Real Estate
1. Similar principles which apply to equities also apply to real estate.
2. When considering real estate never pay more than 5x your salary for residential property. If you are married you can pay 5x combined salary. I recommend always doing 5x an individual salary in the event that the marriage does not work-out.
3. Always know the square footage of the building and the size of the lot you are looking at. Just as we discussed anomalies in equity prices, anomalies also exist or appear in real estate. For example, property should be viewed on the basis of price per square foot. I have on many occasions compared multiple properties and found square footage prices all over the place.
4. I have requested square footage for multiple-property listing in order to compare prices. I have seen square footage prices range from $300 per square foot to more than $1,000 per square foot. The anomalies are usually caught with smaller properties. There are not very many overwhelming reason to pay $1,000 per square foot for property in my opinion.
5. Another very useful exercise is to compare square footage costs to the cost to build a property. Buyers and sellers will often rationalize that the exercise is irrelevant and the land is included. My attitude is that I am buying the house – the land is an add-on.
6. There is a saying that the most important aspect of real estate is location. However if you purchase incorrectly; meaning if you pay too much for a property none of the buzz words matter.
7. If you find that people are routinely paying 8x or 10x their annually salary for property, that is most likely an overheated real estate market.
8. Another concept to apply is not paying more than X percentage of your monthly wage for housing expense i.e. 35%.
9. One of the reasons you don’t want to pay too much for property is you may be purchasing at the top of the market thus leaving you little room for increasing prices. Everyone wants to have the capability of selling something for more than what it cost.
10. Always look at the general market – where is the market trending, is there a housing shortage, what are rents, etc.
11. There are currently 2010 – 2015 a lot of unhappy property owners and lenders in Bermuda. In 2015 Bermuda’s loan delinquency rate is 13% – in the United States and United Kingdom their delinquency rates are 3-4% by comparison.
12. Problems in markets also create opportunities. Some people paid too much; now there are opportunities for others to pick-up bargains.
13. The great thing about Bermuda is we are not widely dispersed. Forty minutes is the farthest point from Hamilton. I would rather pay a little less for something a little farther away from town than to stretch my finances too far.
14. We all need somewhere to live. I am a big proponent of at least owning the home you live in. If you can acquire rental property; good for you.
15. You can make mistakes purchasing stocks – easy to fix. Mistakes purchasing real estate can haunt you for years.
16. Real estate is difficult to purchase and usually difficult to sell.
17. Lenders usually require that you have a down payment. A down payment is your skin in the game.
18. The term under-water mortgages have become common lately. This refers to homes that are valued or appraised at less than the value of the mortgage or debt against the home.
19. Some people are walking away from underwater mortgages. One of the first “walk-a-ways” that I head of was in London. Years later we saw it in Vegas, Florida and I am sure many other parts of the U.S.
20. In Bermuda there is no relief for walking away from debt.
21. Charges that raise the cost of real estate transactions are government taxes, legal fees, brokerage fees, bank closing costs. On a real estate transaction these costs apply on the purchase and sale.
22. Real estate is generally illiquid. In order to sell real estate you have to dress it up – paint, repair, advertise, etc. Spreads between bid/ask in real estate can be very wide.
23. Capital market investments in contrast usually always have a listed bid/ask price.
24. The ratios that we applied in our fundamental analysis can also be applied to real estate. In particular what is the yield on the property if you are purchasing it for investment purposes? For example if a property cost $100k and it is providing $10k in rental income – the yield is 10%. If the property’s market value is appreciating as well, the appreciation can be factored into the return on the property. The total return would of course be an estimate.
25. Investors should always compare yields across multiple classes of assets. If returns on real estate investments exceed returns available on i.e. a savings account, the former would be the most attractive investment. Real estate should probably offer a greater yield as compensation for the illiquidity.
26. In addition, what is the risk associated with the choices available. Rental income for example is fairly inelastic. Rental income amounts don’t vary significantly over short periods of time.
27. As the real and estimated return on real estate, like any other investment rises or becomes known in the market, investors will bid-up the value of the asset. Like a bond, as the cost/price increases the yield will decline in theory. Like any investment, investors who pay more for a property will test the market relative to the yield they can acquire. This is done by raising rents.
28. This process of higher value real estate and higher rents cannot go on into perpetuity. At some point markets reach a top where wage earners cannot pay anymore for rent.
29. The government inadvertently benefits from the push-pull process in that they are able to earn more land tax revenue from the rising land values.
30. In the U.S. investors have the opportunity to purchase REIT’s – Real Estate Investment Trusts. There are many types of REIT’s. Some REIT’s invest in office buildings, retail malls, residential property, oil wells, etc. Some REIT’s are regional. An investment in a REIT provides an investor with real estate investment without the illiquidity. REIT’s are required to pay-out the majority of their income to their shareholders. REIT prices roll across the ticker just like individual security prices.
