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PHILOSOPHIES
* Investments in Cities vs Coasts
* Below market value investments
* Below market value today vs future
* Buyers and sellers markets
* Compound capital growth
* Fees vs Commission
* Finance vs Growth
* Power of finance
* Growth vs Discount
* Location, Location, Location
* Rental market oversupply
* Speed vs Caution when investing

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Property Investment Philosophies


Is it better to invest in cities or on the coast?


To assess any property investment market you have to look at the fundamentals factors that drive the market:

City markets are mainly driven by local residents who are looking for a place to live (this applies to both sales and rentals).

It is these locals that have jobs, rising salaries and access to bank finance, thus making property in the city affordable.

Most companies tend to be based in cities as this is where the people are, and because the jobs are in the cities so people move to the cities in search of these jobs ... and so the cycle continues. This movement of people to the cities swells the cities populations and thus creates higher demand for housing - the more demand there is for a given supply the more likely prices are to increase. Salaries (and real salary growth) in cities tend to be higher than in the countryside.

When you come to sell or rent your property in a city there are potentially 1+ million people who could buy it or rent it from you, thus you market is very large.

Properties in resort markets are driven by different fundamentals.

Typically beach and ski properties are bought by either locals looking for a second home or foreign "investors" (more typically the later).

Most of these foreign investors buy from one of an ever expanding array of property companies out there promoting beach or ski properties as fantastic investments.

They often market these properties with lots of pretty pictures and pseudo facts.

They spend large amounts of money on marketing and employing heavily commission incentivised sales staff who will often say anything to you to make a sale.

These companies can afford such large sales and marketing budgets (and buy lots of column inches in newspapers and magazines) because the commissions they receive from developers are often very large indeed - anywhere from 5-20%.

That's 5-20% of your hard earned cash.

In effect it means you are paying way over the odds for your property. Whatever yields you may get will be reduced and when you come to sell there is a risk that the you will not be able to sell at a higher price than you originally paid and thus lose money.

Developers in these locations operate on high margins (because they have much higher risks). Because the local market for second homes is often not so strong they have to sell their properties at inflated prices to overseas buyers. To be able to do this quickly and effectively they employ foreign agents to market the properties for them and pay them handsome commissions should they make a sale.

If an agent is taking such large non-transparent commissions from the developer they are working for the developer - not you as a client - no matter how nice they may seem. With such a set up how do you know you are paying a good price or indeed whether it is a good investment at all?

The simple answer is you don't know, and such investments are more likely to be huge liabilities both on your time and money.

Conversely in cities developers operate on very low margins (hence you can be more sure you not paying over the odds) and thus pay far less to agents (if anything at all) (often 2-5%).

Thus from an agents point of view there is far less money to be made selling properties in cities than in beach locations. Which is why there is a prolific number agents out there selling beach property anywhere from Brazil to Bulgaria.

Not only does an agent make less money selling properties in city locations but it is also far harder to operate in this environment.

Most developers in cities can sell all of their property to the local market (especially if it is well priced / a good deal) and thus don't need foreign agents (unlike beach developers who really need foreign agents). Therefore, it's a lot harder to get a deal from city developers in the first place and often they are prepared to wait far less time for an agent to sell those properties to his clients.

And what fundamentals are beach and ski markets driven by?

Typically its those foreign investors driving the market not locals. Then when the next "latest hotspot" is revealed the money is moved on and the market you bought in takes a slump. Typically in these markets the exit strategy for investors is very poor, ie there is no secondary or resale market.

When you have a market driven by foreign agents making good money selling offplan property to foreign investors none of these agents are even remotely interested in reselling your property because they can make far more money for far less hassle and this is further compounded by the fact that all the foreign investors are only buying offplan.

Where is the resale market going to come from?

Furthermore, the rental markets in beach and ski locations are driven by tourists - the travel industry is a fical one and fortunes can literally change with the weather.

Typically local tourists only go to the beach or ski for a weekend and will book accommodation in a hotel at much lower prices than your over priced apartment or villa. Foreign tourist typically take a flight/hotel package deal as they are often much cheaper than booking a flight and apartment separately and certainly less hassle.

So where is your rental market going to come from?

Unless you have a very good letting and management agents with great marketing abilities and tour operator contracts (unlikely and if true its no guarantee) the answer is you may be relying on friends and family for your rental income, which is not really the basis of a good investment.

On top of that resort locations typically have very short seasons in which to make your rental return (perhaps 4 months at most in many locations).

In a city even if the rental market is slightly weaker than some other city you can always reduce the rent slightly and you will get a tenant - and these tenants are more stable long term tenants.

The costs of having a long term tenant in a city are far lower than the costs of running short term lets, where you need to pay higher commissions to a letting and management agents, your furniture wears out more quickly and you need to pay for weekly cleaning. Compounding these high costs is the fact that service charges are often far higher in resort buildings (due to swimming pools etc) than in cities. All these costs can greatly eat into your rental yield (should you get any rents) and often leaves investors in beach and ski locations with large monthly negative cashflow.

So if you can rent your beach property and you can't resell it what are you going to do?

The simple answer is you may be stuck with an expensive mortgage to pay out of your own pocket for a long time to come.

We advise you, if you are looking for a true investment, to buy in a city with strong fundamentals to the property market. Only buy in a beach or ski location if you view it as a discretionary purchase and not as an investment.
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