walkitout (walkitout) wrote,
walkitout
walkitout

Risk and What It Is Not

http://www.calculatedriskblog.com/2013/02/housing-some-details-on-business-model.html

I love CR.

Anyway. McBride links to an article about a (really strange -- there's a profile of him in _Lost at Sea_ by Jon Ronson, unless I've gotten horribly confused again) billionaire who made a bunch of money in public storage and is now pouring money into approximately 2000 square foot houses in above average school districts in the Triangle (Raleigh-Durham-Chapel Hill, Wake is the main county involved -- I know this mostly because my sister lived in the area for a few years).

North Carolina is a really weird state. There used to be a good chunk of tobacco farming, but that's more or less gone. The Triangle has a bunch of tech. There's some recreational/retirement areas (notably Asheville). There's some pharma in the state and a few other things as well. The effect is that the average level of educational attainment is higher than most of the south, the standard of living a bit higher, the educational system a bit better, etc. There's also a good amount of turnover: the Triangle, in particular, is as often a stop along the way in a career that will also include the Bay Area, Austin, the Pacific Northwest, Route 128, etc. All of this adds up to a real estate market that tends to not build beyond demand, did not get particularly bubblicious, and doesn't ever really drop a lot, either. All of the demographic indicators suggest that you can reasonably expect North Carolina to continue to have high tech and/or pharma jobs for the foreseeable future and the environment is very accomodative to business.

Short form: if you buy real estate in North Carolina, you can live in it and have a nice life with a good job, you can rent it to a nice family that will stay in it for a few years before they move somewhere else in the country (who would otherwise buy, except no one wants to get stuck and we're all paranoid these days), and if you had to sell it odds on you'll get (most of) your money back, if not make (a bit) more. You can hire competent people to maintain the place. Etc. [ETA: Building code isn't too onerous. You don't have to worry about whether your roof can handle snow load, altho you do have to worry a little about hurricanes. Crappy insulation standards have no impact on whether people can keep the place warm in winter and not too many people figure out how that interacts with the cost of AC -- altho that could change.]

http://www.newsobserver.com/2013/02/23/2702528/california-billionaire-bets-on.html

I cannot argue with Hughes' investment strategy here. It is safe. There is no way you get screwed on this deal, and the returns are _way_ better than anything equivalently safe, assuming you've got decent personnel to handle renting/maintaining/etc. the inventory, an aspect to the business that I keep trying to understand (because scaling this is New -- historically, all big operations renting out housing did multi-family, not single-family detached) and not completely succeeding (I think it can be done -- I'm just looking for the down-and-dirty details).

Which makes this mysterious:

"“I think that this influx of institutional capital into the residential market is creating a bubble within the housing bust,” said Mark Vitner, a Wells Fargo economist in Charlotte. “It will end once the investors that are putting money into the funds come to realize that there are much lower-risk ways to earn the returns that they’re seeking.”"

"Vitner said Wake County may offer the company relatively low returns given the risks involved in acquiring, leasing and managing rental houses scattered across numerous neighborhoods."

"“It’s not a bad strategy, there’s just a lot more risk than I think people realize,” he said. “It surprises me that we’re seeing this much speculative behavior in the housing market after having gone through the bust that we went through.”"

Vitner is correct that there are risks involved in running this operation: this is true innovation, trying to scale single family detached rentals. But there is essentially no risk that you won't have renters who want to pay what you need to ask of them (for all the reasons I mentioned above). Nor is there any risk that the market will prevent you from selling these things for at least what you bought them for, some years hence (that's what more people moving in than houses being built means, after all).

I want to know where Vitner thinks you can get 6.5% returns as more of a sure thing than this. Because I am at a complete loss. OTOH, Vitner is in Charlotte, which IIRC is the place where the schools are so terrible my friend D. (ex-boss) felt compelled to _start his own school_, because even the private school options were so problematic. You can probably make a great living giving very mediocre financial advice to a population that will put up with crummy schools.
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