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October 28, 2005

Real Estate Investment Ideas?

Peter Coy

Every December, BusinessWeek publishes an investment guide for the year ahead. This year I'm doing the real estate story.

Here's the question my editors want me to answer: Are there still any real estate bargains out there?

What do you think?

Any U.S. cities where house prices still have room to rise? (Youngstown?)

Any countries where real estate is still relatively cheap? (Germany?)

Condos feel kind of pricey lately, but are there still deals to be had?

What about REITs?

If you like REITs, which kinds?

Name names, please.

Remember, it's not enough to say that an investment costs less. You have to make the case that it's likely to go up in price and/or throw off a lot of cash in the next year.

Be prepared to defend your choices because at least someone reading this blog is bound to disagree with whatever you say.

I'm thinking of giving a prize to the Hot Property reader who comes up with the idea that works out the best over the next year. Let's say, either 100 acres of midtown Manhattan real estate or a paper crown labeled Real Estate Emperor. My choice.

So ... send in those ideas and start arguing with each other.

04:56 PM

Investing in Real Estate

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? Business Week posts "Hot Property" Real Estate Contest from Pacesetter Mortgage Blog

Peter Coy, over at the Business Week Hot Property Blog, is posting a Real Estate Investment contest of sorts. His question is this, Are there still any real estate bargains out there? I will put my hat in the ring [Read More]

Tracked on October 29, 2005 12:06 PM

? The US Real Estate Market from Adam Dudley

This article at Business Week Online caused me to post my thoughts about the US real estate investing market. With rising interest rates and a multitude of home owners using deadly interest only loans and ARM's in the US, there [Read More]

Tracked on October 31, 2005 09:25 AM

how about being a contrarian, and invest in the tanking market. For example, buy puts or short homebuilders and the credit agencies that have the largest exposure.

Posted by: bradley jellerichs at October 28, 2005 06:37 PM

I'll start the brawling by saying that I'm pretty darn bullish on the Seattle market.

My reasoning? It's the economy... With Boeing and Microsoft doing a wonderful job of holding down the fort, and a thriving start-up vibe (in real estate alone, there is Zillow, Redfin, and HouseValues), it seems like enough of the area residents will be flush with cash for the near future to keep prices rising. And while Seattle has definitely seen some growth in the recent past, things have never gotten out of control like they have in the Bay Area.

Because I really want to win the 100 acres in Manhattan (or at least an Emperor crown!), I'll get a little more specific. I'd invest in a starter home (~$350K) in the Ballard neighborhood. Of course I'm only speculating, but I think that a home like this still has plenty of room to grow in the near future (i.e. one year).

Posted by: Dustin at October 31, 2005 01:30 AM

OK, so far I have Maricopa County, Ariz., and Seattle. I have "short the homebuilders."

I also got a very intelligent email from someone suggesting a narrow segment of REITs--ones with low debt/equity ratios that get most of their income from leasing buildings to companies in healthy industry sectors.

What else?

Posted by: Peter Coy at October 31, 2005 05:23 PM

First, I have put aside some cash ($50k) in my money market account. I also have on my current house a 15-Year fixed mortgage (50% loan-to-value) with really affordable monthly mortgage payment. Finally, I have no plan to move out for at least 5 years.

Second, I opened an (still untapped) equity line of credit on my current home (200k, about half of the equity in my house).

And now, guess who will be a major player in the foreclosure market in my county after the housing boom goes bust.

Assuming a worst case scenario of a 25% decline in valuation in the years following the bust, my remaining equity stake will vanish but I compensated for that by buying $20,000 worth of premium on OTM put options (CTX Jan08 45 Put for example) on the 2 big home builders in my county.

Posted by: the contrarian at October 31, 2005 11:04 PM

The conventional wisdom is that "as interest rates rise, real estate values must decline, and so to must REITs." The problem with this CW is that it is too simple, and it doesn't take into account the wide variation in the various types of REITs out there.

If rising interest rates and the risk of a "real estate bubble" is a concern, then it is possible to screen for REITs that minimize that risk. For example, if we look at REITs that have low debt/equity ratios and derive their income mostly from leasing properties to other businesses, those REITs will be less sensitive to land valuation and

interest rates. These success of these REITs are more dependent on the segment they lease to, such as healthcare, retail, etc.

I ran a screen looking for REITs with debt/equity ratio less than 0.5 and whose income is tied to leases. Some promising candidates include

Universal Health Realty Income Trust (UHT). Leases out 43 medical buildings in the Southwest (where there are plenty of retirees and demand for medical services), has a debt/equity ratio of 0.23. Dividend yield is 6.5% and UHT has steadily increased their dividend over the years. A similar healthcare REIT is LTC Properties Inc. (LTC), with 200 senior long-term care facilities, a debt/equity ratio of 0.23 and a divident yield of 6.6%.

Hospitality Properties Trust (HPT). Owns and leases hotel and motels to various national chains such as Courtyard by Marriott and Candlewood Suites. Debt to equity is 0.49. Has more debt than I'd like but income from operations has been increasing. Good dividend payer at 7.4%.

Correctional Properties Trust (CPV). Leases out 12 prison facilites and has no debt, with a dividend yield of 6.5%. The leases are long-term and include rent increases tied to the CPI. Given the latest White House shenanigans this may be a real growth industry.

Interestingly, there were no residential REITs that met my low debt criteria. Many of them have debt/equity ratios greater than one. I believe those REITs are to be avoided.

Posted by: Jim in Calif at October 31, 2005 11:06 PM

Ernest and Young's Steven Friedman told real estate editors at the National Assn. of Realtors annual convention that the best places to buy a condo in today's market are:

Jacksonville, FL

Austin, TX

Boise, ID

Friedman said his choices are based on job growth, affordability, and quality of life.

Posted by: Frances Flynn Thorsen at November 1, 2005 06:14 AM

Is land still a good buy anywhere? Great comment by Boe Clark about land over on the "Land Sales Could Slow" thread (justly accusing me of being vague). Here's what he wrote:

The blogger speaks of land (improved and unimproved I assume), as if it were a homogeneous commodity. Prices are going down...in which markets? In Florida, Arizona, and Texas? Or in California and Colorado? In urban, sub urban, ag, commerically zoned, or residentially zoned land? 10 miles, or twenty miles, from population centers? In urban infill areas? With or without utilities/services?

Generalities get us nowhere...specifics you can use to make prudent investment decisions with.

Posted by: Peter Coy at November 1, 2005 10:36 AM

Here's an Idea: Wait on the housing market and slowly move towards equities. There's some bet up stocks that could bought for a song.

Posted by: Joe at November 3, 2005 01:27 PM

It probably doesn?? bode well for the real estate market that there are not a lot of investment ideas!

Posted by: Dustin at November 3, 2005 04:15 PM

What about fixing up and renting or selling dilapidated properties in out-of-favor markets? Somebody in that business emailed me with that suggestion. Seems like it could be a good deal for people who don't mind supplementing their cash with elbow grease.

Posted by: Peter Coy at November 3, 2005 06:00 PM

Forget the US. Japan's real estate market is rip-roaring.

Posted by: Taro Akasaka at November 3, 2005 11:15 PM

1. REITs holding a lot of mid level apartment buildings (where the former homeowners in CA will be moving once the number of foreclosures exceeds 100,000 in the state).

2. REITs specializing in self storage facilities. These units rent for the same price per square foot as apartments, but cost a fraction of the cost to build and maintain and are enormously profitable. Again, demand will soar as the number of foreclosures in CA exceeds 100,000.

The number of foreclosures in CA WILL exceed 100,000 now that rates are rising and the I/O speculators and such will be driven out of the market as will so many first time buyers who have been sold these disastrous loans (half of buyers in San Diego and 2/3 of buyers statewide for the past 18 months).

Posted by: Dave at November 8, 2005 06:58 PM

Are we talking about investments (say 5-7% compounding growth over 20 years) or speculation (dreams of 100% inflation over 1 year)? I like the idea of getting a positive cash flow with 20% down and then watching 5-7% appreciation over 20 years.

Summit County, Colorado, is 90 miles west of Denver and another mile higher. From 2001 to 2005, prices were flat, since demand equaled supply. Since January of 2005, demand has increased and prices are starting to climb sharply.

Summit County has a great location, great weather, and spectacular scenery, yet is much less expensive than Aspen and Vail. To me it looks like a great bet.

Posted by: DaveB at November 12, 2005 04:32 PM

Bulgaria is the hottest real estate market in Europe.

http://www.thepropertyinvestorsclub.co.uk/pic-bulgarian-property-investment.htm

http://www.thepropertyinvestorsclub.co.uk/property-investment-tracker.htm

http://bigpicture.typepad.com/comments/2005/06/global_real_est.html

http://bbtbulgaria.blogspot.com

Posted by: Dimitar Vesselinov at November 19, 2005 09:21 PM

How about India; bungalos on the beach near major cities. Bocas in Panama? Or, Tibet, near Changdu. Those are my bets.

Douglas

Posted by: Douglas at December 12, 2005 02:55 AM

Here is my opinion. The great bargain out there is El Paso County Colorado. It currently has a population of about 500,000 and a median price of around $220,000. Last summers Base and Realignment Commission (BRAC) closed several bases around the country and moved several units to Colorado Spring's four military bases. We are expecting somewhere between 10,000 - 15,000 troops. Add to that Barclays (credit card call center) moving to Colorado Springs with an additional 500 jobs and Intel adding 500 jobs to a new facility here.

The bases can only house about 5,000 troops total. When 9/11 hit, Ft. Carson emptied. The rental market deflated and many units sat empty. Since then, normal growth has brought back exceptable vacancy rates.

The spin off effect of this growth is typically predicted at somewhere between 3-10 fold. For every primary position created in Colorado Springs and additional 3-10 positions are needed to keep up with demand. This means a very conservative growth spike estimate of about 30,000 plus 10,000 troops. Not huge (about 8%).

However, these people are additional to the normal growth here. Our inventory is about 5,000 new homes per year. Add another 5,000 previously owned homes. 70% of individuals in this country are home owners. Say we have 24,000 families (40,000 individuals times 60%)and 70% are home buyers. With over 16,000 homebuyers in a balanced market (equal number of buyers and sellers) of 10,000 in inventory this creates a supply challenge. Over two and a half buyers for every home (conservatively).

The Home Builders association can only build about 5,000 homes per year. This is mostly due to a limited labor pool of craftsman. The growth in Phoenix and Las Vegas coupled with the rebuild in New Orleans has created even more pressure in finding building tradespersons. So it will take over two years to meet conservative demand estimates through building new houses.

If that weren't enough, all of this has not begun yet and we are in a balanced market with appreciation in the 18-24% range. The appreciation numbers are from our Tax Assessor who gets a TD-1000 for every sale in El Paso County. This form gives the particulars about the property and it's sale price.

If the war in Iraq ends, all bets are off.

The appreciation numbers are very good right now and they diffinately have wings. So do the residential rental market numbers. My personal pick is residential real estate in El Paso County, Colorado as the next big boom town. I project an average of over 30% appreciation for the next three to four years.

Posted by: Garrett Swasey at January 12, 2006 02:09 PM

Just like any investment, take advantage of the growth as well as the contraction. Foreclosures are up 29% in local markets and a number of investors are lining up to work out short sales between bank and owners that are facing bankruptcy. Banks don't want to own houses and in a falling market, they may be more willing to make deals.

Randy

www.4mysales.com

Posted by: Randall Wilson at January 30, 2006 12:13 AM

Peter,

I still stand by my Maricopa County suggestion in Arizona. They created the largest number of jobs in the country last year.

Jobs = Good Real Estate

See this article from AZ Central: http://www.azcentral.com/business/articles/0203jobs03.html

Posted by: David Porter at February 3, 2006 04:04 PM

There are so many places to invest that it is impossible to present them all. The better question is what is the rate of return that defines a "good" investment given the risk compared to an insured savings account. Once the return desired is established and the risk determined, then the search for suitable investments in real estate begins. Ther are many areas of the country where an investor can place 20% down and have the property cash flow pay for all expenses and debt service. Factoring in a modest rental rate increase (inflation rate 3-4%) the property should be paid off in 20 years or so. The property value is up because cash flow is up. The final result being that on a $1,200,000 property with 240,000 down an owner can expect to end up 20 years from now with a $60,000 net income (in todays dollars) and a net worth of $1,200,000. (todays dollars) not including positive cash flow that was probably achieved within 5-7 years from the first day of ownership. Speculation is entirely different animal. Market timing is the key to success in that game. The beauty of long term investing with solid cash flow properties is if properties go up wildly you benefit from that but if not the cash flow and debt reduction (plus tax benefits) are adequate to provide retirement income for investors. Obviously there is risk primarily jobs in the local market but wise investors will look to invest in communities where job stability long term looks favorable (government or high demand agricultural areas etc.). I would also suggestlookin to invest in areas where new construction costs more than the property acquired so new competition is less likely. I have simplified for the purposes of this blog but hopefully the iformation is useful for discussion.

Posted by: RLA at April 30, 2006 10:20 AM

For investments, you could do worse than take a look at what Thailand has to offer. With the dollar value making investments much cheaper this year, property in Thailand offers some very sound investment opportunities.

After years in the doldrums, the Thailand property market has seen property prices in Bangkok increase by an average of 16% last year. The trend is set to continue, with new projects dotting the city landscape. Real estate developers will be investing over US$2.5 billion in Thailand property residential sector in the CBD alone within the next three years.

The market has received an injection of confidence from the sustained recovery of the Thai economy. Banks and finance houses that are lending money Thailand property purchases are fuelling the boom, with new advertising hoardings displayed throughout Bangkok.

Real estate companies continue to focus on luxury developments to meet the demand of Thailand's expanding middle class, but there is now greater emphasis on building houses and condominiums that meet the budget of the ordinary working family.

New starts of Bt2-3 million per unit are increasing and developers are taking up the government's challenge to build affordable homes that cost under B2 million for the army of workers previously shut out of the market.

Thai people are becoming much more demanding in terms of both the quality of building materials used and the type of property they want, with townhouses and detached homes on managed housing estates in the suburbs becoming increasingly popular.

The reason is partly improved infrastructure, with the Skytrain and the Mass Transit Subway system making the business districts more easily accessible. The downtown areas surrounding Silom, Sathorn, and Sukhumvit Roads remain the most active areas for new condominiums.

Posted by: Chris Heath at May 8, 2006 08:48 AM

Reply to Chris Heath, regarding investing in Thai real estate.

Chris,

How easy is it to own real estate in Thailand? I looked into it very briefly (armchair analysis via Google,) and it seems that there are specific national laws designed to keep foreign investor money out of Thai real estate. There are some legal schemes designed to get around this, but they seemed fly-by-night.

Any insight would be interesting to hear!

Posted by: David S at May 15, 2006 03:11 AM

I would like to focus on prospect EU members.

The real estate market is getting very hot on some of prospect countries like Turkey.

Turkey is also in a process of utilizing a mortgage system which will effect the market big time.

I think the properties in Istanbul will be very profitable..

Tracy

Posted by: Tracy - Miami Real Estate Agent at May 15, 2006 09:49 AM

Try not to follow the crowd!

Rather than look for property bargains...why not 'become the developer'? We are all aware that the greatest profits lie here!

You can buy a plot of French land for ??50,000 build for ??100,000 and the current market value is ??210,000+. Add to that the 18 months growth during the build programme and you are looking at a very profitable investment.

The numbers are very real and not based on agents values. And it can all be done for your armchair.

Posted by: Nigel Morton at July 25, 2006 04:57 AM

Buying a property in Easter Germany is still a very good investment.

Real estate prices have risen as much as 100 percent in the eight former communist states that joined the EU in 2004, driven by buyers from Western Europe. Many locals, with less than a quarter the buying power of their neighbors, have been locked out of the market, adding to frustration with EU membership and eroding support for budget cuts needed to adopt the euro.

Troy

Sarasota

Posted by: Troy@Sarasota at August 17, 2006 10:19 PM

I think investing in Ohio's cities is the way to go. You can buy apartment buildings with a 13% cap rate in places like Cincinnati, Dayton, Columbus, and Cleveland.

Posted by: Joe at September 29, 2006 11:12 AM

Here's a real estate investment idea in case anyone is interested:

Idea #1: Developing previously un-developable properties for Profit!

There are properties that were previously un-developable due to substandard soil, high water tables or any of several other reasons that made it impossible to install septic systems.

Thanks to modern septic technology, these problems have been solved today by the use of alternative septic systems.

This means that there is an opportunity for those with the desire to invest in Real Estate to profit by purchasing property that is thought to be un-developable and then develop it using modern technology.

Until just recently, such properties were thought to be worthless. These properties can be purchased at a low cost and then developed to sell for a profit!

Alternative septic systems may seem expensive when compared to conventional septic systems but are just part of the necessary cost of doing business in this case.

In other words, the opportunity to profit is made possible by these systems and does not exist otherwise.

This idea is something that I realized when I discovered alternative septic systems for myself.

Good Luck with your real estate investments!

Vince Thomas

"The short but informative article below explains further!"

The "Bad Soil" Solution

http://badsoilsolution.tripod.com

Posted by: Vince Thomas at October 20, 2006 04:54 AM

Poster stating that Bulgaria is the hottest real estate market in Europe is obviously not aware of the full facts around that market. Much of the sales volume being delivered there in recent times is derived from the so-called "guaranteed rental" returns attached to the new properties, i.e. the buyer is guaranteed a return (typically around 5%) for the first two years following completion.

In practice, the properties being built in beach and ski areas in Bulgaria have a short rental season, and rentals are almost impossible to find. If you could fill a typical beachside apartment for ten weeks each summer at current rates, minus all expenses, you would hope for (at best) 0.5% to 1% return on the prices sought by the developers.

The reality then is that in many cases the rental "guarantees" are achieved by simply adding the rent to the price, and giving the buyer back 5% p/a for 2 years (minus handling charges). After that, you are on your own, and you will neither be able to rent the property nor sell it at anything approaching the price you paid.

This is the type of product that is driving the Bulgarian market, and the only way for gullible investors in this market is down! The real "hot" markets in Europe, in my view, are the ones being ignored by the lemmings who flock to this area. Smarter investors have been chasing the following areas, with much more hope of real success:

1. Budapest. Hungary's capital has seen steady buying over the past few weeks, following the disastrous PR of the rioting outside the Parliamnet building and TV station in September. The austerity measures that sparked the riots are being seen by old hands in the property business as boding well for future gains. In addition, the unrest has scared off the amateur investors, making property much easier to buy in the city. Rental returns in the new-build residential sector are tipping 6% in many cases, making the wait for better times much les painful.

2. Surprise destination for a nice amount of buying in recent weeks is Spain's Costa del Sol, around Marbella and San Pedro. The planning corruption scandals in Marbella town hall have resulted in the new administration having cancelled all building licenses issued by the old administration, and threats of demolition of any such properties. The realities of the situation however are less dramatic. The Town Hall can not demolish any project that was issued with a genuine license without compensating the owners in full, and any such demolition is most unlikely in any case (except for one possible extreme example, to be carried out just before next summer's elections). Sellers are panicking however, and prices have fallen to below the total cost of site and building in many cases. With good rental returns for long term lets, a local population buying strongly for permanent residential use, and most local banks happy to mortgage properties, the outlook is sunnier than it has been for some time on the Costa del Sol.

Check our blog at http://www.blog.abodes.ie for regular updates on property snippets and research in Europe.

Posted by: Info at November 21, 2006 02:57 PM

Strategy: Build up your cash meanwhile so as to be ready for the upcoming opportunities. Remember the past? Opportunities for those with cash. Foreclosures will hit the fan in the next year or so. Actually, it's already starting! Slowly, but starting.

Posted by: Carol, www.ipropertyfinders.com at December 1, 2006 11:41 AM

2 Places to invest for sure : Austin and San Antonio, Texas.... other good possibilities include College station( near Bryan and Texas A&M ) and Sugar land and Katy (Houston suburbs). Personally I would like to buy a rental home in Austin. If it is just me I think Round Rock would be a good bet as the prices are still good, great schools and lots of work, and should pencil out as a rental with 20% down. Also, I am looking for others to invest with me who want to buy 6 homes in the Austin and San Antonio area's. This way we can leverage our money and absorb vacancy and repair cost together. If anyone is interested in forming an LLC ( Limited Liability Co.) and buy, rent, and hold for 3-5 years, let me know. you can email me at spike432003@yahoo.com. I figure we will need 6 people with $25,000 - $30,000 each to start this company and purchase 6 rental homes/duplex. If there is still a safe place to invest in a good area with upside in appreciation, They are these area's. That is not to say there are not others. Lakeland, Florida still has upside and so does Raleigh, NC. But value for the buck is here. In Round Rock Texas, just north of Austin and home to Dell computer, I have my eye on a 2,300 sq ft 4+ 2 on a nice lot for $119,000? Yes, that is not a misprint. This place is not a major fixer. Some paint and carpet and its ready to rent. The only thing that irks me about Texas are the outrageous property taxes. They run between 2.5 - 3.5 % per $100,000. But the way I look at is if it pencils out as a rental and the PITI+ management and maintenance (Mort.Principal and interest, Taxes and Insurance ) is all covered by the rent, then who cares if the taxes are high? The key is to keep it rented! This may mean a tad lower than market value rent. We are banking on appreciation and covering our cost, Not cash flow. Please don't get me wrong, a small cash flow to be put aside for repairs or vacancy would be great and we should be able to accomplish that, but our priority would be to cover our cost. I am serious about this so contact me asap if your interested. Who knows, maybe we will decide to keep the company and sell and re invest the money and in 10 years sell the company and all be filthy rich? Well, thats an option. But I would be happy with the profit in 3-5 years but am open to what everyone in the LLC has to say. A friend of mine did this and guess what? He ended up selling his interest in the LLC to one of the guys who came in with him and decided to keep the company, this guy bought out everyone and sold the company and the portfolio of properties 5 years later for a HUGE profit.My friend is still kicking himself over that!

Posted by: Mike at January 25, 2007 11:27 AM

There seems to be a wide range of alternatives proposed by the comments. I'll add my support to the ones promoting Eastern Europe. Yes, it's far from the gold rush you could see a decade ago, but real estate in Eastern Europe (particularly properties from the European Union newcomers ?Romania and Bulgaria) still has loads of potential for growth. In spite of a rather infant market, with flats and villas prices likely to slow down their exponential price increases in the near future, the buy-to-let market will generate long-term steady profits in crowded capital cities. Why? Poor transport/road infrastructure is likely to severely discourage commuting and force people who work/learn/must be in the city to also live in the city.

Posted by: Bogdan at February 6, 2007 04:36 PM

I am surprised to recent comments on this post that was done so long ago.

Posted by: Dave Dugdale at February 13, 2007 01:40 PM

Any ideas on up & coming hospitality market?

I own management company that owns (a small stake) in CA & AZ. For approx. past 3 years, any new hospitality investment in CA/AZ simply does not make sense due to lack of cash on cash from operations. Unless one finds a turn around property which is either mis-managed or needs renovations.

Posted by: Kiran Patel at February 26, 2007 01:35 AM

Check out www.lenderimplode.com

Cory Barnett

http://www.FreeShortSaleSecrets.com

Posted by: Cory Barnett at March 13, 2007 01:55 PM

How do I get in touch with Mike who wanted to start the LLC?

Posted by: Kelly Chapman at March 13, 2007 10:11 PM

The Gambian Property market is currently undergoing a boom period. As an 'emerging property market' the Gambia ticks all of the boxes.

As a holiday destination the Gambia has always provided guarnteed winter sunshine. It is well served by cheap chartered flights from the UK, gambia , Germany, Belgium, Holland, Denmark, Sweden and Norway all seeking relief from Northern winter climes.

It is a four hour drive to Dakar International Airport, in neighbouring Senegal which is the international air hub for this region of West Africa.

Direct flights from here exist to Paris, New York, Torronto, Rio, Dubai, the Middle East, South East Asia and major African destinations such Kenya, South Africa and Nigeria.The Gambia is now considered a world class tourist destination.

Forty years ago there were just two hotels in the Gambia. Now there are several hundred offering a range from a few pounds to five hundred pounds a night. Saudi Arabian money is funding the building of further five star luxury hotel developments along the coast.

There is a thriving, expanding European ex-pat community which now enjoys the low cost and high standard of living here. This ex-pat community creates a market for good quality rental accommodation. This in turn is driving the investment market to meet the rapidly increasing demand.

Posted by: Ian Brown at April 11, 2007 05:50 PM


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