The Cheapest Beachfront Around

I met Jack in the back of a taxi here in Malaysia. Jack is American. We shared a ride from the airport yesterday...

Jack asked me where I lived. When I told him I lived in Florida, he quickly turned the subject to real estate. It turns out, Jack got involved in the Miami condo bubble.

Jack knows nothing about real estate or investing. But in 2004, he and his wife bought two condos on Collins Avenue. Miami had two major construction booms: One boom ran along the beach on Collins Avenue. The other was downtown... in the financial district... around Biscayne Boulevard.

Jack's condos rose 15% through 2005. Let's say Jack put 10% money down. He had a 150% profit. Jack had intended to flip his condos, but when he saw how easy it was to make money in Miami's construction boom, he decided to let his profits run. Then the market collapsed...

Collins Avenue condos are now down around 15% from their peak, and the condos around Biscayne Boulevard have lost around 35%.

Jack's investment is back where it started. Except now Jack owns two condos no one wants to buy and he has to rent them out. It reminds me of the old joke: What do you call a short-term trade that goes bad? Answer: An investment. He says the rent covers about half his monthly mortgage, tax, and condo fee.

Here's the thing: Developers can always construct a new condo building in downtown Miami. But as Jack says, "They aren't building anymore beach." Jack made a bad investment. He's stuck with two condos he never wanted and he's losing money every month. But at least his initial investment is still intact. If he'd bought downtown, he'd be sitting on a 250% loss right now... on top of the monthly bleeding. Besides, the beachfront market will recover before the downtown market, and it'll rise faster when the next boom comes along. 

"Thank God we bought on the beach," he says.

The time to buy Miami condos is not here yet. The worst of the decline may be behind us, but I expect it'll take three or four years for this market to find a bottom. We can still take a lesson from Jack: Always buy beachfront. There's less downside and more upside.

In Detroit, "beachfront" is a mansion in Grosse Pointe next to the country club, with views of Lake Saint Clair. In Argentina, beachfront is an apartment in Buenos Aires' Recoleta neighborhood. In Las Vegas, it's a penthouse on the Strip.

The stock market has its beachfront, too. When the time comes to invest in homebuilders again, I'll buy NVR. It's by far the best-managed homebuilder. When financials find a bottom, I'll buy Wells Fargo, the elite bank that counts Warren Buffett as a huge shareholder.

What's the best deal in "beachfront" right now? I like mint condition pre-1933 gold coins. They're almost as cheap as the "downtown" common bullion coins, and they're in an uptrend after a 10-year bear market...

Good investing,

Tom

P.S. Malaysia? Yes... I'll be in Asia for the next month and a half, researching investment opportunities. If you're close by or if you'd like to hear about a specific subject, write us a note at [email protected].