Sunday, February 13th 2011

RIP Jigme
We have set up a trust account for Jigme’s wife and three young children.  Details to follow soon…….

Key Fundamentals to Investing in any Real Estate Market in the US

Why Jacksonville Florida?

The best advice I can give to any real estate investor is to follow Warren Buffet’s advice about investing:

Rule # 1: don’t lose money.

Rule #2: don’t forget rule #1.

Sounds overly simple but if you don’t follow some simple fundamentals there is a good chance you will lose money, have headaches, and depending on your market and niche it could be a significant amount of both.  Conversely, if you pay attention to these fundamentals, your risk will be mitigated and your reward is closer than you think.

I’ll share with you my top two rules for investing and then give you the five key market performance indicators that you should look for in any market where you are looking to invest.  Its important to note that you need to follow both rules and have all five indicators working in your market in order to be successful and more importantly sustainable.   These principals are even more important for a foreign investor to adhere to and not get taken advantage of while investing across borders.

Rule #1 :Only invest in positive cash flow property.

Again, sounds too simple, but you’d be amazed at how many investors out there invest in property based solely on speculation of appreciation and lose money on a monthly basis because their rents won’t cover their expenses.  Our first real estate mentor drove this rule home to us at the beginning of our careers and we have never strayed from it, which has kept us out of a lot of trouble over the past decade.

Rule #2 : Buy low and sell high, you make your money when you buy!

I know, “Duh!!!”  But again, if you follow the history of the real estate cycles (read “Grow Rich with the Property Cycles” by Kieran Trauss), and always buy your property at as deep a discount as possible, there is no reason you shouldn’t make money when you decide to sell.  Swimming with the tide, you want to buy, buy, buy, in an extreme buyers market like we are experiencing in Jacksonville, Florida currently and sell, sell, sell, when the market shifts back into a sellers market like we experienced in 2005-2006 which is when we liquidated our portfolio at the height of the cycle in Bakersfield, California.

So keep it simple, follow these two rules and then look for the following five key performance indicators that drive the growth and long term value of any market.  I’m going to relate these principles to my experience in the market (Jacksonville, Florida) where I currently invest full time and it’s what I know best.

These principals are universal and if any of the principals are lacking in your market, shop for another market, don’t try to force it.  In 05-06, when we were liquidating out of California because the fundamentals were way out of whack, namely, lack of affordability, we searched and searched for another market to invest in that held all five performance indicators.  Our research and due diligence kept bringing us back to Jacksonville, Florida.  You will see why we chose Jacksonville as it relates to these vital principles that are a must for any market.

5 Key Market Performance Indicators

1.  Affordability

Nowhere else on the eastern seaboard can you find a major coastal market where you can buy single family homes (average 1500 sq ft., block or brick, 3 bed/2bath) for less than $100,000 within 15 minutes to downtown and 30 minutes to the beach.  Purchase pricing for educated investors is well below the replacement costs of a new home which is a huge risk mitigation because builders cannot offer their product below what investors can buy and rehab existing homes at.  On top of that, rents are very affordable for tenants but at the same time allow investors to hit what we call the “1% Rule” which is great for positive cash flow.  This means monthly rents are approximately 1% of the purchase price if the house is rent ready. For example, homes we sell in our model to our investors as turn key rentals at $100k, will rent for $1000 a month.  There is a misconception that Florida as a whole has very high taxes and insurance.  It’s important to note that taxes are calculated county by county in the US and Duval County where Jacksonville lies is very affordable.  As a rule of thumb, we project annual taxes at 1.5% of the after repair value of the home (100k home incurs approximately $1500 annual tax bill).  Insurance in Duval County is also very affordable compared to most other counties in Florida.  A typical starter home that we sell in our model to investors can expect to pay between $700-900 (depending on square footage) a year for insurance.  Jacksonville is located in the northeast of Florida and does not have the hurricane activity that south Florida and the Gulf counties along the west coast of Florida experience each summer.  This factor keeps both our taxes and insurance rates low and costs down for the buy and hold investor.

2.  Economic Growth

Stability and future growth of a local economy play a key role in the fundamentals of real estate investing for any market.  In a nutshell, “jobs” at the end of the day are what drive any real estate market.  Jobs are what allow tenants to pay the rent and owners to pay their mortgages so its vital to pay attention to the local economy and what drives job growth.

In our market, we have a great diversity of job source.  Be sure you are not investing in what we call a “one-horse town.”  Meaning the city is dependent upon one job source to support the local economy.  An example of this would be a mining town that may do great while the mine is in business but once the mine closes so does the rest of the town and real estate values plummet and there are no tenants or buyers to be found.

In Jacksonville, we have 20 colleges and universities, seven major hospitals, including the Mayo Clinic, a large military presence with various bases; many Fortune 500 companies are either headquartered or have branches here, and a large and growing port industry.  Because we are coastal and have inter-state highways 95, which runs from south Florida up to Canada, and 10, which starts in Jacksonville and goes west out to Los Angeles, we have recently been dubbed the “Logistics Capital” of the southeast.  This infrastructure and geography is attracting international attention and companies like Korean shipping powerhouses Matsui and Hanjin are creating thousands of jobs in Jacksonville over the next 3-5 years.  This type of projected growth coupled with the incredible buying opportunities is why we/our investors are buying and holding properties, enjoying the positive cash flow and looking forward to the long-term growth.

3.  Population Growth

A simple guide for this fundamental is to ask, “is this market shrinking or growing in population?”  If a trend toward continued growth of the population is not in the forecast I suggest finding another market.  The population in Jax has been growing at a very rapid pace over the last several years and is projected to continue because of the baby boomers that continue to relocate and invest here along with the national and international companies moving their offices here.  According to census, an average of 75 families are moving to Jacksonville every day.   Fifty percent of the population growth is coming from people moving here to take advantage of the job opportunities.  We are the largest city in the country geographically and 3^rd in population behind NYC and Philadelphia.  With a median age of 36, Jacksonville is significantly younger than other major Florida cities.  With a young work force, great climate, and business friendly environment, the greater Jacksonville region has enjoyed exceptional growth and prosperity over the last decade and more importantly is projected to continue with that trend.

4.  Desirability

When considering a market for the purposes of real estate investing, desirability is definitely an important factor.  What is this property close to?  What does this area offer in terms of lifestyle, weather patterns, proximity to amenities, (shopping, beaches, schools, recreation).   Jacksonville is a great place to live life to the fullest and invest in a market that is poised for excellent long-term growth.  The city has a wide variety of distinct residential neighborhoods with housing options to suit any life style or budget.

Expansion Magazine rated Jacksonville as one of America’s “Best City to Live and Work.”  The city is home to the southeast’s largest and contemporary art museum, endless miles of pristine beaches and the largest urban park system in the United States.  We also having gorgeous weather year round and avoid the hurricane activity that Florida is so well known for which is definitely a bonus whether you are living or investing here.  We are blessed to have friends, family, and clients visit us here from around the world and the underlying feedback from all of them is Jacksonville provides an “easy living” lifestyle.

5.  Supply and Demand

This fundamental, if overlooked can spell disaster for investors trying to enter a market whether buying and holding as rentals or flipping.  During the last boom cycle (2005-2006) that occurred in many major cities across the US, many developers overbuilt.  What followed was an extreme over supply of houses with little to no demand.  Keep in mind that real estate and its fundamentals are specific to each individual market and while some markets are experiencing an over supply of homes, other markets are experiencing an over demand from owners and investors at the same time.  To give you an example of this, we have a good friend who invests in Syracuse, NY, and over the last 10 years his market has seen a steady appreciation of 2-3 percent.  During the same exact time in history this was happening, we saw a complete cycle (Boom, Bust, Recovery) in both the California and Florida markets where we were investing in and prices appreciated up to 300% in some cases in the boom and depreciated back down to par pricing from 1999.  As you can see, if you didn’t time it right, you could very easily been bankrupted, which unfortunately a lot of investors were in this last downturn.

Your goal is to enter a market that has a positive balance of supply and demand, or is moving in that direction because of economic and population growth along with affordability and desirability as described above.

“Real estate investing is a numbers game and a people business!” Once you get past and understand the 7^th grade math of real estate investing, the people and teams you build around you are vital to your success!!!    Leveraging off the experience and skills of other people in the industry with a great track record is what separates the newbie investors from the leaders in the field.

The reality is there is no magic pill but if you are patient and persistent, educate yourself, and invest in markets that adhere to these principles; your success will be inevitable. Always remember, that regardless of what is going on in the local or global economy and/or politics, people will always need shelter/housing and if you listen to the numbers and follow these rules, you’ll do fine as a real estate investor.