Thread by @TihoBrkan

Every market is different. Every investor has different mandate.

Various property markets have clear positives & negatives.

Let us compare the advantages and disadvantages of different property markets & strategies used by investors around the world to build wealth.

Thread.👇

https://twitter.com/sweatystartup/status/1319975419848904704

First and foremost, it is very clear American residents investing in local property are incentivized to leverage up and never sell.

Most US investors don't talk about selling, like Nick mentioned. Quite the opposite.

Instead, they all talk about "holding forever."

But why?

Due to high capital gains taxes (can use 1031 with pressure to buy within 90 days again), insane transaction costs & attractive long term fixed agency debt with depreciation.

If executed correctly, this is a fantastic wealth-building strategy — but there is a big emphasis on IF.

While it sounds fantastic in theory, it turns out not many execute things correctly and would potentially benefit from another strategy.

A smarter outcome would be letting investors lock in the gains at times & not holding forever (which incentives leveraging & re-financing).

A little bit of a side story to understand, how theory doesn't actually apply to reality for a larger group of people.

Out of all the risk assets — including venture capital, private equity, public equities, precious metals, commodities, etc — cash flowing real estate is...

...by & large, the safest and least volatile asset class. It's almost impossible to lose!

That is also one of the primary reasons why banks are so comfortable lending >70% LTV on real estate.

Imagine such leveraged permanently used in venture capital or even the stock market?

And yet, despite such low risk & volatility in the price, more investors go bankrupt in real estate than any other sector, industry, or asset strategy.

Currently, the two biggest global markets are NYC and London. Both have declined, maybe, -5% to -15% in price from the peak.

A -10% drop in price, broadly speaking, is just a mild correction.

This can happen over one month in the stock market, and over a day or a week in the energy market — Crude Oil is very volatile.

And yet, in real estate, a -10% drop has people lining up for Chapter 11 filings...

...and large, sometimes famous companies, going out of business.

How can this be?

Clearly, leverage is to blame.

After all, humans are emotional creatures & people WANT their capital returned with profits in hand.

And they will get it, one way or another.

Sure...

You can spin the whole story about "holding forever" but most investors actually opt for a refinance option, if they cannot sell.

The outcome is higher leveraging of properties — usually at the wrong time in the cycle (eg refi is exploding today after an 8-year boom).

Moreover, investors get addicted to leverage during the easy part of the investment cycle, thinking the boom will go on forever.

Inexperienced & experienced investors both have the same ideas💡:

"Leverage helps me buy more properties, in faster time to get rich quicker."

However, let's now take a step in another direction.

I'm not here to say that investors on one side of the globe are more prudent than investors on the other side — but let us for a second entertain the famous '98 property crash in Hong Kong and the wisdom to learn from it.

During the period from 1998 until 2003, Hong Kong dwelling prices declined by a whopping 65%.

Yes, 65%!!!

Just let that sink in for a moment.

Was there pain during such a crash?

Of course, there was.

However, between 10-15 prominent family businesses that run the majority of the Hong Kong real estate & development sector, take a guess how many filed for bankruptcy?

Not a single one.

Once again, I ask the same question:

How can this be?

Hong Kong real estate investors are NOT incentives to "hold forever" which is just another term for leveraging up to the eye bowls (for most, not all) investors.

Instead, the successful ones have sold high & bough back low.

Hong Kong doesn't have CGT (capital gains tax), like some other jurisdictions in the world. Basically, investors are incentives to sell and have very small transaction costs to worry about.

If one believes prices are too high or too low, you could trim some of your holdings...

...or increase them, thus increasing or decreasing cash reserves, leverage & managing the overall health of your portfolio — through prudent risk management.

Moving along, unlike in the USA, Hong Kong has a floating mortgage rate system with a maximum fixed rate of 5-years.

This is very similar to jurisdictions like in Australia, the UK, or several other countries.

Therefore investors have to pay ATTENTION to various macro developments such as central bank policy, inflationary pressures, the bond market, and the business cycle.

If you sense that rates might rise in the future, there is no way to benefit from very long term debt.

You will probably adjust your portfolio wisely & ahead of time — front running the macro developments and taking advantage of higher valuations to "sell high, and buy low."

Two of the more famous real estate investors, who have operated with the incentive NOT to "hold forever" are:

The American legend known as the "grave dancer" Sam Zell;

and the Cantonese (Hong Kong) investor, known as "Superman" Li Ka-shing.

These two giants have left a wealth of knowledge over the years for the younger generations to learn. Their execution has been incredible, making them extremely wealthy due to their flexibility, cautious use of leverage, prudent risk management and judgment of valuation prices.

By the way, additional notes:

• Australia has very low transaction costs & in the real estate sector we operate in there is no CGT

• Czech Republic has extremely low transaction costs and very low CGT (or zero tax)

• Vietnam has tiny transaction costs & no CGT

• Singapore has high transaction costs (unless structured correctly with a local partner) and also no CGT

• UK has decently high transaction costs (for foreigners) & high CGT so we opt to invest via debt — making equity-like returns with downside protection via debt