Have you ever seen such a crazy real estate market? Depending upon where you live, you may be saying 'this is the worst real estate market in 20 years' or you may be saying 'let the good times roll?. Talk about a real split personality situation.
Don't despair. No, the sky is not falling and actually what is going has been quite predictable by many. When you go to real estate markets that were 'hot' 18 months ago, the savvy investors are laughing all the way to the bank since they got out before it went soft. These investors have absolutely no interest in buying in their local market unless someone makes them a deal that they just cannot refuse.
In other markets, you have savvy investors buying everything that makes sense. In fact, there are some markets out there RIGHT NOW where the real investors expect nothing but growth for 3-5 years. And this is coming from the mouths of very experienced (20+ year) investors who are actually putting their money in harms way. For the average Joe, how can you possibly sort out if you are dealing with a Dr. Jekyll or a Mr. Hyde when you are considering a new real estate purchase? Its simple. Look at the fundamentals.
This last week, I was in two resort markets; Cape San Blas, Florida and in Marble Falls, Texas. In this week's article, we are going to compare two example properties to show how working in this (or any) real estate market is quite simple if you follow the fundamentals.
Cape San Blas, Florida Have you ever heard of this awesome beach location? If not, you are in the majority because even in Destin, which is about 90 miles to the east, very few people know about its appeal. Over the Labor day weekend, we returned to this beach location that has been one of our personal favorites for over 20 years. The appeal of this location, at least to us, is that you can rent a beach house on some of the prettiest, but yet most desolate beaches that Florida has to offer. The first night we were there is pretty typical; as far as the eye could see down the beach, in either direction, and not a soul was to be found.
In fact, when you go on the Cape, you better be prepared to be self sufficient since the closest restaurants are 15+ miles away. Ever since we have been going to the area, there has been a moratorium on commercial development. Lots of beach houses (but not condos) dot the beach view so it makes for a nice get away.
Now, from the investment side??. It used to be that the Cape was undervalued beachfront property. Even today, it is priced MUCH less than Destin beach front. Cape San Blas was a location where someone with reasonable resources could actually afford to own a beach front home and rent it out. Boy has that changed recently.
The house next to ours was listed for sale??.AND SO WERE OVER ½ THE PROPERTIES ON THE CAPE. It looked like a very nice beach home, 3200 square feet, 0.7 Acres, with a price tag of 1.99 Million Dollars. A friend of ours went with us and he and I have done a lot of investments together so we started 'doing the math?. Without officially verifying the numbers, here is what we came up with on an annual basis.
Net Income After Property Management: $25,000 (that is being generous)
Estimated Insurance: -$25,000 Estimated Taxes: -$13,000 Principle + Interest (20% Down, 7.5%) -$133,000
Net Annual Cashflow: -$146,000
Oh boy, where do I sign up? Notice that even if you paid CASH, the property would not have a positive cashflow, especially if you factored in maintenance. Sadly, we literally saw hundred's of for sale signs on the Cape. I wish them luck in trying to sell because I don't believe there will be many buyers for those fundamentals for a long time.
Marble Falls, Texas (Note: This article was intended to be before our property release but had to be delayed)
Like the resort market above, many of you have probably never heard of Marble Falls, Texas which is located about 45 minutes west of Austin, Texas. The major attraction to the area is that the Colorado river is damned into LBJ lake that then allows very nice lake homes to be built on its shores. In addition, there is a tremendous amount of golf (5 courses) in the area with a total permanent population of around 5,000. After driving through hot Texas for hours, this location was truly an oasis.
Even more interesting to me is the tremendous growth that is going on in employment, population, press popularity, etc in the area. In fact, Money magazine just ranked Austin #2 in best places to live and the area always ranks very high on job growth since Texas is still very aggressive in corporate relocations. Huge companies are moving to the area on a regular basis due to low land costs and a very favorable tax situation.
When you look inside Marble Hills, it really is just a tiny town that for the most part, services and survives off of the resort area. Like many resort locations, a lot of employment gets created however it is not high paying; if you look at most resort locations that have experienced growth, lower end property has become in extreme demand for affordable housing for workers. Given the growth of the surrounding area, the high dollar value of the resort type homes, and the lack of many true resorts in Texas, it is reasonable to expect Marble Falls to follow the same path.
In addition, when you go into Marble Falls, you see something very, very strange. For a town of such a small population, you see essentially a new Home Depot, and a new Office Depot, and lots of signs of new growth. Hmmmmm. Knowing that firms like Home Depot rarely miss on their analysis of future growth, that is really interesting to me.
So now, let's look at some numbers. We are working on a duplex project that we hope to bring to our group over the next week. Here are the rough numbers with a purchase price of approximately $200,000 ($100,000 per side of the duplex).
Net Income After Property Management: $20,000 (We believe this to be conservative)
Estimated Insurance: - $1,000 Estimated Taxes: - $5,000 Interest Only (20% Down, 7.5%) -$12,000
Net Annual Cashflow: +$2,000
** Note: Most people are choosing to finance with 10% down thus changing to a near neutral cashflow position at current rents.
While these are just preliminary numbers, they clearly show a night and day difference with the numbers in Cape San Blas. Also, when you visit, you find out there is very little property for sale and very little for rent?. That is a good combination in my opinion.
Comparison Of Fundamentals For educational purposes, let's just look at the course fundamentals. Literally, you could put together this information based on just a couple of phone calls to people in the area.
Cape San Blas Annual Cashflow -$146,000 Net Rent Multiplier ($1.99M/$25K) 79.6 Inventory On Market Substantial New Commercial Growth Zero New Job Growth Zero
Marble Falls Annual Cashflow +$2,000 Gross Rent Multiplier ($200K/$19.4K) 10.0 Inventory On Market Negligible New Commercial Growth Substantial New Job Growth Substantial
Even though I would consider this at best a 'first level' analysis, I can tell you immediately that I would have no interest in the Cape San Blas property and I would be very interested in the Marble Falls property. Why? Simple real estate fundamentals.
While there is lots of gloom & doom press out there about the real estate market, and some of it is actually true, never forget that real estate markets are not coupled?. That is, you can have a Mr. Hyde in one location and at the same have a very interesting Dr. Jekyll in another. To sort them out, simply 'do the math?.
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