In a few short years, the partners have built quite a lemonade stand, picking up distressed properties by the bunch and marketing them to investors who still believe in South Florida as a paradise on Earth – and yet can’t believe the low prices!
They offer what they call “effortless investment,” where the properties are managed soup to nuts for buyers. This makes the offer hard to refuse, bust or no bust.
Gietl (from Austria) and Levy Hara (from Argentina) bring an international perspective to a market that is being picked over by an increasingly non-native group of buyers.
Here, Gietl discusses foreign motivations for investment and why South Florida is “it” despite what the naysayers are muttering. He explains his method of buying below replacement cost and why negative land value can be a huge positive for investors. He also predicts the light at the end of the tunnel, and that it will be shining like the Florida sun sooner than you think.
How did you decide to start up your company at the peak of all this economic chaos and doom?
We started in 2009, picking up distressed properties. Everybody was afraid and scared, but this is actually where you usually can make the most money. My partner and I came up with a very simple idea: if you can buy below replacement cost, it means that the land value is negative. In a market-oriented society — in a capitalistic system — land value in the long run can never be negative, but for only one simple exemption: and that’s if demographic data is so bad that people are leaving a place and you have no positive population growth. That’s the only scenario where you can have negative land value.
Can you give an example?
The one good example of this in the United States — and I don’t know a lot of them, honestly — is Detroit. In Detroit, you had a peak in the Seventies, when the population was a boom town, and then people were leaving and the whole real estate market busted. This was ages ago.
However, if you look at South Florida in the last ten years, they had a population growth of almost 20%. And still, people are flocking in from all over the world. We have the snowbirds whether there is a crisis or not a crisis, whether from Chicago or New York or even Canada and Europe. You have a lot of immigration from South America too. Miami is the hub of South America economically, and also for shopping. Argentineans in particular love Miami.
If you look at who is buying in Miami and Fort Lauderdale, you have a lot of people from South America, Canada and from Europe, especially from France and Germany. It’s becoming more and more international.
Orlando doesn’t play into the mix?
Orlando is a little bit different. Orlando is a typical place that is beloved by the British. Don’t ask me why. I don’t understand it. There is a big bulk of investment from the United Kingdom in Orlando. Orlando may actually have a little bit better growth than Miami and Fort Lauderdale. However, the properties there are usually just wooden frame. Due to the hurricane code, I think from 2007, you can only build concrete structure here in Miami. So the buildings do not deteriorate that fast.
So how did you proceed in your market with your master plan?
In total, we bought almost 300 units and we sold out. The last project we did in February, in Fort Lauderdale, was 68 units, and from February until today, we sold 32.
The name of the game in Florida is cash, right?
Most of the transactions are cash. What we see from the banks is an increasing interest in providing loans to foreigners. There is a special loan program called The Foreign National Loan Program, where a bank will not loan to domestic people that much, but will lend to foreigners. [People outside the United States] usually have a stronger equity base. Americans have a rather low savings rate compared to Swedes and Germans, who have tremendously high savings rates. So the banks don’t need to be scared that much [with Europeans], and the leverage is much less. It’s 60%. Domestic financing usually requires a leverage of 80% because people cannot afford the pay down. The foreigners say, “I don’t care if the leverage is 60%. I have the money. And the interest at the moment is low.”
What is the variety of properties you offer?
We offer from one-bedrooms to three-bedrooms in downtown Fort Lauderdale, by the New River. In the Village East, we have one and two bedrooms. We see that the one and two bedrooms are renting very well. Three bedrooms are more difficult.
[Investors] buy it as an investment and we provide full service. We have a property management company and we have the realtor company. We take care so the investors have absolutely no headaches. I have investors from Austria, and they invested in our property because they like it, and they get their reports twice a year. If the a/c breaks, if the tenant needs to be evicted, if it has to be re-rented, we do it. We do the painting, the carpeting, and if necessary, we do the accounting and the taxes for them. They really get the full package with no headache. It’s like being an investor in a vault.
What predictions can you share regarding the near future of your market?
This is what is going to happen within the next 18 months: you will see construction. The last year, we saw more in the low-income housing [sector]and now we strongly believe it will go to regular apartment building [construction]. We just got land under contract in Miami. We will start construction in 9-12 months.
I believe that the remaining inventory will be picked up in the next 18 months, and what’s interesting is that a whole industry is being established around this distressed investment. You have special bridge lenders that provide equity bridge or short-term loans. I assume that in the next 12-18 months, we will see the last really big and significant deals and then we will be ready for construction.
With all this action in South Florida, is it safe to say that you guys are not feeling the pain like the rest of the country?
It depends on how you look at it. If you go west of US 1, it’s more difficult. If you look at some of the buildings that got a mortgage, you understand why this could never work. The good location at the waterfront in Miami was tremendously overbuilt. But also, all the projections of the experts were wrong. They said there was an inventory of ten years and that Miami will be a disaster.
Now here comes the truth: it’s true that it was massively overbuilt, but what happened is that the developers started to rent out those really nice condominiums in downtown Miami, of course at a lower rent. And a lot of yuppies and young families were moving from the outskirts to downtown Miami. There is a very vibrant nightlife in Miami. A lot of restaurants have opened. So the city gained and changed. It’s much more attractive now, even in the nightlife. A few years ago, it was a dead city. It has since become more attractive.
The condominiums have been picked up by a lot of buyers. There is still an inventory, but the inventory is much less than predicted. I think it’s less than one year now. Two years ago, it was predicted that it would last for ten years. And I think this is the difference. We have to look to certain places. It might be true for, let’s say Homestead or Tampa, but as far as Miami, international buyers come because the prices are so low compared to their home country, that it makes sense to buy now.
Can you take this formula and try it somewhere else in the country?
I was looking at California in 2009, but it’s a very regulated market. You have to be there for many, many years to understand all the minor details. I think it’s very easy to fail [in California]because it’s a heavily regulated market. That’s why we like Florida, to be quite frank: if a tenant is not paying, you can evict the tenant in three weeks. Try this in New York. It’s much less headache [in Florida].
What are the challenges you’re facing currently?
The most difficult part, especially in 2009, is to convince people that it’s the right time to buy. 95% of investors that you see are always a little bit behind the cycle. But the markets move massively, like in the stock market. If two or three big players start to fail, everybody fails. It becomes a panic. It’s the same in real estate. Everybody was pessimistic. You had this terrible forecast. But there are a few people who said, “You are right. I am now below replacement cost. The unit is rented. I make a yield of 7%.”
So before any development can start, the pricing of existing inventory has to rise, because otherwise no development is going to happen. And the strongest argument in the United States compared to other developed nations is that you still have significant population growth. And if you look back to the last three to four years in the United States, the inventory increase in multi-family is ridiculous.
We also see one of the lowest construction activity periods in this century. There was only one period lower and it was between 1971 and 1980, where you had lower construction activity. But with the population rising, there will be a demand. A lot of younger people right now are moving in with their parents. This is something that can last for two or three years; but if you get older, you want to have your own home. They will push the demand again in the next two or three years.
What most surprised you about your experience in South Florida so far?
First of all, we were surprised at how fast inventory was absorbed. But the most difficult thing today is to find the good deal. You can find many deals, but you need a good location where you know your investment is going to stay rented over the next year and the building is not going to deteriorate. I think that’s the most difficult part.
From a macroeconomic perspective, we are a little bit surprised by the slow pace of improvement in unemployment. This is one of the key ingredients, especially for residential. The higher the unemployment, the less likely that the housing market is going to recover.
However, having said that, there is one phenomenon, and it’s also something that we were surprised about: even though the unemployment rate is quite high, the rents are currently increasing, especially in Fort Lauderdale.
So all the people who cannot afford their mortgages anymore, they need, of course, to rent. The foreclosure, on the one hand, which is the most serious overall in the economic situation, pushes the rent further because people need to rent. And even with a massive inventory and the banks starting to rent out, and even with this shadow inventory, the rents are increasing. This is one of the biggest surprises. We were not expecting that the rents would increase that much.
What advice can you give investors in the South Florida market?
Wait, because prices will recover in the next two years.