Why Invest In USA? Why ‘Rust Belt’ Cities?

June 21, 2010

USA has the largest real estate market in the English speaking world. It also is one of the most diverse.There are arguments on both sides for investing in US assets but events are beginning to show that the US$ is behaving as a ‘haven’ currency, retaining and even strengthening against the British Pound and Euro and is perceived as having more internal stability, within a more dynamic economy.  However within the country, investing successfully depends on a number of factors taken together as a whole, and different locations have been affected in very different ways throughout the USA.

‘Rust belt’ cities in the NE area of US such as Rochester, Syracuse, Buffalo, Detroit, and Indianapolis have been in the unusual position of missing the real estate boom, and missing the downturn. As a result, a large number of attractive properties can be purchased for ‘yesterdays’ prices – relatively low cost (typically $20,000 – $40,000) and extremely strong cashflow (typical Gross yield 25-35%). Gearing of up to 60% can be obtained on these properties and there while the focus on these units is income, there always remains the potential ‘bonus’ of capital growth. The Gross yields in these cities are some of the highest in the world, and this largely negates the income/debt servicing risk that ‘normal’ real estate is exposed to. For example, if a typical gross yield for foreclosed residential property in Florida, California or Nevada is 8%, then if there is a prolonged vacancy period or a drop in market rents due to large numbers of foreclosures in the area (flooding the market with rental properties), or a rise in interest rates, then there is a real chance of negative cashflow, which negates the reasons for buying the real estate in the first place.

Tangible commodities such as high income government backed real estate can provide a strong and safe cashflow while protecting against the future risks of both deflation and inflation.

In summary

– We believe US$ Assets are more likely to hold their value than Euro or pound in the medium term.

– Locations within USA with Strong cashflow, and a high number of private renters and government backed tenants are more attractive than ‘normal areas’ in the current economic climate, where the tenant market is often limited, and immature, and yields too low to make an attractive investment.

– Steady cashflow is a much more secure way to make a return on investment than hoping for capital growth, which may or may not happen.

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