Monday, April 16, 2012

China : Investors Want More USA Real Estate

I'm on my way to China tomorrow for a two week excursion for both business and pleasure.  As I've never been there before, I am very much looking forward to experiencing the customs, culture, sights and sounds of this powerful and massive country.  By land area, it has 3,722,027 square miles, landing #3 overall in the world, just slightly larger than the United States (3,678,190 square miles).

What's important to understand is that we live in a global economic system now and that investors worldwide are looking to put their money in the highest return, lowest risk investments.  These investors are everywhere, but with the massive rise in the economic power of China over the last decade in particular, there are many investors who have garnered substantial wealth in a short period of time and are among those individuals looking to park their money in the best, most viable investments for their personal goals and criteria.

What's not typically known or advertised is that the price of real estate in the United States in major cities compared to that in China for similar properties is a massive bargain, not only in terms of price for the Chinese, but the fact that the Chinese government does not allow citizens to own the land on which a property is built.  The land is leased to the owner of a property in comparison with complete ownership ability in the United States.  The following Forbes article explains further why the United States is such a popular country for the affluent Chinese to invest their money.  There are many positives that the influx of foreign capital will help with in the USA, and the Chinese do have plenty of capital to spread around.

For those that have an interest in what foreign capital will do to a real estate market, just look north of the border into Canada where there is a completely different market in comparison with the USA.  There has been much said about the strength of the Canadian banking system, and this is one of the driving factors for the long term appreciating real estate markets north of the border, however foreign capital influx has had a bigger impact than the banking system, with much of that coming from Asia and in particular, China.  

The major real estate markets in Canada have been appreciating without a drop for many years beyond that of a typical market cycle and even during the last "great recession" contrary to conventional wisdom.  A vast influx of foreign capital flowing into "relatively safe" Canada has boosted and pushed the real estate markets up in cities like Vancouver and Toronto to astronomically inflated values.  As long as that capital continues to flow, prices will continue to rise and will likely do so in the near future, but this cannot be expected to continue much longer as many experts are now in agreement with including the Bank of Canada.  Without that foreign capital influx, and the "safe" impression that the Canadian Real Estate markets have to foreign investors, the markets for all intensive purposes there should have declined somewhat at minimum over the past few years but didn't as a result of foreign capital influx.

As the tide begins to shift in the United States and the tough times that have been prevalent since about 2007/8 begin to show increasing signs of improvement, expect to see more foreign capital coming into the USA, and a substantial amount more so from China.  There are still many that see the USA as a risky place for investment.  I absolutely disagree with them for a multitude of reasons, but as my business partner Nate Mack of PinPointe Partners in Atlanta says, there is no such thing as a good or bad market.  There are only good or bad investment strategies.

I wish everyone a great balance of April and I will check in again upon my return in May.

Saturday, April 14, 2012

A Nightmare Due to Management!

I just got back from a very productive business trip to Chicago and Atlanta.  Among one of the projects we're working on at the moment is an apartment complex in Texas that is stabilized with excellent occupancy numbers.  Not only is it occupied and almost completely full, the economic occupancy is also near 100%.  When reviewing an apartment complex for potential purchase, we need to know the physical occupancy (the ratio of occupied units to total units), and the economic occupancy (the number of tenants that are actually paying regularly and on-time).  It makes no sense to do your due diligence based solely on physical occupancy as we do need to know who's paying and how much.  Bear in mind the difference between those two occupancy figures.

What we found in this complex is that expenses are running nearly 80% of gross collected rents.  This is a sure sign of a bad management company.  We also found that the management fee is more than double that which it should be for this type of property.  This is bad news for the current owner, but it's great news for us because we know how to solve this problem, and that's why we're solve other people's problems and make money in the process.

Note the following 10 no-no's to identify a bad management company:

1.   Not able to collect rents
2.   Higher than normal expenses
3.   Not able to keep property full to local market levels
4.   High rate of evictions
5.   Poor tenant screening
6.   Slow turn-around getting units re-rented
7.   Property not maintained / clean
8.   Unattended leasing office
9.   Poor reporting regarding expenses
10. Tenant relations are not working properly

The top three above are the biggest flags to identify a bad management company.  Note that what we found on the above property is in the top three.  What does that mean?  We have an acquisition target and the numbers told us this before we ever set foot on the property more than a thousand miles away.  What's more about this project is that we have identified an under-valued property as well with a number of options for us to increase the property value.

Keep in mind that much of determining a viable project lies in the numbers.  If you understand the numbers and the flags, you can quickly reject the vast majority of projects that come across your desk and zoom in on those few that make sense.

Until next to you.