InternationalLiving.com

High Prices, Bad Neighborhoods, and Good Investing

Forbes magazine published an article last week naming the world's most overpriced real estate markets (you can read the article here: http://tinyurl.com/2vdurf). The author goes through a convoluted calculation to come up with a price-to-earnings ratio for each market that he says is comparable to a stock P/E.

The calculations used to arrive at the P/E are complex and include things like transaction costs, both coming and going. When buying, for example, you have to consider transfer taxes, registration fees, and sometimes agent commissions. Selling, you need to factor in agent commissions and capital gains taxes at a minimum, depending on the market.

To produce its overpriced market index, Forbes selected prime city-center locations, then determined the cost of an apartment in each, as well as the respective rental yields; however, the origins of and the figuring for the rental yield figures are a little murky. It isn't clear if the yields are for long-term or short-term rentals, for example, or what size property is being considered in each case. A notation is made explaining that the property sizes are equivalent city to city.

Typically, the higher the value of a long-term rental property, the lower the rental yield. For short-term rentals, the bigger the property, the lower the yield.

I can agree that the city at the top of Forbes list, Monaco, is home to some of the world's most expensive real estate. I'll be there to see for myself in October (in town for my International Real Estate Conference: http://tinyurl.com/377og9). Rome, Paris, and Los Angeles make the Forbes top rankings, as well. No argument that these are also expensive markets, but that doesn't mean you can't find good investment opportunities in all of them.

Last week, I told you about a "cheap" property for sale in York, Pennsylvania. I made the point that, though the price tag might seem a bargain ($299,000 for an historic and well-renovated 5,500-square-foot home), the place didn't make sense as an investment. The price was low, but there was little evidence to persuade me to believe the market (York, Pennsylvania) would see any real appreciation any time soon.

So, in fact, maybe that $299,000 price tag was high…and maybe you could make an argument for York being an overvalued real estate market.

Considering the opposite end of the spectrum, you can't write off an expensive property as a bad investment just because the absolute price is high. A $1 million property might be a better investment than a $50,000 one. You're putting more money at risk, but that is a diversification question rather than an issue of investment quality.

The Forbes index gives Bangalore a low P/E, and the accompanying article, therefore, names this city as a good market for investment. However, the article doesn't explain that it is almost impossible for foreigners to buy real estate in India. In other words, don't waste your time trying to track down an agent in this booming Indian town.

A good real estate investment can be found in almost any market. You have to look closely and know what you're looking for. Don't buy cheap property, just because it is cheap. Don't avoid expensive markets just because they are "expensive." As the old saying goes, it can be better to own the worst house in a great neighborhood than to own the best house in a bad neighborhood.

Your scout…trying to make sense of the numbers,

Lief Simon
For International Living