More than any year in the recent economic troubles, this year ahead looks to be the most interesting yet.

The general public are now belatedly coming round to the idea that valuing real estate on a ‘future capital growth’ basis is simply not sustainable. In other words, one by one everyone has finally admitted [...]]]>

More than any year in the recent economic troubles, this year ahead looks to be the most interesting yet.

The general public are now belatedly coming round to the idea that valuing real estate on a ‘future capital growth’ basis is simply not sustainable. In other words, one by one everyone has finally admitted to themselves, in Europe and the States, that it was just one big bubble.

But the bubble hasn’t fully burst yet – many places haven’t fallen at all. Super-rich enclaves in West London, and Manhatten have been relatively unaffected – why is that? Flight to quality? Rich people haven’t been affected? Well, a bit of both I’d say, but mainly because of a history of cash buyers. According to this BBC article 80% of transactions in some parts of London are cash.

Cash dominated markets are likely to remain more stable than highly geared ones for obvious reasons. They are neither likely to be under risk of foreclosure, nor at the mercy of interest rate rises, rent fluctuations, inflation and of course excessive speculation.

Markets where most people are highly geared give a totally different dynamic, and as the whole residential real estate sector slowly de-gears, it is therefor becoming a more realistically valued market, and less exposed to outside influences like interest rate fluctuations.

You can think of gearing in real estate like air in a balloon. Where gearing is falling, it is likely to have an impact on prices as they deflate to the ‘real’ market price – i.e. without the corrupting factor of bank lending in the equation.

While buying with gearing is great when you can get it, just lets be aware this year ahead that bank money is likely to be retreating from the sector for years to come, and so make your valuations assuming no bank funding and see if it still adds up as an investment then.

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.

It’s not rocket science, but you would be amazed at the number of people who don’t check the local employment makeup when buying investment property. With the economy in many US cities in bad shape and likely to remain precarious, it’s wise to look at what the dominant sectors are [...]]]>

It’s not rocket science, but you would be amazed at the number of people who don’t check the local employment makeup when buying investment property. With the economy in many US cities in bad shape and likely to remain precarious, it’s wise to look at what the dominant sectors are in your chosen investment location.

According to this report – http://microreviews.org/5-recession-proof-sectors/  the top 5 recession proof Sectors are Healthcare, 2^nd hand Shops, Telecom, Higher Education, and Fast Moving Consumer Goods.

It follows that it makes sense to buy in a city where at least two of these sectors dominate (for example in Buffalo, NY – Healthcare and Higher Education are the two largest employment sectors in the city.)

Taking the time to check on this, gives a strong foundation to your investment that tenant demand will remain and not be washed away by high unemployment and declining population. Just look at the devastation caused in Detroit from the Auto-Manufacturing Industry fallout – prices have dropped dramatically and tenant demand has also fallen.  This environment is not attractive when you’re looking for steady rents, good tenants, and even some future growth.

Cities where unemployment has hit badly, like Las Vegas, not only has a high number of foreclosures (often adding to rental supply) but the knock on effect of having a large number of empty homes in a neighbourhood can also hit rents, increase crime, and give any landlord headaches.

But buying in a boom bust city can be avoided, with a little homework – just focus on cities full of steady boring jobs like Healthcare, Higher Education, and Telecoms.

On the other side of the coin, avoiding declining industries is just as important – smaller declining sectors like Print Media, CD/DVD stores and Real Estate Brokerages are countrywide and so maybe don’t factor so much, but according to this article.

According to the article, Oil Dependant Businesses are one larger sector being hurt from the higher oil price – This not only affects the Auto Industry, but also interestingly affects sprawling Cities like Atlanta, Georgia, where long car commutes from the suburbs are becoming prohibitively expensive. Bear this and other future trends in mind too – avoid areas where the inhabitants rely on goods and other variables that are becoming more expensive or less attractive. More on this later.

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.

With the spread of the ‘Occupy Wall Street’ movement around the world, Eurozone crisis, and various other obvious signs, it doesn’t look like the economy is going to improve any time soon.

A large number of people are, however, sitting on money in the bank, earning around 1% per annum interest. But surely there [...]]]>

With the spread of the ‘Occupy Wall Street’ movement around the world, Eurozone crisis, and various other obvious signs, it doesn’t look like the economy is going to improve any time soon.

A large number of people are, however, sitting on money in the bank, earning around 1% per annum interest. But surely there are better ways to make your money work for you?

Well let’s look at a few things we can be quite certain about –

1. In general, people will have less money to spend.
2. They are actively looking for ways to budget.
3. Poorer and Middle-income people have been hit harder than the richest 1%
4. Mortgages are increasingly difficult to obtain.
5. Rental demand is therefor increasing.

And the rather obvious,

1. People, no matter their economic circumstances, need a place to live.

So bearing this in mind, how does this extrapolate out to people’s actions?

Rich People – Not all the top 1% have been unaffected by the recession. Those unaffected can pick up a bargain – either buying or renting.  Those who have moved down a league, or simply moved, have often found themselves as accidental landlords, not wanting to sell their property for a low price, so adding to the supply of luxury rental property (pushing rents marginally down for real estate few can afford).

The Middle Class – The middle classes have been squeezed, not only by a sharply rising cost of living, but by rising unemployment, crumbling home equity, redundancies and foreclosures.  If we see inflation continuing to increase, then this will hurt the middle more as their disposable income shrinks.

So what are they doing to tighten their belts? Certainly one way to save money, and an increasing trend is to rent their larger house and ‘downsize’ or to simply move downmarket in terms of accommodation. This is putting upward pressure already on rent at the lower end of the market and is likely to be a welcome to all lower end landlords.

Poor People – The poor will always be with us. They make up the bulk of the budget private rental market and their choices on accommodation are becoming increasingly limited as the middle classes encroach on their traditional rental market, pushing rents up and improving the quality of the tenants available to landlords.

The end result? In a continuing recessionary environment, with rampant inflation, high unemployment, and an awful economy, a responsible ‘lower end’ landlord who keeps his accommodation in good condition will not only find increasing competition for his offering, the increased demand at the lower end will increase his rents and improve the quality of his tenant.

With increasing numbers of refugees (certainly in New York State), Section 8 (government assistance) applicants, and middle class people moving downmarket, the poorer parts of good neighbourhoods are seeing unprecedented demand for good quality budget accommodation. 

In other words, well managed, good quality cash-flow oriented investments are an excellent and secure source of income in a recession. 

Geography of course is also relevant here -

In Buffalo, New York, its possible to buy a 4 bedroom ‘rental’ detached villa,  in an ‘up and coming’ area (read – gentrifying working class area where the middle classes on a budget are encroaching) for $30,000 with a rent of $700 a month – a 28% yield. The equivalent in East London London would be a 2 bedroom flat costing £300,000, renting for £300 a week –only 5% yield !

This would mean that it would take 20 years to make your money back in London, but in Buffalo you’d make it back in less than 5 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.

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An example [...]]]> When holding investments, one of the most important pieces of information to have is to know the true value of the investment. Typically this means the value of the investment as compared to other similar investments, so you can sleep well knowing your holdings constitute good value, especially in the current economic environment.

An example could be the ‘8% rule of thumb’, which held for many years for geared residential investments.

In an environment where typical gearing is 80%, and interest rates 5% – an 8% yield was often seen, at least in a positive capital growth scenario, as a minimum level to interest investors. Looking at this return, a $100,000 investment with 8% yield would give $8000 per annum income. Add say $5000 a year capital growth, then you have $13,000 income, minus interest of $6,400 = $6,600 per annum against $20,000 investment, a rough return of 33%.

But what happens in an environment when banks retreat from real estate? And when capital growth cannot be taken for granted? Then to obtain the same true value, your investment should be getting the same rough return. Let us look at 2 examples of cash purchases.

1. A foreclosed villa in Florida. Rent $12,000 a year, value in 2006 – $200,000, sold now for $100,000. Seems a good deal huh? No. Not at all. As a cash purchase, the rough gross return is only 12%. In a state with one of the highest number of houses in foreclosure in the country, ‘capital growth’ simply isn’t going to happen. And even if miraculously there was 10% capital growth then the return would only be 12+10=24%. Therefor even in a best-case scenario, compared to the first investment, this house is bad value.

2. A cheap cash-flow duplex rental property in Western New York. Rent $12,000 a year ($500 a unit per month) costing $30,000. Needs $7,000 renovation. $12,000/$37,000 = with no capital growth, it gives just below the same 33% return as the original house.

In other words, as example 2 shows, in a non-gearing and non-capital growth environment, you’re going to need a gross yield of 33% to ensure your investment is similar value to the 8% yielding ‘boom time’ investment.

Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment.

The conclusion I have come to in the current market is that the days of ‘buying for capital growth’ are over, for a few years yet. Why?

1. Bank money is retreating from residential real estate – new Lending has been [...]]]> As an investor, how can you tell you are ‘buying right’ in the market?

The conclusion I have come to in the current market is that the days of ‘buying for capital growth’ are over, for a few years yet. Why?

1. Bank money is retreating from residential real estate – new Lending has been at a low for some time. Despite denials from a large number of people, this is the root cause behind the ‘great unwind’ of real estate prices. Less money in the system equals lower values.

2. Prices are still too high. Why can you see a home in Rochester New York with a 25% yield, and a similar house in San Francisco with a 4% yield? Unemployment in San Francisco is higher, % foreclosures are higher, affordability is lower, and prices are well above replacement cost. Las Vegas was the fastest growing city in USA from 2000–2010, therefore the house price growth was largely fuelled by bank lending. Now it is the highest city for foreclosures in USA, demonstrating
not only the banks’ bad policy decision to lend to anyone and everyone, but demonstrating prices need to fall sharply to ensure they are affordable for new buyers in the current banking climate.

3. Interest rates will rise. You think things are bad now? Even the most idiotic government understands that if US wants to avoid the high inflation that could result from printing trillions of $, they will need to raise interest rates. This will make it harder to buy a house, and less affordable. Rentals will benefit from increased demand, pushing rents up further. High interest rates will make it harder for homeowners to keep up mortgage payments and could cause a further wave of foreclosures, pushing prices down again to their ‘real’ price.

So the first and most important thing for an investor is to find a market where houses are already at their ‘real’ price and won’t be vulnerable to further falls.

How can you tell?

1. The price is below ‘replacement cost’ . It is possible to find real estate that costs around half the price that it would cost to build the house. This is typically in depressed real estate markets where bank intrusions were low in the boom time, and the prices were not artificially inflated.

2. Foreclosure levels are low. This confirms that bank lending locally has been responsible, that the local economy is in good stead.

3. Local affordability levels are high i.e. the local income to house price ratios are high. If you see anything towards parity between the annual income for the average house price, then prices are well within range of affordability, and unless there is a dire economic scenario locally, then this is attractive. For example, Syracuse, Western New York has a median income of $64,300 and a median home price of $80,000, i.e. a ratio of 80.37%. While Ocean City, New Jersey has a similar median income of $68,100 but a median home price of $282,000, a ratio of 24%

Unemployment in Syracuse stands at 7.6%, less than half of that in Ocean city. This should make it apparent which market is more vulnerable to future price drops.

Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment.

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