I know, I know. I'm an advocate of value investing…
As some of you may know, Greece has been nearing bankruptcy again and again for years, and it keeps being bailed out from the European Union (EU) and International Monetary Fund (IMF). And as such, a similar story line has developed again and again – a promise of reforms and austerity in exchange for bailout package. In a way, Greece is similar to your girlfriend (or boyfriend) threatening you to buy her expensive shit or otherwise she will break up with you. Technically, it really isn’t free cash – it’s a temporary loan that you expect her to pay you back when she has the money. But she keeps taking advantage of you and never really does. What happens is a spiral of debt that keeps piling more and more, and her past actions indicate she has done anything but pay back the debt. The promises she makes are empty. Having said that, Greece has a history of defaulting on its debt.
Before we continue, I have to admit that I am no property expert at all. But with the looming disaster happening in Greece, opportunities will arise for investing. And it rings true for property investing as well. I mean, how cool is it to tell people that you have a property in Greece? Of course, while it’s cool, it obviously cannot be the main factor for any investing decision. What’s more important is asking whether money invested in Greek property will result in money earned.
So what spurred me to suddenly have an idea in investing property in Greece? First, Greece will forever have historical significance, so tourism will always exist. Second, it’s got breathtaking ocean views and the place is just a beautiful sight to behold, and again this is an attractive factor for tourism. Third, current Greece prime minister Alexis Tsipras seems much more hard line about holding back reforms and austerity, making it more likely for Greece to detach itself from Euro currency. There are two ways – Tsipras’ hard line strategy works, giving them the bailout money they need and again delaying bankruptcy (or avoiding it…) and using Euros means you can borrow money at an extremely low interest rate, or they adopt a parallel currency or maybe even detach from the euro currency to have their own currency drachma. If let’s say the currency cheapens, it makes assets inflate. Property is no exception. Cheaper money means property values will soar. So in a sense, investing in property is a hedge against inflation. (Stocks, by the way, are inflation hedgers in the long run as well. Bonds lose out in inflation. So another reason why stocks > bonds). Fourth, properties are always an asset that people need. People will always need places to live. Fifth, the Greece Housing Index has fallen quite a bit for the past few years. See chart below.
Greece House Price Index – source from www.tradingeconomics.com
The last updated data is from first quarter of 2015. Data starts from 1990. As you can see since 2008, housing prices have fallen year after year. When you’re reading about sellers panicking to sell their properties because of declining prices and are struggling to find buyers, it’s time to start looking to buy properties.
So this really intrigued me. I wanted to do some research about Greece property markets and ask my mom to go to Greece together not only for tourism purposes, but also to look at property and get a feel of the country and its culture and people. So I told her that – we should take a look at properties in Greece.
The only reason I’m writing this post right now is because after I told her that, which was only 3 hours ago since writing this sentence, I changed my mind. So without even beginning my research, I’ve already ended this idea. Well, at least for now.
You see with all ideas and situations, you can’t just pick a side and stick with it. Usually if we are the ones with the idea, we tend to only think of the positive side of things. So everything mentioned above just makes it so enticing for me to take a trip to Greece and invest in Greek property. But the greatest decisions are often accompanied by looking at every angle and weighing the rewards and risks involved. So my mom was the devil’s advocate in this regard.
She mentioned that housing prices are decompressed usually with reason and are usually riskier. I sort of agree but also disagree with this statement. Let’s start with the disagreement. I used an example with stocks. A stock with its price gone down does not entail that it becomes riskier… a cheaper stock in general means that the stock is less risky. It makes sense right? For the same number of shares, you pay a lesser total when the price is lower than when the price is higher. If the company goes bankrupt, you lose less. And when you buy it at a lower price, say $2 a share, you lose less than if you had bought it at $10 a share. And on the flip side, your potential reward is much more. Imagine it goes up to $20, that $2 a share is a 10x bagger, whereas the $10 a share is a 2x bagger. So the risk reward ratio is lower as the share price goes lower. This should be pretty common sense.
But like I said, this is in general. At the end of the day, investing means you want to earn money, not lose money. Sometimes a stock is cheap because the company just can’t earn as much anymore, or it may be losing money. For example, it doesn’t matter what price you bought Eastman Kodak or Blockbuster… at the end of the day, their industries diminished dramatically (vanished, in a sense) because of technological disruptions. Regardless of what price you bought, had you kept buying at lower and lower prices, you would just have kept losing more and more money. These stocks were cheap for a reason and they were only headed for one direction.
So with that said, the question is – does Greek property prices justify where it is at? In a sense, yes and no. Properties are assets that have value, as I mentioned before, because people need a place to live. No matter what happens, it will be worth something. This is different from a company like Blockbuster, who can run out of business because people just don’t have a need for it anymore. Thanks Netflix. On the other side of the equation, just because a property is worth something doesn’t mean it’s just worth anything. It could be worth less than what it’s currently worth, even given how low the prices have gone! A factor to consider is the rampant unemployment rate in Greece, which I can assume if I were to have a property in Greece, the chance that a tenant cannot pay his or her rent is higher than other countries who have higher incomes and lower unemployment rate.
This is sort of the reason why Manhattan (New York) prices are so high (reason from Mom) – it’s a city with lower unemployment rates, with more stable incomes, and some people have just shit loads of money. It’s an attractive place to live and work. It’s also more likely (but not impossible) that tenants pay back their rent.
With investing in properties, you want to have tenants who can a) pay their rent on time and b) have your property well maintained. Let’s be honest – this is more likely to be the case in a good, low crime neighborhood than a bad, high crime neighborhood. Without going too off topic, there are a few reasons why rent does not get paid on time and the property is not well maintained in a bad neighborhood. First, the people that live in bad neighborhoods are those with unstable jobs or low income and are sort of forced to live there. And because of their job instability and low income, they may have a more difficult time to pay rent on time. A bad neighborhood also means more crimes, which could mean house break ins, meaning your property may have windows smashed etc. A good neighborhood would have less crimes and perhaps a better security system. Also, tenants in bad neighborhoods generally do not care if the property is well maintained because a) they may be switching from one job to another, forcing them to move out or b) they know they don’t have a stable job and so they know they may get kicked out any day when they can’t afford rent so they don’t have interest in maintaining the property and c) who wants to live in a bad neighborhood anyway? People see bad neighborhoods as a temporary location; everyone wants to live in nice areas. And so they again don’t have interest in maintaining the place. In good neighborhoods, tenants are more likely to stay for a longer term and have vested interest in keeping the property maintained and cleaned. So given the choice of buying a property at USD 250,000 with a yearly rent of USD 12,500 in a bad neighborhood and a property at USD 2,000,000 with a yearly rent of USD 100,000 in a good neighborhood, I would almost always choose the latter as they both give me a 5% yield. So to persuade me to invest in a bad neighborhood, the yield must be significantly higher since my risks are significantly higher (sort of like junk bonds vs. AAA grade bonds. But then it’s a bit contradictory to demand higher rent in bad neighborhoods… if they are having trouble paying rent on time, by increasing rent even further to justify the risk, you are making it even more likely that they can’t pay the rent, and you’re just getting yourself in a mess).
With that said, so perhaps it’s arguable to purchase a property in high-income neighborhoods in Greece? Perhaps. Since rich people, even in a recession, they are still going to be rich. Unlike lower income families where they may have to sacrifice buying certain items, higher income families tend to continue living the same lifestyle. When the economy is booming they are eating in Morton’s steakhouse, and when the economy is declining they are still eating in Morton’s steakhouse.
And there are many fees associated with buying properties. You look at the price it’s like wow, that’s not that bad. Then you add the tax, management fees, renovation fees, agent fees, maintenance fees, and a salary payment to someone to look after the place and then suddenly it’s not worth it. Especially if you’re a foreigner, other countries might charge a premium for you to invest in their properties. Greece is known to place high taxes on their properties… maybe after all these fees, your money might be placed somewhere better.
Compare it with stocks. Let’s say you purchase a stock yourself, then you usually have to pay taxes (for some countries’ citizenship), commission, and dividend fees. Less fees in general. And, you can get in and out of stocks easily. Whereas for properties? It’s not as liquid.
But pricing isn’t the only issue at hand with properties. The other thing is the hassle. The fees mentioned for the properties, usually you have to take care of those things. For stocks, you have the broker who takes care of everything. When the tenant needs something fixed or have issues with the property, you have to be the one responsible of taking care of that. And sometimes, you may have to fly over there to take a look or do some managing or gauge the housing market over there. You may have a court dispute with the tenant. That requires flight fees and travel time. I don’t really have to do that with stocks as companies have public financial statements, quotes listed on a daily basis, lots of news for me to swallow. Properties? You kind of have to be at the area to feel the market and compare with other house prices in the area, information that isn’t as accessible if you live outside the area. Oh, and how trustworthy is the person managing the property for you?
That’s why I decided to withdraw from my idea of investing in a Greek property even before I began my research. Of course, doing some research would help make things even clearer, but the hassle and not having a long term presence there would be a deterrence from investing anyway.
I guess I won’t be going to Greece this year after all.