Holiday Homes Part 3

Holiday Homes versus Cash – Part 3

Okay, so I am saying you’d be better off investing your cash anywhere but in a holiday home or a retirement home, so where am I getting my comparables from?

Let’s have a look at a couple of deals. I am not necessarily recommending any of these deals, but I am quoting them simply to show you what is available. I am deliberately not going for high returns which may also be risky ventures.

I have already quoted the 14%+ returns possible in investing in solar panels for housing association property roofs which is government backed.

Let’s keep with real estate for the first couple of examples. How about buying a fully managed and tenanted home in the US? The ad says “Properties direct from foreclosure agencies with 16.3% net rental yields”. Apparently the deals are government backed. The deal is that you buy a detached 3 bed house in North Detroit.

I am not a fan of the USA but a lot of people are. If you want me to give you the contact details just let me know.

And if you dont like the sound of Detroit, and I dont blame you, then how about this one in North Dakota? This is where the Bakken oil shales are being exploited, and a large influx of oil industry workers is expected (about 15,000). Here’s the blurb:

“We are pleased to offer for sale a unique investment opportunity in North Dakota which will produce fantastic annual yields of 43%.
Great hotel room investment opportunity in area with 15,000 oil workers requiring accommodation. Pre-launch price of $37,000 if reserved before the end of January 2012. At the official launch on 1st February 2012 the price will be $47,000 – save $10,000 by reserving now.
Massive annual rental returns predicted to be around 43% gross. Net yield 37.4%. Rental income supported by multi-national oil companies. Great income from month 4.”
I’m also looking at another US rental deal which guarantees 20% net income. But there are other kinds of deal available.

I am particularly interested in investments based on essential commodities. They dont tend to lose value over time. So I have invested in green oil, in particular, jatropha trees. That investment pays out 10% in the first year, and then gradually increases to 30% by year five.

I’ve also invested in bamboo. That pays peanuts for the first four years (about 5%), but then it starts to pay off big time. With the jatropha investment I am getting returns now, but my bamboo investment is recent and so I haven’t yet had a payout, but I’m looking at returns of about 25% in year five, and rising from there.

I am not licensed to give investment advice so I am not advising anyone to go into these deals. This is merely a heads-up showing you what alternatives there are.

Another deal that is being touted around at the moment concerns carbon credits. One is supposed to be able to make 30% a year on those, but I have a bit of a problem with the idea. I cant see how the deal is based as there is no dedicated exchange, and the validation of the credits leaves a lot to be desired. I think that is an investment for those with an appetite for high risk.

Obviously I am not going to give a long list of possible investments in a short blog but these deals are available now, are relatively secure, and pay out anything from those pathetic 5% initial returns to 43% and more. There is no reason why you shouldn’t do the maths on any alternatives to a holiday home by assuming you could get long term returns of 15% plus.

To remind you, that would give you £15,000 a year return on £100,000. That return would pay the rent on two two bed apartments in Spain or the Algarve for a year. And you’d have no maintenance or taxes to pay. Think about it next time you look at that apartment for €93,000. And prices will be going down for the foreseeable future. Prices in southern Europe have dropped about 15% over the past year. They are still dropping.

You tell me: what is that apartment worth? Is it really worth the equivalent of £15,000 a year in rent?

Of course, if you are still working, bringing up kids, and all that, then you are in a different category altogether. I am only talking about holiday homes, and retirees.

john

Holiday/Retirement Homes Part 2

Holiday/Retirement homes Part 2

One of the things we have to look at when buying real estate is what is the best use of the money.

There are obvious equivalences. If I live at 1 Windsor Drive and you live at 3 Windsor Drive in an almost identical house, we should expect to be paying the same money for the pleasure of living in that area. If you rent your home and I pay an interest mortgage for mine then our monthly outgoings should be roughly the same. By that I mean, the cost of the rent and the cost of the mortgage money should be roughly the same, give or take 10%.

If you are paying £1,000 a month in rent, then I would expect to pay a similar amount for the money I’ve borrowed. If I had a repayment mortgage I would have a larger outgoing because I would be paying back the money I’d borrowed, which would be paying for the house itself so it eventually became mine. I dont count that amount, it is the cost of the money that should be the same as the cost of the rent. That means, if interest rates are at 5%, then £1,000 a month in outgoings on a notional 100% mortgage should be £12,000 a year. At 5% that would assume a purchase price for the house of £240,000.

It would be rare for the outgoings for both houses to be identical, but that is the equivalence. The further those figures get out of balance the more someone is paying over the odds for their home. Is it you?

Needing a Mortgage:

In terms of a holiday home, are your total costs realistic in terms of equivalences? If your mortgage costs are £1,000 a month, what are your repairs and maintenance costs? What are the taxes? Add up your total annual figure. Now ask yourself how many weeks of the year you intend using your holiday home. Now check the rental figures in the local newspapers (not the online rental sites). If your total annual costs for the bought house come out at, say, £15,000, and you use the place on average two months a year, ask yourself whether holiday rentals are going to cost you more than £7,500 a month. The answer is that they are more likely to cost you £1,000 a month or less. Renting beats owning hands down. If you are retiring you will probably use the place effectively for the whole twelve months, so your cost is likely to be £12,000. Not that much difference, but rental is still a better deal.

There is an unfortunate unknown in the calculations. Will that 5% interest rate change over time, and by how much, and in which direction? If interest rates go up, the person with the mortgage is going to have to face a sudden increase in costs whereas the renter is less likely to be affected. The renter can take action to alleviate higher rents by moving somewhere else. If interest rates go up, the buyer cant do that because rising interest rates will cause house prices to fall.

One tends to buy real estate for the long term. Interest rate variations are short term movements. We now have the lowest rates in recorded history. Those rates may well stay low for the next two or three years. They may even stay low for the next decade. They wont stay this low for ever. At some stage they will rise, and rise substantially. If you are buying for your retirement you will be on a fixed income. You wont want interest rates to rise.

Paying Cash:

If you are paying cash, you would need to work on a different equivalence. You need to check what returns you could get on your money. Here we would be looking at very safe investments. One I recently recommended to a friend was an investment into solar panels for social housing in the UK backed by the government and returning 14% a year for a set period. There are many similar investments. With a locked-up banking system, there are companies that take deposits, and then lend on to developers with the deposits fully secured on hard assets. In other words, other companies are filling the lending gap left by banks. You can get returns of anything from 10% to 30% a year without too much trouble. For the moment let’s stick with the fairly simple and safe government backed investment, and use 14% as a bench mark.

Let’s go back and look at what your £240,000 could buy. You could buy that holiday home and have somewhere nice to stay, or you could invest the £240,000 and collect that 14% return. That equals £33,600 a year. As you can rent a nice holiday home for £1,000 a month, you will have a place to live plus an extra income of £21,600 a year, and when you get fed up with your current holiday home you just move on. With the extra £21,600 a year there are no headaches, no repair bills, no maintenance, no taxes; you are free, and you have a lot more money to have a much better lifestyle. What the heck would you want to be lumbered with a house for?

If you change your mind, then you can always buy later; your capital is still intact, but I seriously wonder whether, once hooked in the hassle free rental situation, you’d want to go back to owning.

If the figures were closer together I would think my argument would be based around lifestyle choices, but the figures diverge so much that it seems to me to be a simple matter of mathematics. An extra £21,600 a year for selling the house? Think about it.

john clare

2012 Real Estate

2012 Real Estate

I’ve been reading what other real estate writers have been saying about what will happen in the world of real estate for the next year. For once it is a sorry state of prediction. No-one is happy. No-one sees anything much happening either one way or the other. Prices wont fall much because there is so much demand. Prices cant rise much because people will be poorer and feel poorer.

It’s more a matter of what wont happen rather than what will. I think most people are phased by the situation with the euro, and dont know what to make of the current economic chaos.

As I usually say in these circumstances, if you are just looking to sell one place and buy another it doesn’t really make much difference what happens. You are just swapping counters. But if you are investing you have big problems. Interest rates are low, but will have to rise sometime, so you need to build in a safety zone for that eventuality. You need to cost your project on the basis of rental returns rather than assume any capital gain in the near future.

I am staying on the sidelines because I dont like risk, and the risk element is high. I do still have rental properties but they were bought so long ago that they are in for peanuts.

As I stated in my previous post I think the tourist ghettoes are in for a hard time. Now is certainly not the time for buying holiday homes. The prices are still coming down, and the whole operation of buying a second home abroad is simply not cost effective, certainly not in Europe.

There are always exceptions to the general rule. The objective for the next year or so is to find those exceptions. They are out there. I still think the southern areas of Andalucia away from the Costa del Sol are good value, and so is the deep south of Italy. The eastern Mediterranean area, and Eastern Europe are still no-go areas.

john

Buying a Holiday Home

Buying a holiday home

Okay, let’s start the new year with a look at a situation which I think is unsustainable, and then I will make a suggestion. I’m talking about buying a holiday home, or buying a retirement home.

Have you been thinking about buying a holiday home in the warm south? Have you thought about buying a retirement home in southern Italy, or Spain, or the Algarve? Well, I’ve got a few things to say that I think you should take on board before you make that final decision.

Apartments in southern Spain are at last coming down to reasonable levels. You can now buy a two bed two bath apartment close to the sea, new build, for around €75,000. For a basic well built apartment in a pleasant area that is a reasonable current price. If you want to be on the coast itself, maybe a similar build will cost a bit more. If it’s a flashy joint then expect to pay more again, but for a basic well constructed all mod cons average holiday home that price is about right. Dont pay more.

If you cant find retirement homes or holiday homes at that price just drop me a line and I’ll point you in the right direction.

So, you have been looking at apartments costing €135,000 or even more. You think my prices are nuts, and that I’ve finally flipped. Well, look at it this way. First, those are the prices that are now available. If other prices are higher then you know what that means. It means those prices will have to fall, and they will. And I’m not guessing.

Second, how much would it cost to rent a similar apartment? You will find rentals available for anything from €400 a month upwards. If you haggle you can probably do a long term deal at €350 a month without too much trouble. Dont check out the rental sites, check out the local newspapers.

Now ask yourself what your apartment is costing you if you buy it. Say you buy your holiday home on a mortgage. What will the money cost? At current prices about 4%. If you buy something for, say, €100,000 the money will cost you €4,000 a year. If the mortgage is over 20 years that will be a total price to pay of €9,000 p.a. If, on the other hand, you have cash, that €100,000 can be invested to bring you in a darn site more than 10% p.a., but let’s say 10% at the moment. You could get 15% on managed US rentals, 12% on UK rentals, 14% on UK government backed solar panel investments, 15% on green oil investments, and so on. All solid investments, but we’ll stick with 10%. You’d earn €10,000 a year. Similar to the cost of the property so the price isn’t that far out of line. But…..

Let’s have a quick look at that caveat. How much for the maintenance, rates, repairs, gas and electric bills, and all the etc on that holiday home? That would lift the annual cost of your nice new apartment from €9,000 to at least €12,000, and maybe even more.

Now let’s have a look at another option. I spent Christmas in a four star hotel. I had a large room, with a large balcony overlooking a lagoon and the sea. I had half board, the use of a vast outdoor pool, and a heated indoor pool, a gym, and daily entertainment from table tennis, to shooting, to petanque on the beach, and golf, and so on. No electric bills, no maintenance, no cooking, no shopping or washing up, and someone even makes my bed. I reckon I save about €6,000 a year on food and service charges for one. Why not add that figure to the €12,000 from the previous paragraph. Now ask me what I paid for my room for two people.

It worked out at €55 a day. If I stayed for more than four weeks I would get a discount. 55 * 365 = 20,000. Assume a 10% discount for long term residency and that hotel with all its amenities, and worries removed from my day to day living, costs exactly the same as that €100.000 apartment. Quite frankly you can keep it.

I reckon we are going to see some changes in tourist land. And I think my investments will go up in value a darn site more than a holiday home will.

john