Real Estate Market Conditions: Dr. Jekyll & Mr. Hyde

Copyright 2006 Have you ever seen such a crazyLike the resort market above, many of you have
real estate market? Depending upon where youprobably never heard of Marble Falls, Texas which
live, you may be saying this is the worst realis located about 45 minutes west of Austin,
estate market in 20 years or you may be sayingTexas. The major attraction to the area is that
let the good times roll. Talk about a real splitthe Colorado river is damned into LBJ lake that
personality situation.then allows very nice lake homes to be built on its
Dont despair. No, the sky is not falling and actuallyshores. In addition, there is a tremendous amount
what is going has been quite predictable by many.of golf (5 courses) in the area with a total
When you go to real estate markets that werepermanent population of around 5,000. After
hot 18 months ago, the savvy investors aredriving through hot Texas for hours, this location
laughing all the way to the bank since they gotwas truly an oasis.
out before it went soft. These investors haveEven more interesting to me is the tremendous
absolutely no interest in buying in their localgrowth that is going on in employment, population,
market unless someone makes them a deal thatpress popularity, etc in the area. In fact, Money
they just cannot refuse.magazine just ranked Austin #2 in best places to
In other markets, you have savvy investorslive and the area always ranks very high on job
buying everything that makes sense. In fact,growth since Texas is still very aggressive in
there are some markets out there RIGHT NOWcorporate relocations. Huge companies are moving
where the real investors expect nothing butto the area on a regular basis due to low land
growth for 3-5 years. And this is coming from thecosts and a very favorable tax situation.
mouths of very experienced (20+ year) investorsWhen you look inside Marble Hills, it really is just a
who are actually putting their money in harmstiny town that for the most part, services and
way. For the average Joe, how can you possiblysurvives off of the resort area. Like many resort
sort out if you are dealing with a Dr. Jekyll or alocations, a lot of employment gets created
Mr. Hyde when you are considering a new realhowever it is not high paying; if you look at most
estate purchase? Its simple. Look at theresort locations that have experienced growth,
fundamentals.lower end property has become in extreme
This last week, I was in two resort markets;demand for affordable housing for workers. Given
Cape San Blas, Florida and in Marble Falls, Texas.the growth of the surrounding area, the high dollar
In this weeks article, we are going to comparevalue of the resort type homes, and the lack of
two example properties to show how working inmany true resorts in Texas, it is reasonable to
this (or any) real estate market is quite simple ifexpect Marble Falls to follow the same path.
you follow the fundamentals.In addition, when you go into Marble Falls, you see
Cape San Blas, Florida Have you ever heard ofsomething very, very strange. For a town of
this awesome beach location? If not, you are insuch a small population, you see essentially a new
the majority because even in Destin, which isHome Depot, and a new Office Depot, and lots of
about 90 miles to the east, very few peoplesigns of new growth. Hmmmmm. Knowing that
know about its appeal. Over the Labor dayfirms like Home Depot rarely miss on their
weekend, we returned to this beach location thatanalysis of future growth, that is really interesting
has been one of our personal favorites for overto me.
20 years. The appeal of this location, at least toSo now, lets look at some numbers. We are
us, is that you can rent a beach house on someworking on a duplex project that we hope to
of the prettiest, but yet most desolate beachesbring to our group over the next week. Here are
that Florida has to offer. The first night we werethe rough numbers with a purchase price of
there is pretty typical; as far as the eye couldapproximately $200,000 ($100,000 per side of the
see down the beach, in either direction, and not aduplex).
soul was to be found.Net Income After Property Management: $20,000
In fact, when you go on the Cape, you better be(We believe this to be conservative)
prepared to be self sufficient since the closestEstimated Insurance: - $1,000 Estimated Taxes: -
restaurants are 15+ miles away. Ever since we$5,000 Interest Only (20% Down, 7.5%) -$12,000
have been going to the area, there has been aNet Annual Cashflow: +$2,000
moratorium on commercial development. Lots of** Note: Most people are choosing to finance with
beach houses (but not condos) dot the beach10% down thus changing to a near neutral
view so it makes for a nice get away.cashflow position at current rents.
Now, from the investment side. It used to beWhile these are just preliminary numbers, they
that the Cape was undervalued beachfrontclearly show a night and day difference with the
property. Even today, it is priced MUCH less thannumbers in Cape San Blas. Also, when you visit,
Destin beach front. Cape San Blas was a locationyou find out there is very little property for sale
where someone with reasonable resources couldand very little for rent. That is a good combination
actually afford to own a beach front home andin my opinion.
rent it out. Boy has that changed recently.Comparison Of Fundamentals For educational
The house next to ours was listed for sale.ANDpurposes, lets just look at the course
SO WERE OVER THE PROPERTIES ON THEfundamentals. Literally, you could put together this
CAPE. It looked like a very nice beach home,information based on just a couple of phone calls
3200 square feet, 0.7 Acres, with a price tag ofto people in the area.
1.99 Million Dollars. A friend of ours went with usCape San Blas Annual Cashflow -$146,000 Net
and he and I have done a lot of investmentsRent Multiplier ($1.99M/$25K) 79.6 Inventory On
together so we started doing the math. WithoutMarket Substantial New Commercial Growth Zero
officially verifying the numbers, here is what weNew Job Growth Zero
came up with on an annual basis.Marble Falls Annual Cashflow +$2,000 Gross Rent
Net Income After Property Management: $25,000Multiplier ($200K/$19.4K) 10.0 Inventory On
(that is being generous)Market Negligible New Commercial Growth
Estimated Insurance: -$25,000 Estimated Taxes:Substantial New Job Growth Substantial
-$13,000 Principle + Interest (20% Down, 7.5%)Even though I would consider this at best a first
-$133,000level analysis, I can tell you immediately that I
Net Annual Cashflow: -$146,000would have no interest in the Cape San Blas
Oh boy, where do I sign up? Notice that even ifproperty and I would be very interested in the
you paid CASH, the property would not have aMarble Falls property. Why? Simple real estate
positive cashflow, especially if you factored infundamentals.
maintenance. Sadly, we literally saw hundreds ofWhile there is lots of gloom & doom press out
for sale signs on the Cape. I wish them luck inthere about the real estate market, and some of
trying to sell because I dont believe there will beit is actually true, never forget that real estate
many buyers for those fundamentals for a longmarkets are not coupled. That is, you can have a
time.Mr. Hyde in one location and at the same have a
Marble Falls, Texas (Note: This article was intendedvery interesting Dr. Jekyll in another. To sort
to be before our property release but had to bethem out, simply do the math.
delayed)