Investing in Property: Can you tell the three kinds of property apart?

Yesterday was a beautiful October day in Taiwan. Christine and I had been talking about one of the steps I outlined earlier in A Man and a Plan: renting out property. I finally was able to analyze the figures and make some modest suggestions on how to capitalize on our return by renting out our home, and living elsewhere.

  • 1. We would secure a line of income, currently we’d be able to earn nearly $1078 per year gross. Of course, we’d have to pay a renter’s tax at a gross 10%.
  • 2. We would be able to start saving for a new house, so we could expand our portfolio to two or even more houses.
  • 3. We’d get experience of different property markets as we could live in different areas throughout the metropolitan area.
  • 4. If we made additional mortgage payments, we’d be able to secure an additional 8.78% return because our mortgage payment would decrease by a proportionate amount.
  • 5. Each renter would have to pay a two month deposit, so we’d be able to invest that nearly US$1,100 as well. Obviously, it would have to be paid back at some point. But we could earn the interest on that amount in the meantime.

Naturally, we’d be willing property agents, and happy landlords… I am beginning to think it’s a step we would like to take. So yesterday, we went off to look at some alternative places to live. We went up into the mountain areas behind our home near XiaouPingDing area in Tamsui County. It’s right next to the city boundaries. We came across a beautiful property called in West in Hilla. This is a prestigious development begun in the late 90’s and restarted with the recent boom in property prices.

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Its unique draw is the location: it has an absolutely uninterrupted view across the Tamsui Bay area from Sanchih on the right to the new port on the left. It was a bright breezy day on the mountains, and we thought we were in heaven. Clearly this is the impression the developer had intended… And it is unparalleled in all the years we’ve been looking at apartments, to get an apartment or house with such a view over the surrounding area. It left me speechless, the photographs on the website just do not do justice to this at all.

The PreSell: Dreams, Apartments, and Cold REALty

Because the pre-sell was all intended to build on that dream: a clubhouse, a hotel, reception center, shopping, etc. all supposedly top quality and ‘being built’. The community itself was composed of two types of accommodation: villas and apartments, with villas selling in the NT$20 million range, and apartments selling from approx. NT$4 million upwards. According to the sales lady, most villas and larger apartments were already gone, and there were none at our requested size. So she took us to see a modest apartment and a much larger (twice our current size). Both apartments were reasonably fitted out, refurbished, and spacious.

Let’s party like it’s 1999!

Slowly, though, we managed to piece together the story: the apartments phase I were originally built and sold at the end of the 90’s (no word on what pricing was used), but when the major earthquake hit us in 1999, all mountain side development stopped on government orders. Much of the central county of Nantou was in mountainous areas, and this area experienced great shaking, landslides, collapses, and a geographical upheaval on that fateful day.

Of course, this also coincided with a weakening of the property market island-wide; and the original developer collapsed, unable to complete development on some of the villas. This also happened at a similar time in many places island-wide. Only recently, did the government give the go-ahead to such communities whose projects had been suspended.

The DEAL: Wow!

These were, of course, snapped up on the cheap. I was told at about 1/3 of the current retail price. This was probably a firesale by the owning bank, as much property was sold by banks from the repossessions at the beginning of the 2000’s. The new developer then jumped into the fray, put up a lot of seed money, refurbished the units that were unsold, and relaunched the project in 2006-7 with a large marketing program. I’m pretty sure that the unfolding property boom also helped to shift product. Certainly the website is very nicely done, with lots of details and touches.

As the result of visiting this property, I was able to further some of my own thinking on property markets and figure out what kind of property this was. This is my statement on my theories…

The A,B,Cs of evaluating property

These three kinds of property are only clearly differentiated by price in a price recession, though in a property boom it may be difficult at times to differentiate clearly between the three categories, though not between A & C. So what constitutes each category?

Category A – property that is fairly valued.

This includes premium property as well as property that is always near fully valued. It’s rare to get a bargain on such property as it is usually undiscounted. Factors that identify its value: proximity to transportation centers, high desirability, stable pricing (even premium plus pricing), good area, building quality, builder reputation, etc.. In our area, we reckon there are two or three communities that rank in this category: ours, the one across the road, and perhaps one other. Ours is simply because of its proximity to the MTR and its sheer size; the one across the road because of its zoning as commercial land, it enjoys a 20% premium over ours; and perhaps another couple.

Category B -property trading at a discount to market.

property that is adjacent to Category A property or in some important respect resembles Category A property. In a property bubble, it may be difficult to identify this kind of property at all because it looks like, and smells like, Category A property. But in a property bust, this kind of property can lose value much more so than the first category. In the non-manic phases of the property cycle, this kind of property can sell at a discount to average property prices in the area. Near our community is an older community that is smaller in stature, with an older building, older design, and poorer quality construction. Its always traded at a discount to prices in our community, and its likely because few people would feel comfortable buying such a property, or living there. It’s just a poor quality building with a great location.

Category C -property that is valued otherwise.

You can usually spot this kind of property because the price being asked is enough to make you gasp in a property boom; and, in a bust, you’d guffaw. You know the type: the garage that fetches US$1.5 million in a boom can barely be sold in a bust: why? Because it’s the sign of excess when people start grossly overpaying for property that a beggar would turn their nose up at. If you guffawed or your jaw hit the floor, then it’s a Category C type property. In a boom period, it may be difficult to tell them apart.

So what is West-in-Hilla?

Well, when we went to see this mountain community, we thought initially we were looking at Category A type property – property that was otherwise premium value because of its location and environment. After we began to unravel the story, we realized it was a tale of two communities sitting cheek by jowl. The first are the town houses (luxury houses) that sit on their property and retail at good prices, most of which have been sold; and apartments (modern apartments) – which sit in smallish blocks around the community, and which enjoy fantastic views. We thought this was premium property.

But then we began to understand the background: distressed property that had been sold, polished up and resold at a huge markup to the original purchase price. We dug a little further on the net to see that property was in fact being marked down from NT$270,000 per ping to approx. NT$220,000 on first inspection. We reckoned we could get even under that rate without asking. Of course, we would drive a much harder deal… But then we came across one person who lived there who thought NT$180,000 per ping was still too expensive. So who knows what it’s really worth? It can be difficult to value such property.

That’s when we also noted that the community is built in a sensitive area (I wonder if a community like that would be approved at all today) and the woodland is ‘protected’. It’s situated on a hill-side, where much of the tree cover has been cut down, exposing it to quite heavy winds in winter, I imagine. Don’t mention a typhoon (of which we’ve had four this year already) which can bring wind speeds in excess of 100km/h. Although there isn’t any hillside directly behind it, the risk of earthquakes in mountaineous areas can cause property to be undervalued as landslides are common, roads are easily blocked (even in typhoons)… So it was quite clear that this community price (equivalent to a suburban or even select urban locations) was trading at unrealistic and unrealizable values.

Living in Environmentally Compromised Areas

In fact, we visited about six months ago several communities with a very similar mix of property on the coast, and found that prices had declined somewhat for apartments in that community since we had been there. Mostly, this was because the secondary resale market was quite tricky. Taiwanese people like to purchase property in the mountains as a retreat. Often, the realtor told us, they buy and never move in. Why? It’s likely because the wife thinks it’s just too inconvenient for life… so they sit empty. More often than not, they fall into disrepair, community payments aren’t kept up, and the community goes into early decrepitude.

Our final determination was very much: risky property dressed up as premium property for sale to suckers who couldn’t tell the difference. In other words, this is barely class B property in a boom, but in reality the investment is quite risky, and in fact the location means that the building itself has a risk profile that means perhaps even buying insurance is difficult. But the straw that broke the camels back, some online posters claimed that this developer tends not to fulfill promises. Given the size of the dreams that we were told, a certain natural skepticism in me already surfaced when I saw the plans. It’s unlikely that the developer will make good on much of his plans, simply because the profit margins may not be there. Discounts are already available on much of the property… So, he simply won’t be able to do the math, I reckon.

From the business point of view, I really can see why he did the deal. It was a win-win deal for him, his company and the current residents. He would recover his initial investment, make some money on his investments, and help finish the community that was started earlier. It had to be good for everyone.

Our own conclusion: Beautiful but Risky

We would have loved to live there. It would have made a perfect get-a-way from the city, and for people with a lot of money, purchasing a villa there wouldn’t have caused them unnecessary hardship if they couldn’t sell it particularly quickly. For us, though, we’d have been putting a considerable amount of our personal capital at stake. To purchase such an illiquid property as a mountain property can be would make no sense. It might be quite some time before we would be able to sell it, should we want to.

In general, though, the lack of fire in the local property market also means that such properties are on the outside of the hotspots in the market until late in the boom when they become the only affordable property to city dwellers. Right now, the property market is soft and prices are stagnant, partly in expectation of weakening prices and slower economic growth. In addition, in many areas, there is an abundance of available property soaking up latent demand anyway. That’s my take.

This story has been edited, amplified and beautified since publication .

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Buzz: Inner8 – Can you be one of the Inner 8?

It’s the holy grail of the Internet these days: the social ‘net. Every major industry has joined, and now it’s the turn of the investing fraternity to get the kind of social feature set now found in Facebook, MySpace and much more. Inner8 seeks to provide a similar social service for investors. InvestorBlogger, as one of the earliest members to join SocialSpark in the pre-launch period, is delighted to be one of the first to review this social service.


True to form, you will find all the social bells and whistles you need for this online investors’ community called Inner 8 which seeks to bring investors of all kinds together under the following statement “Inner8 technology gives you the best, personalized ideas, and lets you keep the savings“. Given the background of the owners of Inner8, this site should not be underestimated as it tries to bind investors with complex data analysis.

The deal for investors though is quite simple: you connect with investors from a wide range of backgrounds as you all seek to make money trading online, whether it is stocks, bonds, or whatever. There are several pages in which you can interact: Tools and Community.

The tools page is worth playing with: you can simply tweak the controls at the bottom to show what kind of market segments you are interested in, then you will see the results on the right.

scenario explorer

The community page is also worth a look to find people online who are investing. There are similar slider controls that you can play with as you search for members to form your community.

Both tools and community pages are works-in-progress as the range of tools are limited, as is the size of the community. But one thing is sure: if Inner8 sticks around long enough, they will be able to develop a focused and passionate group of users. The tools are innovative and promising, as is the community. I’ve already joined, and have filled in a bit of my profile.


Flea Markets: Can they be fun?

It’s fun to try different things when you have your own business. I’d seen a ‘flea market’ in the TV show ‘The Apprentice’, in fact in the first series when the contestants were asked to sell items at a flea market. I’d always wondered what we’d learn about doing that.

Well, on the weekend last, our community had its own flea market, and so we decided to see if we could sell some English Books to passersby. Terry, Christine, and I set out our stall in the main area, with a lot of traffic walking by. Our target market was parents who wanted to buy books for their children, and children who liked books.

Our price points were about US$3.00 for paperback books and $7.00 for hardback children’s books. Generally, for new books, in Taiwan, these prices were already good value. But for English language, American books, the prices were extraordinary value.

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Terry checking the stand to see if the books would stand up or not against the wind. They didn’t.

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“Now where should we put those books?”

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We’re all taking a breather, and reading the books to see what we could sell.

At the start, we all were quite excited: business was brisk as we sold 6 in about 15 minutes. But the next few hours didn’t produce any more sales at all. At about lunch time, we started wrapping things up as we realized the heat of the day was coming and most people would be taking a siesta after lunch.

Overall, we learned a lot about taking part in a flea market, though. We talked it over and here are the benefits of our experience:

1. Pick your product: not all products can sell well in a flea market. People don’t go to them to buy NEW items, but rather items that are second hand usually.

2. Pick your price point: in a flea market, people will readily hand over good cash for junk, but are often reluctant to part with cash for things of value. Perversely, they seem willing to throw away $100 on a piece of junk that they may never use. Yet, to buy a book at the same price, esp. a new one, a great deal, seems weird.

3. Selling books: there are places to sell books, and places NOT to sell books. Most bookstores carve out a real atmosphere for themselves, even 2nd hand ones. A flea market like the one we attended has none. Nada. Zip.

4. Market well!: we originally had intended to do other marketing of our books to our students, but we didn’t. Big mistake. If some of our own students and their parents had dropped by, we might have sold MANY more books than we did.

5. Our profit margins: we didn’t have sufficient profit margins on the books to make the whole effort worthwhile. While we charged a 35% markup on the books, we figured that buying a cup of coffee basically killed any money that we made. We realized that to make any money on books, … well, it’s difficult.

Unfortunately, for #4 above, we failed to market our books to our students and we failed to market our courses and classes to our book customers. This had been the primary set of objectives (not making money as in #5). In this respect, we absolutely failed.

So if I was sitting in the boardroom with Donald Trump, I’m afraid that I’d be the one taking the rap for failing on so many counts! But then we aren’t. We were happy to try this approach, and see what we could make of it. Perhaps we’ll try it again, perhaps not. We’ll see. Did we learn anything? You bet, a whole lot! And it was kind of fun!

Have you ever sold anything in a flea market? How did you approach the whole thing?