To be Struck by Thunder Again
I was reading Hormozi's book on Entrepreneurship, which I recommend seeing for yourself, and he was making the point that growing a business to 10 million has a 0.4% chance, so that being able to grow 4 businesses to 10 millions has a near 0 probability.
You might become rich because of a stroke of luck, you need to develop skills to repeat it. There is the difference between being struck by lightning once and having the ancient god's ability to control thunder.
My 2013 US sunbelt investment thesis was to buy SFH at 12% gross yield. That would generate returns above inflation above 6%, far in excess of bond yields of 3% at the time. This worked out well, but the prospects cannot be as good as they were then. Where houses previously sold below replacement cost at 100k, they reach towards 300k, well above replacement cost.
While this business produces an excellent revenue stream, and the suburbs SFH continue on their way up post covid. I feel that the increase has run much of its course and diversification into different areas and business models, rather than plowing in new funds might be in order.
My comparative advantage is a relative openness that led me to invest overseas. I realized that the rules of the game implemented by a polity frame individual action, and dictate how profitable your investment in a given sector can be.
Where freedom is real, equality is the passion of the masses, where equality is real, freedom is the passion of a small minority. Equality without freedom creates a more stable social model than freedom without equality. -- Eric Hoffer
This remark by Hoffer explains why polities tend to transition towards big State redistributive policies unless they be limited by a competitive situation. Policies often get replicated from one country to another when they look sufficiently attractive to politicians.
The hallmark of a pro-tenant jurisdiction is one where short-term benefits to tenant create incentives aligned against the long-term provision of housing. The situation is then permanently described as a "housing crisis". More oil is poured on the fire by politicians and perpetuate a situation that keeps the median voter convinced that the government ought to intervene more. We see this mechanism at play in San Francisco, New York, France, Spain, Portugal.
You generally get an unholy alliance of owner occupiers and tenants who vote together to make landlord pay more tax if given the possibility. There are many signs that such an evolution is at work in democracies. The whole point is not to jump from a decaying political order to another where that decay is more advanced.
The indicia are:
- rent control (increase limited to CPI or a very low estimation of CPI)
- eviction restrictions
- restrictions on short term rental, furnished rental, restriction on rent per sqft
- high tax rate on rental income
- local property tax with exemptions for owner occupiers
- capital gains tax at high level but exempted on owner occupiers
A Tax rate between 10% and 20% on rent income signals that landlords are welcome, a tax rate above 40% signals that they are invited to leave. Similarly, capital gains are often exempt after 5 year in countries with more experience of inflation than the US, or at a low rate such as 20% for gains below 500k for the US.
A capital gains tax of 43% in Portugal or similar 38% in France is a signal that new investment by free folk is not welcome. The government set the protection rent to an extractive level, focusing on the exploitation of its local serfs rather than on attracting talent.
Economic Cost of Maintaining a House
Despite the wide disparity in salaries worldwide, the market for energy is a worldwide market. An air conditioning unit has a similar price world wide which acts as a floor on housing maintenance cost. In fact, US houses building costs are amongst the lowest in the planet.
There is a minimal cost of maintaining a property below which you don't want to go, the risk is to end up with a stranded asset that earns to little for its upkeep:
- rents above 1000/month to allow for repairs: An AC system costs $400 to $1000 to install or repair, this is not much when rent is above $1000, it is a problem when rent is below $300.
- put tenants in that you can get out: In Arizona, you can get an eviction done in a month and for $300, in Turkey, it will take years and the lawyer will charge you a few thousands of dollars.
- affordability: rents should be affordable compared to local income
In hostile jurisdiction such as France, landlords have adapted to the environment by trying different strategies:
- airbnb rentals (this is being shut down after a while)
- furnished rentals of 1br 400sqf in city center to dink couple. Studios have too much turnover, the 400sqf surface and furniture ensures there is no kid and the couple eventually leaves (unless inflation and rent control).
- 1yr furnished rentals to nomads/lifestyle travelers
- very large flat in city center rented as flat share to several high income earners
Intuition on Jurisdiction
Hostile to Landlords:
- US Wokeistan cities: SF, LA, NY, Portland, Seattle
Friendly to Landlords:
- US: Utah, FL Fort Myers, AZ, Wyoming, Montana, Indiana
- Australia 3%, New Zealand 3%
- Singapore 3% (with stamp duty for non PR except US persons),
- Hong Kong
- Dubai 5%
- Uruguay 5.7%
- Channel Islands
Some landlord friendly countries are closing the door to landlording: Singapore and Hong Kong implemented higher stamp duty for foreign buyers whereas they used to reward buying with Permanent Residency.
So far, I was struck by lightning only once, it seems more like luck than sound analysis. I am still convinced that finding the right place where to buy from an unconstrained worldwide standpoint beats trying to extract the best deal out of a market with limited opportunity.
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