Good sized single family home in a quiet suburban street. The area is well kept and family friendly, and popular with a mix of owner-occupiers and renters.

The house is newly renovated throughout, and has new Section 8 tenants, with a rent of $795 per month. The sale price of $29,500 gives a gross yield of over 32%.

To find out more about this house please contact us:
Telephone: +44 20 7193 2079
UK Local calls: 0843 103 2312
E-mail: info@abbotsinchcapital.com

It plots the increase in employment in Education and Medical professions in Buffalo, since 2002 to it becoming the city’s largest employment sector in both terms of numbers and as a %. As you can see, regardless of the economic situation, the number of jobs here are growing, replacing less highly paid manufacturing jobs, which have fallen, being replaced by a wide range of white collar professions.

Of course this is part of the reason for the GDP per capita rising higher than almost any other part of US in 2011 (see x article) but what else does it mean for Buffalo?

In Buffalo the health/education sector is 17.9% of all non-farm employment and the biggest single employment sector (compared with Las Vegas at 8.8% or San Francisco Metro at 11.6%). The Buffalo Niagara Medical Campus, which includes the famous Roswell Park Cancer Research Institute, employs over 12,000 people, including more than 500 MD’s, 200 PhD’s, and 1,400 nurses.

This simply means that the largest employment sector in Buffalo is also the most recession proof according to reports:

- 5 Recession Proof Sectors
- 5 Sectors With Recession-Proof Pay
– Siddiqui: “Healthcare is one of the few recession-proof sectors”
– UK jobs: the top 10 sectors to be in

These are the kind of growth statistics I like to see bolstering rental incomes, especially if we’re likely to be in for a few rises in interest rates in coming years.

***

Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan by E-mail: alan@abbotsinchcapital.com or by phone: +44 (0) 20 7193 2079.

© Photo by Eric Beato

There used to be hundreds of ‘tip sheets’ for budding buy-to-let investors. Almost all of them seemed to give bad advice – buy lots of new flats, at a ‘discount’ for capital growth.

Anyone who did this in UK within the past five years will have run into serious problems. As inflation begins to rear its head and with possible rises in interest rates on the horizon, the man sitting on his 5 year old apartments with his 5.2% yield will be hit by a cashflow tsunami when the interest rate cycle, until now artificially held back by the Bank of England, inevitably hits.

But it is still possible to:

1. Build a buy to let portfolio from scratch with £50,000/$75,000.
2. Avoid all the traps that the ‘growth’ peddlers fell into.

Firstly you’ll have to decide where to look. There are very few good deals in British real estate right now. Now the tide is out on capital growth, real estate is left with only its yield exposed.

According to Findaproperty.com Rental Index Gross yields in UK average around 5%.

Lets say you find your first investment with your £50,000. Two £100,000 apartments rented fro £550 each per month – a gross yield of 6.5%, so a good deal for UK. Lets say you get a mortgage of 75% at 4% interest rate.

Monthly money in £550 x 2 minus service charge of £80 x2 minus letting fee of £75 x 2. Total money in = £790 per month

Monthly money out = £150,000 x 4% interest = £600 per month.

So net return with no repairs, voids or other issues would be £190 per month, or 4.5% annual return.

BUT, I hear you say – surely in a post capital growth world, this return can be eaten up by any repairs, voids, and more importantly, rises in interest rates? A 1% rise in interest rate wipes out almost all the annual return. A months vacancy does the same. Surely the money would be better in a bank than in an investment where all the risk is downside ?

Well, that was the conclusion I came to regarding the UK market. It tells me that the market is overpriced and rents must rise and prices must fall for a few years yet before anything becomes attractive. Perhaps its better to be the guy buying these same apartments in 5 years time in foreclosure, when rents are the same but the price is £60,000 each.

After some years of search however, I came across Western New York.

In a city like Buffalo, I managed to seed my portfolio with £60,000 – lets say $90,000, by buying 2 single unit houses and one double unit house with cash. The prices have gone up a little bit in the last 2 years, but it’s still possible to achieve the following –

Single house – $28,000 – rent $650, taxes, management fee, and maintenance $250 – net income $400

Double unit house $34,000 – rent $850, tax, management and maintenance $350 – net income $500

My net income is therefor $400+$400+$500 = $1300 per month – 17.3% return per annum.

This means that in around two years I can save up enough to add another house to the portfolio.

Ok, you may say – there are a lot of things I don’t know about here:

Local vs Worldwide – Building a portfolio in a place that isn’t ‘home’ is a perceived risk that in fact, doesn’t exist.

With the right investment at the right price, and a reputable letting and management agency, the perception of distance is removed, and the investment should run smoothly.

In fact, like many professional investors, I prefer not to pass the investments every day in the car, as it brings an unwanted emotional attachment to the house/apartment. A ‘full service’ portfolio building advisor like Abbotsinch Capital can take the perceived distance risk out, and ensure the investment is arms length.

Local Economy, and Tenant Demand

The other issue with arms length investments is that you may not know too much about the local economy and local tenant demand. This again, is where a reputable portfolio building advisor comes in.

Fortunately the internet (including our website, www.abbotsinchcapital.com) has a myriad of statistics and information regarding the local trends and environment. We rely on repeat business, so our interests are aligned with helping the investor make good long term investment decisions.

Finance

Finance is more difficult to obtain in overseas markets, including first world countries similar to our own, simply because the credit rating systems are not linked up.

This however, could be a blessing in disguise, in the current environment where the interest rates are being held down artificially by politicians, stoking the fire for when interest rates really must rise to quell inflation (which is now).

Borrowing at low rates and being able to fix for the term however, should be taken advantage of while rates are low, but rates can rise quickly and by a large amount, putting certainly most real estate into negative cashflow within a matter or two or three months.

If you do decide to take the cashflow risk, calculate in the interest rate being at least three times current rates. If the investment is still cashflow positive, then it’s a deal.

More smaller investments versus one bigger one

Hedging your bets and spreading the risk with 3 or 4 investment properties is the reason for most people building a portfolio. The advantage of having a few properties rather than one are:

- Less vacancy risk. If one is empty then the others can take up the slack.
- More flexibility. If your circumstances change and you need some money out (perhaps to buy a place to live) then you can sell one.
- Spread exposure. You can have one house in one area, others in different areas. One area may go downhill for some reason, the others may go up. The main thing is that a portfolio can more accurately reflect trends rather than having all your eggs in one inflexible basket.

One negative regarding going down the portfolio route is that for each property you buy, there will be one roof, one boiler, one set of tenants, floors, and so one set of problems for EACH house. However, with good management, this risk is vastly offset by the advantages outlines above.

In conclusion

- buy right, and don’t let geography cloud your vision
- take advice from a knowledgable local advisor, like www.abbotsinchcapital.com
- DON’T buy for capital growth.
- DO buy poised for strong cashflow, no matter the economic climate, like any healthy business.
- Spread your risks and build a portfolio that can sustainably build itself over the years, until your monthly income is the amount you choose to retire on.

***

Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan by E-mail: alan@abbotsinchcapital.com or by phone: +44 (0) 20 7193 2079.

A big theme these days is the comparison between buying a new home, or fixing up/extending an existing one. Which is the better option?

Well, in many markets across USA prices remain stubbornly high for newbuild homes, so a wrecked old foreclosure may make better value for money. But renovation isn’t for everyone, and costs can escalate, especially if you’re looking at the luxury end of the market.

In Buffalo, however, the decision dynamics are a little bit different. Newbuilds, beyond luxury ‘one off’ homes, are a rare breed, even now. The reason? Existing houses are too cheap. Lets look at the numbers –

Cost to build a simple 4 bedroom house in typical rental area of Buffalo – $100,000

Cost to buy a house in bad condition in a similar area – $10,000 (renovation cost $20-$30,000)

Cost to buy a newly renovated house in similar area – $30-35,000.

So what does this mean, bearing in mind the recent economic stats confirming Buffalo as having the 2nd highest GDP per Capital growth in USA?

GDP Growth means people are earning more money, i.e. job quality is improving (and presumably skill levels) Maybe the current low cost of living has attracted more jobs, improving the economy, or existing companies are prospering in the low cost environment – either way, in time this must put upward pressure on prices as people are attracted to an improving area. In Buffalo that can be seen from the improvements in rental vacancy rates -According to US Census Bureau, rental vacancy rates in Buffalo fell from 12.5 to 8.3% from 1st to 4th quarter 2011 – compared to New York vacancies increasing 23% to 6.8%, Houston at 14.6%, Detroit at 16.2%, Chicago 10.4%.)

Right now, Buffalo is one of the few places in USA where you can buy a fully renovated house for less than half the cost of a newly build house. With increasing demand for homes in the area, and no new supply due to the higher cost of building new homes, then the slack will have tighten up by increasing rents and prices towards the ‘par’ of newbuild cost – the cost of the land, bricks and mortar, which could be seen as the residual value of any home in any area.

Lesson of the day? ALWAYS BUY BELOW RESIDUAL VALUE!

Someone asked me the other day – ok Alan, if I should be looking at about 15% return plus capital growth, there MUST be some risk involved there. What are those risks?

So I thought I’d share my thoughts on this with you.

1. Management
Good management is the overriding factor in making the difference between a successful investment and a bad one. Having bad or ineffective management of the property leads to the downward spiral of the house falling into bad repair, leading to lower quality tenants (good tenants wouldn’t want a run down house) and often ends up with an empty unlettable house and a large renovation bill. Always mitigate this risk and use a reputable recommended management company.

2. Condition
When you buy the house, unless you’re a handyman and live locally, always try to get something recently renovated. This gives you a headache free income, and fewer headaches for the tenants. Key things to look at are the roof, and the boiler/heating/water system.

3. Tenant quality
Tenant quality has a lot to do with what you buy and where, but it pays to try to avoid bad tenants. Having good management and a house in good condition will give the agents a wider range of choices re tenants and lessen the risk that your tenants will be non-payers/messy/causing damage. If you are concerned about the quality of an existing tenant, it is possible to take out insurance to mitigate risks like tenant vandalism and even non-payment.

4. Location
The location of where you buy is a big risk factor in your investment. Of course the cheaper the house and higher the yield, in theory this should mean the riskier the location. Stick to cities with positive economic dynamics, and avoid the very worst areas unless you plan to buy every house in that neighbourhood. Look for locations near to the usual nodes like transport and employment centres, and also nearby to more upscale areas, to win from possible gentrification, and improvement in tenant quality that comes from this. In Hackney, London for example my tenants changed in ten years from being mainly DHSS (government welfare funded) tenants to upwardly mobile professional people, as the transport improved and the area gentrified.

5. Legals
I’ve seen situations before where a buyer uses the cheapest lawyer, or none at all in a transaction. While it may work out quite ok, its often worthwhile trying to simply find a reliable and efficient one, who you know has made all contracts correctly. Strange although it may seem, I’ve seen situations where the buyers lawyer forgot to check the water bills were paid, and after closing the new buyer was obliged to pay the back bill of several hundred dollars! In short, use a lawyer, and preferably one recommended by someone you trust.

I have just outlined the main technical risks that will be in your control that you will be taking when investing in real estate. As you can see there are numerous ways of mitigating those. I always recommend a good attorney, and a good management team who I’ve used for years positively. There are also however many risks that are out of your control – Political risk, currency risk, and also ‘black swans’ connected to those – what if Canada attacks USA? Well I wouldn’t worry too much on that…

Click here to read “The Rustbelt returns” in Overseas Property Professional magazine.

House: 1,312sq ft
Lot: 3,484 sq ft

Three bedroom single family home for sale in Schiller Park.
Average rents $675-$695 per month.

Call +44 20 7193 2079 or E-mail info at abbotsinchcapital.com for more information.

Six U.S. metro areas, including three manufacturing centers in the great lakes region (Buffalo, Detroit, and Rochester), ranked among the ten metro areas that outpaced their nations by the largest margins.

So what does this mean for Buffalo real estate investors? While it’s a pleasant surprise to see Buffalo – with a reputation as a low income ‘blue collar’ city so far up the actual income charts, the statistic that makes me happy here is in table 3, where it shows Buffalo’s income growth as the 2nd highest in the US, after Houston (nearby Rochester came 4th) – income growth is one of the fundamental variables that affect both rental levels and house prices. Take away the booms and busts that seemed to evade Western New York, and the fundamentally correct house price and rental growth can be compared from there from metro to metro. For example, if a city’s income is falling, then people are earning less money, and so puts downward pressure on both house prices and rental affordability.

Buffalo showing up as the 2nd top riser in the whole country is great news for those of us wanting to see both improving rental levels, higher earning (and presumably better quality) tenants, higher levels of tenant affordability, and of course increasing house prices. Be sure to avoid metros on a downward income or employment trend.

Income: per capita GDP for an economy. It is not personal income or household income, and does not reflect the distribution of income distribution, but proxies the average standard of living in an area.