Is owning a second house really a good investment?

 

The picture above shows my parent’s beautiful summerhouse with a 10 minute walk to the ocean – a great investment?

What you are about to read now is kind of a contradiction to what I have written before about investing in property. I would like to challenge your mind and the common “universal truth” that investing in property is a good thing…

My family has had a summer house in a popular summer vacation resort for many years: Last year my mom told me what a great investment it has been. She mentioned that she and dad bought it for 12 000 USD in 1975 when I was one year old and my sister was three years old. And now the house is worth about 540 000 USD. It sounds like a great investment, doesn’t it? At least at a first glance…

Let’s look at this a bit more. When mom and dad bought the house they had to give it a thorough “facelift” as the house was in bad condition, and they also built on to the house. So they actually invested around 43 000 USD initially, including both the initial house purchase and renovation. But it still sounds like a great investment, right?

And in year 2003 they built on to the house a second time, this time to a cost of 77 000 USD. So they have actually invested 120 000 USD - and now the value is 540 000 USD. So, do you have any idea how much the value increase of the house has been per year since they bought the house? About 6%! Not too bad, but I must say that I got a bit disappointed when I calculated this figure as I thought it would turn out to be even higher ROI considering that 540 000 USD is so much money! L

Figure above: calculation of the ROI of the house investment

However, this is not the whole truth. During the years there has also been running costs such as maintenance and repairs, as well as electricity, insurance, water, etc. If we would take this into account (with the assumption that the running costs year 2014 are estimated to 1% of the yearly house price) we would have paid in total about 71 000 USD during the 39 years we have had the house, bringing down the ROI per year to around 5,5%.

Figure above: calculation of ROI also considering running costs. The housing costs of 70 669 USD decreased our calculated annual rate of return further to 5,45% (sorry about the small figures in the table :-) )

Does this house still sound like a good investment? Well, not really to me. But it of course depends on how you would have used your money otherwise and what returns you are looking for. I am looking for higher returns than 5,5% per year. But the house has been a safe investment, so for being a low risk investment 5,5% is quite good. Also, we shouldn’t forget how much fun we have had in the summer house. So from that perspective it actually has been a great investment!

As a conclusion, in order to get a really good return on your summer house/ 2nd house you should try to rent it out to increase the house payoff. I was in Hawaii (Big Island) earlier this year and got interested in buying an apartment there for rental purposes and for own usage. Hawaii is an excellent location for a rental property with good weather all year long, making the rental period long. And it has beautiful beaches and exciting landscapes and a strong, consistent rental demand from mainly the US and Japan. There are a lot of vacation rentals in Hawaii and I found one that seemed great at the first sight; a smaller condo (1 bedroom) in good shape right by the beach and quite central - and according to the prospect it had a track record for being a successful rental property. And indeed, it would give me a gross rental income of roughly 11%. Not bad. But there was a lot of overhead cost related to this, such as property management, repairs, electricity, which took down the ROI to around 5%. Not that good compared to the first calculated ROI of 11%. But on the other hand, I also would gain from the capital appreciation of the apartment.

Again, here is a good learning that reinforces what I mentioned earlier –things you don’t think really about (i.e. electricity, maintenance, etc.) actually add up quite a bit and actually cost a lot of money, bringing your potential net ROI down! Have this in mind when you look into vacation rental properties!

 

/Chris

Brazilian social housing investment “minha casa, minha vida” - Bosque Residencial

 

 

“With a population now exceeding 200 million, Brazil needs more houses! Lower-income families are facing a housing deficit of 8 million homes, set to grow to over 12 million by 2023. We are helping to solve their problem.”

 

 

This is how the investment prospect starts to describe the investment that I have made recently. The investment is a “social housing investment”, which I have made through Emerald Knight Consultants, an investment broker specializing in Socially Responsible & Sustainable Investments (http://www.emeraldknightconsultants.com/). The issuing company of the investment is EcoHouse Developments, an award winning property developer of social housing programme in Brazil (http://www.ecohousedevelopments.com/). “EcoHouse was founded in June 2009 and are now a global organisation with an annual turnover of 65M and offices in London, England - Natal, Brazil - Toronto, Canada - Dubai, UAE and Singapore. We have an expanding workforce of over 1040 full time employees across the globe which includes over 900 full time buildcrew onsite in Natal, Brazil.”

So what is a social housing?

EcoHouse Developments describes the social housing investment as following:

‘Social housing’ is a term used for homes provided by a government for families with modest incomes. The economy of Brazil has now grown to become the 6^th biggest in the world (overtaking the UK at the end of 2011) and is continuing to rise. This means that the demand for housing has of course increased. Property supply simply can’t keep up with demand and added to this millions of families in Brazil already live in sub standard housing. In 2009 the government decided to act decisively to tackle this problem. So the Minha Casa, Minha Vida social housing scheme was launched! The ‘MCMV’ scheme aims to build three million homes over a five-year period. This big investment has a government budget of around R$100 billion (approx £40 billion/US$65 billion/€ 45 billion). The first phase of Minha Casa, Minha Vida Brazil was launched in early 2009 and aimed initially to build a million houses throughout Brazil. In June 2011 the government announced the start of a second phase comprising a further two million properties.

How does the investment work?

The investment is quite simple. Private persons invest in off-plan property developments in Brazil. Once the property is built and sold to an individual in Brazil, the investor gets the invested money back. Plus a 20% interest rate - in one year!

So why did I invest in this?

There are a number of attractive reasons why I did this investment. Some of them are (not individually ranked):

·         High returns. The returns are set to 20% within 12 month. Not bad!

·         Short-medium investment horizon. The 12 months investment period is a good short investment period, so my money is not tied up too long. Also, there is a chance to prolong the investment period with a similar investment with the same company (a three year investment if I have understood it correctly)

·         Brazil is an excellent place to invest in and the investment type is in high demand. Being one of the famous BRIC-countries, Brazil is definitely a good place to invest in. It has rapid growing economy with high GDP-growth and has a high housing deficit. The picture below illustrates this very well:

 

Picture above comes from the EcoHouse investment prospect

·         A proven investment. The developer is an award winning developer with offices worldwide with proven track record and identical projects already delivered on time. According to Emerald Knight, investors in EcoHouse’s previous investments have received their money back earlier than the agreed 12 months!

·         A social responsible investment. Helping to solve the housing deficit by building houses for people in need of properties with good standard

·         A relatively safe investment. The investment is backed up by the Brazilian government and protected by a Lloyds TSB Escrow facility that offers 100% security. The worst case scenario in the project is that all money is returned to the investor if the project does not go ahead for whatever reason

I will write more about this investment in later postings so you can see if this investment turned out as planned! In one of my next postings I will write about the results from an exciting investment I have made – a carbon credit investment. So stay tuned and subscribe to my blog (at the top right on my blog) - don’t miss out on more interesting stories!

(Flag-picture above from: bestflag.blogspot.se/2012/09/brazil-flag.html)

16% annual return from a property investment?

 

 

 

 

 

 

 

Recently I have invested in an alternative investment that according to the prospect will give 16% ROI per year with a maximum investment period of three years. Not bad if this investment will work (fingers crossed!).

The investment is a property development, a luxury eco-resort on an island in the Panamanian Caribbean named Sarani Resort. Panama was voted as the best tourist destination for 2012 by New York Times, and is currently experiencing a tourist boom. Also, ecotourism is among the fastest growing travel trends (http://www.pcbeach.org/ecotourism/ecotourism-in-pcb) and the goal with the Sarani Resort development is to be the region’s most luxurious eco-resort.

I invest through the broker Cavendish Blue (www.cavendishblue.com) that describes the investment opportunity like this:

“A limited opportunity to invest in the early stages of the eco-luxury Sarani Resort and benefit from contracted returns of 16%pa with 100% deposit protection. Investors also benefit from a contractual buy back guarantee from the developer within a maximum 3 year timeframe.”

The investment process has worked well this far. Cavendish Blue has been professional, provided instructions that have been easy to follow how to proceed with the investment (which were necessary – it was a lot of paperwork to fill in!), and gave quick feedback during our correspondence.

So what made me invest in this property development?

·         It seems to be a quite safe investment with attractive potential returns; 16% per annum is very good returns for me, considering that I see the risk as fairly low.  The key factors why I believe this as a low investment risk are:

o   I consider Cavendish Blue as reliable to invest with. Cavendish Blue is a quite new player on the market, but it has a good foundation. The company operates under the same company as IPIN (International Property Investment Network, http://www.ipinglobal.com) which is well known. As I understand it, Cavendish Blue has a short-term investment focus, while IPIN often has a long investment focus

o   Cavendish Blue has worked with the property developer before and that co-operation turned out well. This fact increases the chances for a successful co-operation this time as well

o   Deposit protection against developer default, meaning I should be able to get my invested money back in case the development fails

·         The investment timeframe of maximum three years suits me well for where I am right now from a personal standpoint

·          The investment prospect is approved by my wife J (co-investor)

On top of the attractive potential returns, there is also an opportunity to stay one week at the resort for free once it is completed. I am already looking forward to this great perk! I have 18 month to exercise this right after the facilities have opened.

I will write more about this investment in my future blogs so you will know how it performs. So stay tuned and subscribe to my blog (at the top right on my blog) - don’t miss out on more interesting stories!

Picture above from: www.cavendishblue.com

My top tips for a successful short-term property investment

Happy New Year! I hope your holiday was as nice as mine.

Below are some useful tips for a successful short-term property investment based on my experience and from what I have heard has worked for others. Hope it will help you as well!

Choose a dedicated broker to sell the apartment. We invited several brokers for interviews when it was time to sell our apartment. Check if the brokers are familiar with the area. Check if they have sold other apartments in the area. Check their previous experience. Check how successful the brokers have been.
 

One of the invited brokers told us how lucky a buyer of his had been to get an apartment for a really low price. Would you like to have this broker to sell your apartment to a really low price..? Another broker showed great confidence and had trustworthy answers to all our questions. Also, he told us about how many successful sales he had made. He had broken a number of sales records in different apartment buildings. Either he was good at bragging or he was this good! We finally chose this broker because he seemed more motivated than the other brokers, had a positive attitude, and he was a bit of a “dreamer” where nothing was impossible. And he did indeed break another record as he sold our apartment for the highest price ever in our building – and the broker sold it for much higher than the average price in the area!

If you can get a broker on recommendation it is also worth a lot, but make sure to always interview the person to get a feeling about his/her capacity and sales methodology.

Renovate smartly. Ask yourself during a renovation: “What is the apartment lacking and will it be worth renovating?”. Think in terms of “renovation cost vs. benefit” and go through all decisions thoroughly before conducting them. Every single little improvement will cost time and money and not everything is worth doing. Consider also whether you should go for quality renovation or if would be ok to use cheaper quality (IKEA has great kitchens for a reasonable price!).

As I mentioned in an earlier posting, my wife’s and my apartment was basically fully renovated when we moved in and the previous owner had flipped the apartment with a huge profit. He had lived in the apartment for about six month and used IKEA in the kitchen and bathroom – and it looked great! Also, don’t just do the bare minimum when renovating, it will look cheap. That is the difference in what our last apartment sold for when we sold it and what it sold for when we purchased it. We made very few changes but had exclusive furniture, very good taste and a few showpieces of furniture.

Use an appealing taste which fits well with the rest of your apartment. I have visited many apartments for sale as this is an interest of mine and many have been top renovated but unfortunately not always with good taste. I remember one apartment with a fully renovated bathroom with carefully selected and expensive material. It would have been a great bathroom if it wouldn’t have been for the weird African style with crazy wall colors. It didn’t fly with the rest of the apartment, and certainly not with the taste of the average apartment buyer. It was such a waste with renovation money.

Speaking of bathrooms; if you decide to renovate one, make it unique for god’s sake! It seems like most renovated bathrooms too often look the same, with black tile floors, white tile walls and the same fixtures. Throw something unique in, but do it with taste so that it is still uncluttered and/or luxurious looking.

 

Figure to the left shows our bathroom before renovation and the right photo the result after renovation. Both of the bathrooms are unique in their own way… My wife and I wanted to create an exclusive bathroom with an old-fashion feeling that went with the rest of the style of our apartment from 1882. We are very happy with the result!
 

Choose your object wisely. It is important to choose an apartment that has qualities that is appealing to the market and will boost your chances for a successful sale. My wife and I normally look for the following criteria when we search for apartments:

·         Balcony. We, as many others, value highly the opportunity to sit outdoor in the morning with a cup of coffee, or sitting a summer evening on the balcony having a cold beer and enjoying the good weather!

·         Apartments located high up in the building. This gives the apartment better sun light. I never look at apartments on the bottom floor. Many people don’t even go to showings for apartments on the bottom floor apartments because the risk is higher for burglary, less sun light in the apartment and the fact that there is often little privacy because people can look into the apartment from the street.

·         Look for some aspects that make the apartment unique. Little quirks that not everyone may like, but that a few will find completely charming.

·         Be strict about floors. My wife and I are very picky about the floors. They must be all the same material and preferably old and charming, or very “earthy and textured”. Same material throughout the apartment creates a homogenous and nice feeling. We never choose shiny floors and never different colors. Remove room borders if possible when renovating.

·         Location. Many property investors claim that the most important factor for a successful property investment is LOCATION! Location is to my opinion important but not priority #1. I do agree that this factor is very important if you are looking for a long term investment, but in the short term the other parameters in this article can be just as important.

·         Renovation potential. Make sure that the apartment has the renovation potential you are looking for, and that it is within your budget.

·         Old apartments, turn-of-the century apartments if possible. High ceilings create a nice spacious feeling to the apartments, and old ornaments such as crown moldings gives charm to the apartment.

·         Elevator. Having an elevator makes a huge difference if you would live on the fifth floor… (even on the first floor if you are lazy J ). Older people, who often are strong buyers, would probably not even consider an apartment high up in a building without an elevator.

·         Fireplace. Imagine sitting in front of a fireplace with a glass of wine at night when it is snowing outside. Do I need to write more about this point?

·         Choose an open floor plan if possible. This creates a more spacious apartment and good social areas.

 

 

To the left are sales photos of my wife’s and my apartment, using tips from this posting. We made +33% off the purchase price –not bad considering the average apartment price increase in the area was about 0% during the same time!

 

 

Last but not least, make sure to have good luck and good timing during the sales process! This is probably one of the more important factors when selling an apartment, but unfortunately also the most difficult to control J. All it takes is two parties being really dedicated and interested in the same apartment. It can make a difference of several ten thousand dollars…

Also, some other smaller tips along the way:

·         Buy in an up-going property market. It is easier to sell in an up-going market and the apartment increases in value while being in your possession. Consider the micro- and macro-economic when buying as this often affects the property market. For instance, is the market at the bottom of a recession? How will the property market be affected by the Euro-crisis? Read the business newspapers to follow what is happening on the market!

·         Make sure to be ok to stay in the apartment for a longer time, in case the apartment would be difficult to sell (for instance due to a declining property market.) and you don’t want to make a loss

·         Live in the apartment while you renovate it – makes it cheaper

·         Consider what apartment size you want to target. Should you target a smaller apartment in an attractive area or a larger apartment for the same amount in a less attractive area? I would recommend the smaller apartment if you are going to renovate – it is less to renovate and saves both time and money – and chances for a better investment payoff are often higher in attractive areas.

A successful investment on the property market

My girlfriend and I bought an apartment with the goal of making money out of it after some minor renovations to make it even more attractive.

 

We were unfortunate to buy the apartment when the economy and property prices were on top 2007. Luckily we had decided before buying the apartment that we would stay here for a while in case the property market would go down and until the market would recover.

 

I still remember how angry I was when we bought the apartment. We had in my opinion paid far too much for the apartment. The apartment was sold for about 20% more than our original budget! I called my girlfriend and complained about the high price, reminding her that my sister had bought her apartment a lot cheaper in a much more desirable location (even though it was a few years ago). And if this wasn’t enough - a few months after we had purchased the apartment the house prices started to fall. Imagine our frustration for the bad timing…

 

 

 

 

 

 

 

 

 

 

 

During the period we lived in the apartment we only made some smaller adjustments since the apartment was basically fully renovated when we bought it. We installed wardrobes with more space and made the kitchen more convenient by installing some more cupboards and a built-in microwave. It was quite nice not to have to do too much work the first time we bought an apartment for renovation purposes J .

 

2010 property prices were back to the levels of 2007 we decided it was time to move to another apartment and invited a few brokers to come and evaluate the apartment. The price evaluation varied from less than we had bought the apartment for, to a profit of +20%. That’s a huge price range, considering brokers claim themselves to be “apartment sales specialists”! We had one of the leading brokers in the area over (an acquaintance of my sister) and she actually gave us the lowest price estimate of all brokers! I remember she said “10 years ago it was impossible to sell in this area and it is still difficult”, hinting that it was going to be really difficult to sell our apartment. And she also mentioned that the open floor plan style we had was out of fashion – no one wants it nowadays. I wonder if this was her strategy, to talk down the apartment before selling it and then “surprise” us with a good selling price… However, we didn’t choose the “top broker” and ended up having an extremely good sales price, +33% compared to our purchase price! Not bad considering that the market prices basically were back to the same levels as when we bought the apartment.

 

Since the loan conditions were very good at the time we bought the apartment we only had a down payment of about 2% of the apartment price (sounds crazy, considering it is currently about a minimum of 15% down payment!). This gave us a fantastic leverage on invested capital!

 

In my next posting I will tell you about my top tips how we made this property investment so successful, so stay tuned and subscribe to my blog, don’t miss out these interesting stories!