleon was reported to have said, “America is a fortunate country. She grows rich by the follies of our European nations.”
I couldn’t agree more!
One of the life lessons that has struck me time and again, is the importance of listening.
The primary ways that information enters our brains is either through the two eyes at the front, or the ears on either side. Today I’m talking about the latter.
Whether it’s listening to casual conversations, lectures, talks, opinions, even the media… I can’t tell you how many times a simple conversation, a brief comment or a short discussion has alerted me to something that has proved extremely interesting and often very profitable.
I’ve made a lot of money over the years from simple conversations that have alerted me to something, or some opportunity, that I might not have otherwise noticed or seen clearly.
(For example… the property I referred to in this article that I bought in 2006, came onto my radar during a conversation over a couple beers with a friend. That conversation ended up being worth nearly a million dollars.)
Keeping your ears open is not just about making money. It can also prevent costly mistakes.
Whenever you’re looking to buy property, you should take the time to ask your friends, colleagues and acquaintances for their thoughts.
It seems to be that every dinner party I’ve ever been to has involved at some point these two topics of conversation: Airline horror stories, and real estate.
People love to talk about property. Everyone’s an expert – or knows an expert. Everyone has a tale to tell. And you’d be wise not to dismiss this as small talk or idle chatter and tune in.
Whenever friends visit Hong Kong, I always ask about what they’re seeing in real estate back home in their neighbourhood or city. Always, always ask for opinions about property and the chances are you’ll receive plenty.
No matter how much experience you have or how much research you do, you can’t know it all. Real estate markets are huge, diverse beasts. In any city, real estate behaves differently depending on the district, street, neighbourhood and property type. There are constantly new developments coming on stream with different physical characteristics and different financing models. Councils and local authorities change planning rules, providing further opportunities to enhance value.
New infrastructure can have a big impact on nearby real estate, resulting in new opportunities – positive and negative. It’s impossible to keep track of all this in one city – let alone several.
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Over the years, a passing conversation, informal chat or piece of gossip has led me to dig further and on many occasions resulted in making a profitable investment decision.
Talk is cheap, so why not listen?
Over my career, research and analysis have been my main professional endeavours, and they have contributed immensely to our overall wealth.
Understanding what goes on in certain markets – the trends, drivers, cause and effect, who’s doing what to whom and why – are all vital for making informed investment decisions.
Some of my most profitable calls have been made on the back of understanding what drivers are likely to shape trends in the markets in the coming months or years.
But as important in my mind as big-picture research is, so is listening and talking to locals who share knowledge that you would otherwise not be privy to. Before you make an investment, call a few people, shout them a coffee and see if they can add to your research.
What happens on the ground
Top-down research can give us the big-picture story. But digging into the subtleties and nuances of what is happening on the ground can bring even bigger rewards.
Getting the overall market call right is hugely important, but it is that knowledge at grassroots level that can really give you an edge when you’re making big real estate investment decisions.
Listening to people who are close to these very local forces is key to success. Yes, the big picture for the London market (or the Hong Kong, Auckland, Sydney, San Francisco market) may look good, but how do you invest in it? Ask a few locals and I bet they’ll have some ideas.
Just by listening and being alert and interested in property news and stories, I have chanced upon real estate investment opportunities – many of which have led to very profitable outcomes.
If you make it a habit to ask questions, and more importantly listen to the answers, you’ll put yourself in the best position to do the same.
Finding properties to invest in is often just being in the right place at the right time, following up on a hunch or a rumour that luckily enough leads to an opportunity.
Many people shy away from owning investment real estate. They worry about the hassle and risk.
Tenants can sometimes be a pain in the neck. Or you can face periods when the property is empty, where you don’t have a tenant paying rent… but that mortgage (if you have one) still needs paying every month.
Natural events can sometimes cause damage – floods, typhoons, storms.
But as I’ve said many times in the past, I believe owning rental properties is right up there among the best investments that you can ever make.
Let me tell you a story about my friend Rod.
I first met Rod whilst travelling with my wife in the deserts of northern Kenya in the mid-1970s. My legs were sticking out from underneath our Volkswagen Kombi as I wrestled to bolt the gearbox back into place. Rod rode up to the rescue in his Peugeot, gave me a hand and invited us to stay at his place in Nairobi. He offered the services of his company’s workshop to make a more permanent repair to our vehicle. He worked for a global company that made and distributed farm and construction equipment, tractors, ploughs, cranes, lifts, bulldozers and so on. We became very good friends.
A few years later, after about 15 years in Africa, Rod quit his job and returned to Auckland, New Zealand. He had no clear plan of what he was going to do. Soon after his arrival back home his brother invited him to come over to a friend’s house. They sat on the expansive deck of an expensive house, overlooking the harbour, enjoying a few cold beers and chatting. His host was clearly enjoying his delightful property.
Rod happened to notice a bell ring somewhere in the house every 15 or 20 minutes throughout the afternoon. He eventually asked his host what this bell ringing was all about. ‘Oh that’, he said, ‘is my happy money bell’.
‘Huh?’ Rod asked.
‘Yes, that reminds me that every time I hear it ring another $20 has landed in my bank account’.
‘How come?’ asked my friend.
‘From my portfolio of rental properties,’ was the reply.
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‘And what’s more, it keeps ringing when I’m asleep at night, when I’m out fishing, and when I’m on the golf course.’
Rod did some quick mental arithmetic and figured that at that rate, his host was earning about $43,000 each month. That was a HUGE amount of money at the time, and even today is a substantial income.
What’s more, this regular income was coming in without working 80-hour weeks. The host enjoyed his fishing and was a handy golfer as well.
Soon after that Rod embarked on a small business venture buying and renovating residential and commercial properties. Some he would sell, and others he would keep for rental income. He invited me to join in a couple of his projects, and I still own the first property that I bought with him. It is a great little money earner. The annual rental income is now roughly 50 percent of what I paid for the property back then.
I always smile to myself when I remember that story. I have relayed it to many people. And that story has helped guide our own activities over the years to build a rental property portfolio that will keep turning out solid rental income year after year.
So, yes, owning rental properties is not hassle-free, nor is it entirely risk-free. The properties need to be managed. Bills need to be paid, and renovations undertaken from time to time. Tenants can sometimes be a pain in the neck. There can be periods of no tenants when the property might stand empty for some time. (That risk can be mitigated by ensuring you follow this critical rule).
But for long periods of time, not a lot needs to be done. You can just sit back and watch the rental income hit your bank account.
And in terms of reward for effort, I think it is right up there among the better investments that you might make. It certainly has proved so for me and my family.
It is also usually a pretty inflation-proof investment. Rentals do tend to grow along with the economy, incomes, and inflation.
Perhaps you should be thinking of ringing your own ‘happy money bell’.
I can think of several markets where that makes a lot of sense right now. Interest rates are low in most western markets and I believe they will stay below long-term averages for some time to come. In times of stress, rental yields (calculated as the annual rental income divided by purchase price) tend to be on the high side. And as markets improve, yields come down – normally because values go up more than rentals. I like that equation.
That is exactly where many real estate markets are positioned today. And here’s a market I visited recently that I think presents an excellent opportunity for investment real estate as well.
A few years ago, a group of us were having lunch during a ski trip to the French Alps.
One of the guys leaned across the table and showed me some photos on his iPhone.
The images showed a stunning piece of property. A gorgeous chalet set amongst the trees and snow of a mountain resort in western Canada. A very seductive piece of real estate.
I commented that he and his wife must rattle around in there like peas in a pod given how big the property was.
“Yep, we do, now that the kids have grown and are off doing their own thing.”
Expensive to run, I queried?
“Very,” came back the reply, instantly. Accompanied with a sigh…
I thought so…
He continued, “In fact I could take two months holiday each year in some of the best resorts in the world with the cash that I pay just to manage this place.”
And there would be no hassle. Walk in, walk out. Maintenance and all those other costs are someone else’s problems.
Did he have any plans for the property, I asked?
“Absolutely. We’re trying to sell the place.”
He’s now retired. The capital locked in that asset needs be put to better use producing income. His property simply wasn’t doing that.
So how is the sale process going?
“It’s been on the market for nearly a year. No serious buyers yet.”
He’ll have to drop the price quite a bit to shift it.
That hurts, but given he built it almost twenty years ago, he’ll still probably come out ahead.
That is, if he can sell it…
I hear this story repeated constantly from friends and acquaintances all over the world.
This story happened to be in Canada, but it could just as easily as have been Tuscany, Provence, Phuket, Niseko, or the Algarve.
The ingredients are always the same.
They fell in love with a piece of “recreational real estate.”
The family doesn’t really use it much these days. The kids have flown the nest and have their own agendas.
Maintenance and management costs are very high. This isn’t a simple lock-up-and-leave apartment.
Worst of all, the property cannot produce a decent reliable rental income stream.
And this all comes just as retirement is hitting home and that regular paycheck is fading…
The following day and a similar story.
This time a property in France, but with a slight twist.
Although in this case it was a delightful country property that could produce some income as a B&B, the French tax regime makes running a small business virtually impossible.
The French bureaucracy is stifling. Take my ski instructor, for example. His little ski instruction business requires the services, and costs, of at least two tax advisors.
It’s no surprise that tens of thousands of French people have moved to Hong Kong in the past decade. France simply doesn’t support entrepreneurial-minded people who want the freedom to create personal wealth.
So a sale is their only escape. The money will be taken to England where a real estate rental business can be viable and the tax system is codified and transparent.
So what’s the problem? Well, the real estate market in rural France was dead.
The owners know they are going to take a big hit if they are to get their cash out in any kind of reasonable time frame.
I know other owners of recreational type real estate in France, Italy, Spain, Croatia, New Zealand, Australia, even Canada and the U.S. who are trapped with their properties.
Yet, in major cities in these countries real estate markets are often doing well. Prices have recovered in many and now stand at levels well above pre-crisis highs.
Even if they are not at such levels, recovery is in the air at least.
But more importantly, there is liquidity. By that I mean deals are getting done.
That is not the case in those wonderful beach, river, mountain and lakeside locations.
Regular readers will know that I am a big believer in owning real estate for long-term capital preservation, growth and income.
A small property or two in your investment portfolio can provide a big boost to your income stream later in life.
As we know, the vast majority of people retire with an income stream way less than that immediately prior to retirement.
Huge numbers of people retire without any private income stream at all. Reliance on state handouts is their lot.
The western world is facing a retirement crisis. It’s a fact. And it’s something you’ll hear more from us on in the coming months.
Regular readers will also know my views on recreational real estate investment. In my opinion, it is often not an investment at all. It is an expensive consumption item.
We all have the potential to get seduced by that wonderful country cottage, the beach house, the chalet in the mountains. I have almost succumbed to this temptation a number of times myself.
I remember sitting in the enormous garden of a friends house in the south of France one sunny summer afternoon a few years ago, drinking rose and thinking “I could make this work.” I even got in touch with a few agents… But fortunately, I came to my senses.
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The trouble is that rationality tends to fly out the window when we look at these beautiful examples of the builder’s art. There is no doubt that you and the family may love to spend a couple of weeks, or even a month a year if you’re lucky.
But think about some of the realities.
Owning a recreational home somewhere means that you will probably feel obliged to go there every holiday you take. It narrows your options. Perhaps you might want to go to other places, experience other countries, locations, activities. Owning that cottage by the lake means that you may not get to enjoy other experiences so much, if at all.
And what about management of the cottage, chalet, house when you are not there. Or when you do go there. I know people who spend the first week of their holiday doing maintenance chores and fixing broken gear at their holiday home. If that is what cranks your crank, then fine. But for most of us, we view our holiday time a bit differently.
And who is going to manage the property for the many months that you are not there? To check that pipes have not broken, that the windows and roof are not leaking. To ensure the place doesn’t become overrun with insects, mice, cockroaches… it happens, I assure you.
And then there is the cost of that management service. Employing a professional management company can be expensive. You can pay anywhere from 10-40 percent of your rental income to your management and listing agency.
On top of that, you have all those local fees, duties, taxes, and charges that might be levied on you as an owner – which may differ if you are a foreigner.
And if you’re a foreigner, there are plenty of countries in Asia where you have very weak property rights.
For example, in Thailand, you’re not allowed to have outright ownership of landed property (i.e., a house, not a condo/apartment).
You can have 49% ownership. Then you need to get a (trusted) lawyer to create a structure that allows you to circumvent that. On top of that, the land is only leasehold and often just a 30-year lease.
My email inbox is loaded with files of wonderful, seductive, gorgeous recreational real estate sent by agents from all over the place.
I do find myself having a browse and getting a sense of how markets are behaving. But I do not get tempted these days.
I have enough expensive vices in life as it is. Being a boat owner is one of them!
But don’t get me wrong. I don’t believe you should never indulge your real estate fantasies. But recognise them for what they are. Just that. A wonderful fantasy, to be enjoyed and paid for.
The two examples I gave earlier are just a couple of many that I’ve seen over the years. I’ve seen so many friends and acquaintances put their hard earned money into holiday real estate without even owning proper investment real estate!
To my younger readers, the ones in their thirties who’ve maybe now got a little cash in the bank, please ignore recreational real estate. Forget about it.
In my opinion, it only makes sense if you already have a property or two under your belt, maybe a home and an investment property.
I know if you live in London or Hong Kong you won’t necessarily be able to afford a family home. But please, if you are looking at real estate make sure at least it’s a solid investment property.
And by that I mean, a nice one or two bedroom apartment. It should be a location where people where a suit and tie to go to work. Somewhere you and a better half would be happy to live yourselves.
That’s exactly how I’ve built my investment property portfolio. My properties all have 1-3 bedrooms. They’re located in areas favoured by professionals and are therefore rarely vacant. They are in major global cities with solid property rights and a transparent legal system. And they require minimal maintenance.
By the time you’re in your late 50’s, the mortgage is paid off, you will likely be sitting on good capital gains. On top of that you’ll have an asset that’s spinning you off extra cash flow month after month.
I can’t tell you how many folks in my generation wish they had a couple of those kinds of assets right now…
More recently, a good friend emailed me saying he was considering buying a lake house. What did I think?
Usually when I get an email like that, the alarm bells start ringing. My default response is to fire back an email that includes something along the lines of what I wrote above.
But this time I said, “Go for it!”
Well, my buddy has worked hard and enjoyed success in his profession. He’s invested wisely and – critically – he owns a few investment properties already (one of which he asked my advice on a few years ago).
He’s not one of the “younger readers” I refer to above who should be focused on building a core asset base rather than splurging on this kind of vacation home.
Nor is he particularly old. But he’s just a guy who made the right decision and bought investment real estate when he was younger. Because of that now he has the luxury of being able to even consider a decision like this, with the kind of financial independence that we all aspire to.
My friend is the perfect example of what happens when you make those tougher decisions earlier on in life. Because recreational real estate is always tempting, no matter your age!
And maybe when you’re in your thirties or early forties, and if you have a little money in your pocket, the idea of that lake house or chalet in the mountains is tantalisingly seductive. But that’s when the tough decision counts.
Do some people make money on recreational real estate? Of course. But in my many, many years in real estate I’ve found that to be the exception, not the rule.
Don’t confuse recreational real estate with an investment. It’s a consumption item, a dream to indulge in for you and your family.
And don’t assume this is something you can easily sell if the need arises.
Elon Musk, the man behind the Tesla electric car, is also involved in pioneering private ventures into space. Recently, his space exploration company has been taking orders for people who would like to send some of the ashes of a loved one on a two-year space odyssey that would have them circling Earth in his proposed space vehicle.
A friend who recently secured a spot on the flight for a deceased family member tells me that there are 300 slots available on the flight – with a ticket price of US$2,500 each.
Before I elaborate any further, let me ask you a question: Can you guess what sector of the U.S. public real estate space has performed best over the past two decades?
Grade A office space? Residential property? Retail? No: It’s the self-storage sector… which easily occupies the most mundane and least glamorous spot of the real estate spectrum. This is simply where individuals and businesses rent some space and store their belongings (personal effects, furniture, corporate documents)… that’s it.
Take a look at the breakdown of compound annual growth returns (CAGR) in U.S. real estate investment trusts (REITs) by sector over the past two decades. A US$1,000 dollar investment in self-storage REITs back in late 1993 would be worth over US$30,000 today.
I’ll highlight two conclusions from the table above. Self-storage comfortably outperformed every other real estate sector. More importantly, REITs across the board have outperformed the S&P 500 over the past 20-odd years. I’m a big believer that you should have REITs in your portfolio. These are real companies backed by real assets and income.
The self-storage boom
Back to the self-storage market. The U.S. has by far the largest and most extensive self-storage industry of any country globally, with close to 7.5 square feet of self-storage for every man, woman and child in the country.
Australia, the next largest market on a per capita basis, boasts 1.2 square feet per capita, a fraction of the U.S. market. Europe is generally underserved by this business. The U.K. is the only country in Europe that offers more than 0.5 square feet (0.59 sq ft) of self storage space per capita. For many countries in Europe, the per capita provision is less than one-tenth of one square foot per person.
LEARN MORE HERE.
Hong Kong and Singapore, where residential housing is small and expensive, have the smallest self storage space per capita on average in the developed world. The industry provides a mere 0.62 square feet per capita in Hong Kong and 0.28 square feet in Singapore.
China’s self-storage players provide a minute 0.0006 square feet per capita. That represents 0.9 of one square inch – less than the area of your thumbnail.
Asia, and China in particular, are ripe for growth in this sector
This mundane business is a growth industry in places like Hong Kong, Singapore, China and other rapidly developing consumer societies. Just take a step back and think about the bigger picture for a moment.
Between 2014 and 2050, India and China are projected to add approximately 700 million people to their urban areas. In other words, the equivalent of two times the entire U.S. population will be moving into cities across India and China over the next three decades.
The second factor to consider is this: There isn’t much space for these folks to live. In Hong Kong, for example, the average apartment size is less than 500 square feet.
So when you have a lot of people, who are increasingly joining an upwardly mobile consumer middle class, moving into small apartments, then we know that the demand for self-storage space will increase as well.
Similarly, as office space becomes increasingly expensive, we’ll see demand from the corporate sector. Companies are required to retain records, and still continue to do so in paper form. Storing records in self-storage facilities is a cost-effective solution for many smaller businesses.
Measuring volume rather than square footage
When we look at self-storage we tend to use the same metrics in determining value as we do for other property uses. We look at effective rental per square foot (or square metre). For storage, as a user, we’re concerned more about volume rather than square footage.
How much household gear and boxes can I squeeze into a particular cubicle? To determine that, we need to look at our monthly cost in terms of cubic feet or cubic metres of storage volume.
A storage cubicle in Hong Kong, for example, with an internal floor area of four by five feet, has a usable volume of about 180 cubic feet. Rent for a cubicle of this size, in a good quality facility with air-conditioning, parking and industrial grade lift access will cost around US$10 per cubic foot per year. This is enough to store a couple pieces of furniture, a few big suitcases, half a dozen document boxes and some sports equipment.
As for outer space self-storage (no pun intended)
Assuming that the Musk space vehicle takes 25 percent of the ashes of 300 deceased people, the total amount of space that will be used to store these remains in outer space will amount to a fraction under seven cubic feet, according to my calculations. That’s equivalent to a box 3.5 feet long, two feet wide and one foot deep. A little bigger than that grand suitcase you take on holiday.
This equates roughly to about US$53,750 per year for each cubic feet of extra-terrestrial storage versus US$10 above.
But back on Earth, look to Asia
As I said earlier, Asia is drastically underserved in the self-storage space. Just look at the table below. Again, China… the most populous nation on Earth has less than a hundred self-storage facilities!
Not only will demand be underpinned by urbanisation, but other factors such as:
Death: with increasingly aging populations in Japan and China in particular, as people pass away their belongings are often stored before being distributed amongst relatives and disposed of by executors.
Divorce: increasingly common and accepted in Asia, divorce is a big driver of storage demand. As couples separate, and typically downsize, they use self-storage for belongings – especially larger furniture items that do not suit an intermediate single lifestyle.
As this sector matures, we will see more opportunities arise in this space and we will look to capitalise accordingly.
If you want to be successful in real estate investing, you absolutely must get one thing right.
I have invested in all types of real estate over some 40 years: and this factor has a bigger impact on property price than any other.
I’m talking about a property’s location…
It is the oldest cliché in real estate. But there’s more to it than meets the eye.
The basics of the “L”
A property’s location is the single most important factor in determining your investment success. That’s a fact.
You can buy the grandest house in the world. But if it’s next to a smoke-belching factory, or in the middle of a rundown neighbourhood with no prospects of gentrification or upgrade, you’re not going to build wealth.
Real estate prices can vary significantly at a very local level. The position of a property on one side or one end of the street matters. Prices can differ enormously within and across neighbourhoods, suburbs and districts.
The particularities of location are infinite. How do you judge the desirability of one position over another? How do you assess human nature? What really drives people to pay more for the same piece of property in one location versus another – not only now, but in the future?
When it comes to location, a few simple ideas have worked for me repeatedly over decades of investing in real estate in many different cities.
I buy properties in places where people wear a suit and tie when they go to work.
Does that sound a bit elitist? Perhaps. But this makes my life so much easier. People who wear a suit and tie to work are usually in higher-paying jobs. Therefore, as an upwardly mobile white-collar worker they are typically able to afford to pay more to buy property or to rent it.
In these days of casual work clothes, you’ll have to give this point a bit of latitude, but you know what I mean. I always buy in locations where white-collar workers want to live, whose earnings are in the higher salary brackets.
LEARN MORE HERE.
Your “suits and ties” need to get to work.
New transportation infrastructure, like underground rail, can be a major value-enhancing factor, in particular in big cities where getting to and from work can be a major hassle
For example, in Hong Kong, the construction of new mass transit rail lines has had a huge impact on property prices. In the early 1980s, the prices of residential property in the new town development of Tsuen Wan, some miles to the west of the densely developed tourism and office district of the Kowloon peninsula, sold at about a 40 percent to 50 percent discount to the more central Kowloon prices.
As the mass transit link to the new town came on stream, that discount narrowed to about 20 percent to 25 percent. Anyone owning property in Tsuen Wan saw the value of their apartments rise sharply relative to prices in the core urban areas.
“They aren’t making any more of this.”
You’ve probably heard this old saying when referring to beachfront land. But it applies equally to land in the inner core of prime cities. There is no new land being created in Central London, or Manhattan, or around Sydney Harbour, or indeed in many large cities around the world.
As cities grow, there are often increasing pressures on existing land resources that make land increasingly valuable. Recognising this, municipal authorities may dramatically increase how many people can occupy a particular piece of land.
For example, low-rise warehouse areas in the middle of a city may be rezoned for high-rise offices, or apartments, or hotels or retail.
So authorities are making more “use” of land by rezoning it from industrial buildings to residential or commercial spaces. in many areas around the globe. This is a reflection of the changing industries that work out of our cities, and the increasing populations of renters and home-owners who are attracted to city living. Look out for locations that could be moving from industrial to mixed use and you just could be onto something
You don’t really get a feel for an area unless you visit, spend time there and walk around. Every location is different – and every micro area differs too. A lot of people invest without checking out the property, or the neighbourhood. This is a terrible idea. Unless you don’t care whether your real estate purchase makes money, you absolutely must kick the tires before you buy anything. And far and away the best way of doing this is to go there. Walk and walk and walk some more to get a feel for the neighbourhood, the shops, the people, the streets, everything. Seeing is believing – go take a look.
You can research any location from anywhere in the world, thanks to the worldwide web. But if you want to find the best locations, you’ll need some local knowledge to back up your research. By asking a local, you might find a location you hadn’t considered before, or realise a location isn’t as great as you thought.
For example, a property next to a cemetery might not be a big deal in the West. But in China, where buyers take Feng Shui (that is, harmonising with your surrounding environment) seriously, a property next to a cemetery would be a horrible investment. Chinese investors wouldn’t be interested. It’s unlikely you’d find this information out on a basic web search. But any local would know.
So whenever you’re looking to invest in real estate, remember location is the one thing you can’t get wrong. It’s the first step to successful real estate investing.
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