Peter Churchouse's Real Estate Rule #8: Buy With Your Head

Peter Churchouse is the founder of Portwood Capital, a leading real estate investment company. With more than three decades of experience in real estate investment and research he is widely considered one of the world’s foremost authorities on Asian real estate markets. He is also author of The Churchouse Letter, his financial newsletter which provides investment and wealth building strategies. In this 8-part series, he highlights key rules he feels investors should follow when purchasing real estate. This is Part 6 of the series.

I'm sure all of us have had great holidays and fallen in love with an area. "I can really imagine myself hanging out in my dream house here" you think to yourself.

It could be a cabin by the lake, a house by the sea, a fishing lodge on a river, or a chalet in the snow. We have all been enticed….

I have been tempted on numerous occasions in different parts of the world.

A villa in Tuscany, a chateau in Provence, a chalet in the Trois Valées (The Alps), a beach house overlooking the Pacific Ocean. On many occasion I have nearly been seduced, but fortunately I have resisted. I made a cheeky bid made on a beautiful two thousand year old hilltop chateau in the south of France a few years ago. It was rejected by the seller.

I have been grateful of that ever since!

Here are the questions to ask yourself before committing to purchase of that vacation dream house…..

Do I want to commit to spend every holiday here for the foreseeable future? Do I no longer want to visit other countries or regions? Will my kids want to hang out here?

Do I really understand the maintenance and management bills coming my way? Especially if it’s an area you are not familiar with. And especially if you haven’t followed my Rule #4.

How do I manage the property given it’ll be mostly vacant while I’m slaving away in New York, London, Tokyo or Hong Kong? Who is going to ensure the place is not robbed. What happens if it leaks? Who’s going to mow the lawn? Who’s going to clean the place?

Do I fully understand the tax regime where I’m buying? Not just local taxes, but capital gains tax, income tax (if you rent it out), and a myriad of other fees and charges. These can be both substantial and opaque. (Ahem… France). More effort, energy and cost.

Do I want to rent this property out when I am not using it? Holiday rentals can often prove quite lucrative but there are costs. Agents who specialize in such rentals often take a very large slice out of any income. There are no guarantees that tenants will be found. Short lettings require an efficient local manager to clean up and prepare it for the next tenants. They may need to fix the fridge, clean the pool, do the laundry, and mow the lawns. Finding someone to do all of this can be difficult and expensive.

Am I buying for investment? Or am I simply treating this as consumption expenditure? Such properties might be good investments, but they are usually the first property types to suffer in a downturn.

There are currently HUGE numbers of recreational properties on the markets in Europe, UK, Ireland, Australia, and New Zealand right now. Spain is simply awash with holiday homes.

There are simply NO BIDS for huge swathes of recreational real estate in many markets right now. If you want or NEED to sell, you’re in trouble. You’re stuck.

I can sell a London one bedroom investment flat tomorrow if I need to. Maybe I’ll have to discount it 5 to 10% to get it done fast. But I can unlock my money promptly if required.

The 2,500 square foot lake house in Queenstown, New Zealand? Forget it. That money is frozen. Unless I take an axe to my asking price. And even then it’s going to take a while to shift it.

Recreational property often has limited or zero liquidity. And the more you’re likely to need the cash (like in financial crisis), the less likely you are to get it.

A very good friend of mine has a beautiful beachfront villa in Thailand. It’s sensational. She oversaw the design and the build herself (with great personal effort!). We have rented it from her in the past. So it does earn income, but the villa management company takes a lot.

But her husband now prefers they no longer holiday there because when they do, she spends the entire time with the management staff fixing problems!

If you are buying a seductive piece of recreational real estate, be honest with yourself. If it is a case of head ruling the heart, admit it from the outset. In today's market you may indeed find some great discounted bargains, but remember, they may stay bargains for a long time, and ability to on sell is usually much worse than that inner city apartment or house.

And be prepared to sit on it for a long time!

This concludes Part 6 of the series. I know that if you make an effort to follow even a couple of the rules that I outline in this series, you will be in a better position to successfully invest in property. If you have any questions or comments, I’d love to hear from you. You’ll find my details here.

Back to PART 5 | Proceed to PART 7

Peter Churchouse's Real Estate Rule #8: Buy With Your Head

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