Torcana Investment Blog

Consumers & Investors vs Workers & Citizens

Tweet

 

The Financial Times has been publishing an outstanding series of articles based on the theme "Capitalism in Crisis". One of the trends I´m starting to understand a little more clearly is that the financial services industry and the crazy salaries earned by the top people within it are just a small part of the puzzle.

A much bigger part is the role played by investors, consumers, workers and citizens. Many of us fit into all four of these roles - i.e. we invest in stocks, consume ipods, work in a bank and receive basic health, education and security from our government. 

With technology and globalization, almost anything you can dream of can be identified, purchased and sold at the click of a button. A single person in a home office can probably accomplish more today than an office manager with 10 roaming assistants could have 15 years ago. Think about that for a moment. 

This power is presenting opportunities our parents could not even have imagined. There is a flip side to this however.

If we continue to break down traditional barriers and reward companies who provide the best products at the lowest prices, then inequality and job insecurity will rise for those who can´t meet these expectations. 

I think everybody has to try and adapt to this new reality. Experts and laymen alike now realize that rising living standards during the boom were mostly a mirage as they were based on cheap credit and by living beyond our means.

In my view, the next 5-10 years will provide a huge amount of genuine opportunities to increase living standards and our personal wealth for real.

We can accomplish this by teaching ourselves and our families how to get into the right mindset, by leveraging the myriad of tools available to us and by taking advantage of opportunities when they present themselves. 

Investors are saving the USA property market

Tweet

 

"Three cheers for investors!" is probably not something you´re likely to hear the Occupy Wall Street protesters shouting. Nevertheless, the economic situation in the US would be a lot worse without investors. 

It is estimated that investors snapped up a whopping 30% of the total sales of USA property last year. When the property crisis was at its worst, it was investors (many from overseas) who pumped billions into the US economy. They bought when the market was at its lowest ebb when nobody else was interested. They used hard cash to purchase and fix up hundreds of thousands of properties and then rented them out to families.

Nobody else would have had the confidence to buy enough volumes of property to stop the slide in prices and reduce inventory back to pre boom levels in many cities. Investor activity has revived many local real estate markets and it has given potential owner occupiers (and their bank managers) much more confidence. 

I´m not suggesting that property investors have purely charitable motives - they´re in this business to make money and they certainly know how to squeeze a seller. Nonetheless, the actions of the majority of them have had a very positive impact on the market. According to the National Association of Realtors, every home purchased pumps $60,000 into the economy for furniture, home improvements and related items.

Looking forward to your thoughts. 

Will Chinese consumers come to Europe´s rescue?

Tweet

 

If the Chinese can be persuaded to spend more and save less, that might provide the opportunities western economies need to grow and pay down their excessive debts. Try to imagine the sheer quantity of products and services that hundreds of millions of emerging middle class Chinese will need for the first time during the next decade. It´s mind boggling. The rub is that this rosy scenario would require a huge transformation on both sides.  

Germany is often touted as the model to follow and while there is certainly much to admire and learn from Germany´s manufacturing and exporting prowess, it is not easy to replicate. 

For example, telling Greece that it should be more like Germany is a bit like telling me to repay my mortgage by becoming a professional golfer - possible in theory, but not very practical for a high handicapper.   

These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities.  

However, it is equally true that the majority of people reading this, who still have a steady job and savings, have never faced an investment environment so ripe with opportunities.  

Opportunities

It is often said that the Chinese use the same word for "crisis" and "opportunity". While the unemployment and suffering that has occurred should never be taken lightly or disrespected, one of the biggest beneficiaries of the economic turmoil is the distressed assets industry.  

A huge range of companies, developments and individual properties have been bought by liquid buyers at prices that could scarcely have been imagined just four years ago.  

For several years, Torcana has been at the forefront of the distressed property industry in Florida sourcing hundreds of deals for buyers all over the world. In 2012, we will continue to work in this incredibly dynamic market. 

Where will the sovereign debt crisis go in 2012?

Tweet

 

There has been no shortage of somber faced pundits and politicians competing against each other to make the direst predictions for the coming year. It is a bit like watching the Monty Python Four Yorkshiremen sketch in reverse. Thankfully, these people are hardly ever right about anything, and if they are all so gloomy, then perhaps we have significant grounds for optimism after all. 

However, it does seem safe to assume that the sovereign debt crisis in Europe will get worse in 2012. I read somewhere that it´s not the debt that gets you, but your ability to service it. That strikes me as being very true. 

Just look at the UK & USA: their debts are equally (if not more) scary than those of Spain & Italy and yet it is safe to assume that the markets will happily lend to both in 2012. Spain & Italy on the other hand, have to raise at least €500 billion between them this year, and I´m not convinced they´re going to get it from the private sector. 

If that happens, then much bigger rescues than the ones handed out to Ireland, Greece and Portugal will be required. Between Germany, the IMF and the ECB, the economic firepower is certainly there to do it, but politically, it will very difficult.   

Banking Vs Sovereign Debt Crisis

In 2008, governments spent billions bailing out banks that couldn´t borrow the money they needed on the open market. In 2011, the sovereign and banking crisis became one and the same because if a small country like Greece defaults, then banks in many countries could go under.  

As has happened many times before, EU institutions can perform all manner of contortions to avoid crossing a line they´ve drawn for themselves. At the moment, one of those lines is that the European Central Bank will not directly purchase eurozone government bonds.  

With a wink and a nod, the ECB is therefore lending huge amounts of money to eurozone banks, who then buy eurozone government bonds. These eurozone bonds are then used as collateral to borrow even more ECB money. Very clever isn´t it? Everyone´s a winner and we all live to survive another weekend, except that these multi billion euro shenanigans do not address the true underlying problems.  

The major issue facing so many western economies is that too much debt has been accumulated and they will need to spend less than they earn for many years in order to reduce it. That´s logic a five year could follow, but life is never that simple. If you reduce spending too fast, then an economy can grind to a halt. 

What makes sense from a personal perspective (cut down debt, don´t buy things you don´t need) is very bad for economies balanced towards consumption rather than production. You can´t export consumerism and you can´t easily transform a country into a net producer.

These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities. 

The Financial Crisis - Hollywood Style

Tweet

 

Ironically enough, Hollywood doesn´t seem to have had any problems raising the cash needed to produce a slew of new movies and documentaries relating to the financial crisis. Some of them are actually very good. The best I´ve seen are: 

How do experienced investors identify property in Florida?

Tweet

 

In a previous blog, I wrote about why experienced investors will often pay more for a property with a lower yield. The reason they do this is because they prefer stable yields, well maintained communities and happy tenants with a high disposable income. Now, I´m going to show you how they identify these properties. 

Firstly, in property, as in everything else, you get what you pay for.  

Secondly, the adverts and the glossy brochures generally don´t tell you anything about the stability of the rental returns, the financial health of the community or the disposable income of the tenants.

You have to do a lot of digging to find a property in Florida (or anywhere for that matter) that will supply a steady income stream and can be sold for a premium in the future. Torcana has a checklist the length of your arm that needs to be ticked once a potential deal clears the first few due diligence hurdles.

 However, you´ll avoid the majority of mistakes and nasty surprises first time investors experience if you can locate properties with the following characteristics: 

1. FHA approved financing available (or likely to be available soon) to owner occupiers

2. Low foreclosure levels

3. High owner occupancy and low vacancy levels

4. Low levels of unpaid HOA fees 

5. Little or no evidence of deferred community maintenance

6. An adequate HOA reserve to cover future maintenance work (i.e. those new roofs)

7. Located close to quality schools, major employers and important infrastructure

If your seller can satisfactorily answer the questions above, you may located a very solid deal. If they are reluctant or unable to provide this information, and instead keep referring you to the great purchase price and the great yield, then the property is unlikely to match the key criteria that experienced investors look for (see first paragraph above).  

Conclusion 

Imagine for a moment that you are buying a second hand car. Sure, the price tag and the mileage are important considerations, but most of us would also get a qualified mechanic examine the brakes, the engine, the tyres, the paintwork, the battery, the ignition etc.

The point I´m trying to make is that buying a property solely based on its price and current monthly rental yield is a bit like buying a car because it looks nice. In both scenarios, there´s a high possibility you´ll get ripped off. 

Purchasing a property is right up there with the most important financial decisions a person has to make. At Torcana, we take that responsibility very seriously indeed when promoting products to our clients.  

The subject headings on our promotions might not be as flashy as some of our competitors (14% yields! Guaranteed Finance! From $30,000!) but our aim is to sell great properties with a real income stream and genuine resale potential.  

If you like the sound of that, then we´d really love to talk to you. 

Kind Regards

Colin Murphy 

Property in Florida: What experienced investors really look for

Tweet

 

As a company who is constantly researching and sourcing deals, it is always tempting to latch onto the property with the best headline price and rental yield.  

For example, if I emailed a promotion with "14% rental yields from $50,000" in the subject heading, a lot more people will open it compared to another announcing "7% rental yields from $80,000".   

In this blog, I´d like to discuss property in Florida (or anywhere else) with low prices and high rental yields. This can be a toxic mix and the risks are often misunderstood. 

While our sales team would be delighted with a "14% rental yield" the simple truth is that high yields are directly proportional to the level of risk involved. A buyer who chases the highest possible initial yield will neglect to consider several critical factors that determine the true profitability of his/her purchase. 

Experienced investors don´t make that mistake, and there are many scenarios where they will deliberately choose a lower yield for a higher quality property. 

Experienced property investors generally look for the following:  

Predictable and stable returns

Renting to stable professionals in full time jobs earning above average salaries is the best way to ensure a continuous and hassle free income stream. People outside of these categories tend to move around more, which leads to vacancy periods. 

It is much better to earn a modest but consistent rental income compared to a volatile rental income that varies sharply from year to year. In other words, it is preferable to earn $7000 every year, as opposed to $9000 some years and $5000 other years. The reason is simple: it is very difficult to plan future investments if your income stream is unreliable.   

A well maintained community

It makes sense to pay more for a property in a very well maintained community (such as Notting Hill in Orlando, pictured right). This creates a lot of stability for the landlord as unexpected expenses and tenant turnover will be much less frequent. An unplanned increase of several hundred dollars per month in your community (HOA) fees can wipe several percentage points from a rental return.  

While some aspects of a well maintained community are easy to spot (no rubbish, trimmed grass, freshly painted exteriors, clean swimming pool and clubhouse etc.) others take a little more investigation. For example, the roofs on all the buildings need to be replaced after 20 years, and if a reserve hasn´t been built up, all the property owners will have to pay a lot extra to get it done.  

Neighborhoods with a low crime rate and a high average income

Very often, the highest yielding properties are located in lower income neighborhoods. This happens because the purchase price is proportionately much lower than the reduced rents available. For example, in a two star neighborhood, you could buy a property for $50,000 which will rent for $700 per month. That is a 16.8% gross yield. In a four star neighborhood, you could buy a property for $80,000 which will rent for $900 per month. That´s a 13.5% gross yield.

While 16.8% sounds better than 13.5% on paper, it is worth noting that properties in two star neighborhoods will have higher crime rates, higher unemployment, higher tenant turnover and higher repair costs. Not exactly a recipe for a stable and hassle free income.  

Tenants in lower income neighborhoods are also much less willing to absorb rent increases - so you´ll have to suck up any increases in the running costs yourself. An extra $50 per month is a lot of money to someone on the minimum wage. On the other hand, people earning comparatively higher salaries who are happily renting in well maintained communities can and will absorb regular rent increases. 

If your property is empty, you are losing money. It´s that simple. Real yields come from stable tenants.  

Lower management fees

You may not notice it at the beginning, but the small print in every management contract will contain additional fees to oversee a property with high vacancy rates and high repair costs. 

A professional investor will pay more to own a property in a well maintained community that attracts tenants with high credit scores to protect who are able to pay higher deposits. Tenants like this have more skin in the game and are much more likely to take care of their property. This is a virtuous circle that leads to lower vacancies, much lower management fees and a higher annual income.  

A property in Florida with these characteristics will always sell for a premium in the long run.

Warren Buffett´s thoughts on America & Property in Florida

Tweet

 

December is a funny old month isn´t it? For some, it is a signal to slow right down - taking longer lunches, spending more money, leaving the office earlier and postponing as many important decisions as you can get away with.  

For others, the opposite occurs - it is a time to focus and pull out all the stops to meet end of year targets before the clock strikes midnight on the 31st.  

For a business owner or sales person, the financial difference between the two scenarios above can be enormous. 

To be honest, I´ve been guilty of both extremes. I got away with murder when I was a young marketing graduate in London. Nowadays, with a family to support and a business to run, I would naturally lean towards the latter - December is often one my most intense and productive months.   

Why has the global property "bust" varied so dramatically?

Tweet

 

A recent article in The Economist gave me pause for thought. Unless you´ve just returned from a few years living with the Nukak tribes in the Amazon, you´ll be aware that a huge worldwide property boom came to an abrupt halt between 2007-2008. What is less commented on is how the actual "bust" has been much less widespread than the "boom".   

Boom to bust and back again

Let´s have a quick look at what happened in the countries where most of our blog readers reside:  

Timber!!

Average prices across the 50 states in the US fell by 34% from peak to trough  - a hefty drop indeed, although price levels have been remarkably steady since 2009 (see graph below). Across the Atlantic in Ireland, prices have fallen by an eye watering 45% since 2007 and yet they are still falling by approx 1% every month.  

Tumbleweed 

In Spain & Britain, prices have fallen by only 10-15%, even though you could argue that their property booms were just as large as Ireland´s and America´s. Bankruptcy laws, lending criteria, planning laws and government intervention have all had a big influence on property prices during the post boom years.   

Woah horsey!

In Australia and Canada, property prices wobbled a bit in 2008, but they´ve been on a roll since 2009 and average prices are now 40% higher than 2005 levels. Indeed, they´ve been rising inexorably since 2001. 

It´s worth bearing in mind that all of these figures are national averages - they point out very useful macro trends but they hide huge regional differences. Also, buying the right property at the right price has always depended on getting the little details right - i.e. figuring out the best town, neighborhood, community and unit. 

Note: Click on the image above if you´d like to play around with the dates and countries.  

So what conclusions can we draw from this graph? For a start, the world class number crunchers who supplied the information above have provided us with a very clear indication of whether these property markets are overvalued or not. As a property investor, I would consider that to be extremely useful. 

Just as the combination of a high share price and low profitability can point towards an overvalued stock (Groupon anyone?) a low purchase price and a high rental income can point towards an undervalued property. Think about it. Makes sense right? 

By these measures, property in Spain, Britain, Canada and Australia looks overvalued. You simply aren´t getting much bang for your buck in these locations. Prices in Ireland would merely be considered "fair". Why? Because property prices were in the stratosphere and both rents and the average income of renters has been falling very sharply. 

On the other hand, property in the US would be considered significantly undervalued compared to the historical ratios between house prices and rents. By historical I don´t mean comparing 2005 with 2011 - that was a very volatile period. But if you can do it over 35 years, then you are onto something meaningful.  

The Economist has done exactly that. After analyzing all the housing data between 1975 and 2011, they have categorically stated that US property prices are 22% below the average price-to-rent ratio. 

In other words, they´re saying that purchase prices should be 22% higher given the amount of money the average renter is earning and is willing to pay. That suggests plenty of room for future capital growth and a healthy rental income in the meantime. 

Buying property in Florida versus stocks, bonds and savings accounts

Tweet

 

Investments are always a risk and buying property in Florida is no different. However, there are plenty of positives and profits to be made .... 

Location #1: Why Florida?

Even though the state of Florida has been battered as much as most states by the housing crisis, there are still rock-solid investments in real estate. Economic problems have not changed the fact that the state is still a prime relocation area. There are reasons that it will remain that way: Ocean breezes, temperate winter climate and prime vacation destination.

• There are greater numbers of baby boomers retiring each year. Florida is their golden destination to spend their golden years.
• The population as a whole is more health conscious. Florida offers year-round outdoor activities such as walking, jogging, biking, tennis and golf.
• The state is easily reached from the populous northeast via the I-95 corridor. From Virginia, Maryland, D.C., and New York, the state line can be crossed in a day by vehicle. Multiple airlines have continuous flights in and out.

Location #2: Why Orlando?

There are cities in Florida that have felt the crush of the housing decline to a maximum. Others, such as Orlando and Miami have sustained themselves rather well. But Florida properties have never lost 80 percent of their value in a day, such as certain stocks. The trick is to find a city that offers growth potential but has not been dealt a crippling blow by economic circumstances.

• Banks will be more ready to lend in areas that have lower foreclosure rates.
• Prices on real estate are, in many cases, at a 10-year low. People are buying property in Florida for lower than the original construction price.
• Cities are ready to move forward and improve facilities and neighborhood areas. Look for a progressive municipality with low crime rates, long-term plans for improvement and incentives for drawing business and industry.

Location #3: Which neighborhood?

There are very good prices on homes and rental property in depressed neighborhoods. The drawback is -- they are depressed neighborhoods. Investing in such an area could be disastrous. What to avoid:

• Areas with new housing and a high foreclosure rates. Developments built only a few years prior to 2007 have a high number of homeowners underwater in their mortgages. Target communities that are 10-20 years old. 
• Beware of unkempt landscaping, peeling paint, potholes in community roads, unfinished amenities and developments with scarce and unfinished homes or apartments. These areas have less creditworthy occupants, more transient owners and high maintenance costs. Renters will likely neither be long term, responsible nor stable. Rental income will be less reliable and periods between tenants may be long.
• Properties in such areas will take much longer to stabilize, will attract crime and irresponsible behavior and short term returns will be shaky. Such real estate is usually a bargain because it's such a high risk.

Properties that are a solid investment at a good price are not as common but they do exist. If the price seems "to good to be true" there is probably a reason. Do some investigation before buying.

However, buying property in Florida at a good price in a solid neighborhoods is possible.

 

In order to solidify your investment look for these amenities in a neighborhood:

• FHA financing to appeal to owner occupiers once the investor is ready to exit the property.
• Low vacancy levels in the neighborhood indicates a stable market and responsible owners and lessees.
• High owner occupancy creates a responsible neighborhood. High absentee ownership can lead to community problems.
• Low levels of rental and mortgage delinquency are indications of a stable real estate area.
• Well-manicured landscaping, building and street maintenance are further indications of a solid investment.
• Commercial areas, hospitals, schools, libraries, parks and other recreation facilities in walking distance are a draw to owners, renters and increase long-term occupancy.