Hi All –

Now things are slightly less busy due to plague and government shutdowns, this seems as good a time as any to share my thoughts on the market.

I think the best place to start is to consider the reason we have this kind of asset in the first place – we’re fortunate enough to be in a defensive asset here, where the main concern right now should be the maintenance of strong cashflow.

There are still a number of unknowns and contradictory opinions, but what we do know is – 
1. Long term, Coronavirus isn’t going to be the issue – but the economic fallout from the resulting lockdown will be.
2. Evictions will be harder for a period but the government is bailing everyone out so there really isn’t any reason for tenants not to pay.

What we don’t yet know is how all this will affect house prices. I was amazed to hear from more than a few guys at the structured finance conference in February how attractive a 7-8% net yield was for them, and its likely to stay attractive as other options become less so.

My view is that the higher end may be hit simply due to the fact that banks are already de-risking and lending less, so houses that attract mortgages (i.e.$120k+ level) will be harder to get lending on (with lower LTV’s) but the lower end which is mainly cash deals will not be affected so much.

In short – 
1. Houses at the ‘cash’ level are at less risk of falling in value. Cash buyers are still buying. Although I haven’t seen it yet, there may be a few people looking for quick sales, so some good deals may come available.
2. Bailouts should ensure rents get paid. The spike in unemployment is made up mainly of people who will be back in a job when things normalize. Section 8 And Rental Assistance will be paid as normal (which make up a fair number of your rents)
3. If you do have a mortgage, you can contact the lender and its likely you’ll get 90+ days grace period if required (email or call me if you want to know more) – this also will mean we’re likely to see less in the way of panic selling further up the value level. 

I think as investors in affordable, cashflow oriented housing, our bases are covered right now. We’re better equipped than most other assets classes in a recession to retain income and hold value.  If prices crash then yields jump so it’ll become an opportunity, but I’m not quite seeing that yet.

The overall economic situation when things calm down is a bigger issue to deal with but hopefully that can be an opportunity too. In coming weeks we’ll see the lay of the land much better, but for now I’m cautiously optimistic.

Until then stay safe,
Alan Findlay

+1 716 436 1296

Photo credit: Aubrey Rose Odom

For those of us who’ve been around through a crash or two, there’s always a bit of nervousness when an economy or a market seems to be growing too fast, or the returns on our investments seem too good.

Right now, is a time like that here in USA. Unemployment is at all-time lows. Wage growth is high and GDP growth is high. Everyone is doing well. That’s also reflecting in the housing market– prices are rising, rents are rising and we have a great choice of tenants for each house we put on the market.

So, can it be too good to be true? I think the answer is more complicated. In many parts of USA, there are indeed signs of a bubble – prices are often jumping due to lack of inventory, rather than higher actual demand. Yields are so low that investments are often in negative cashflow if there’s a mortgage on the home.

I like to focus on the fundamentals when I look to value a home – the bricks and mortar value if you like. Buffalo has seen extraordinary house price growth and rental growth in the past 5 years, but in the main rental areas we focus on, prices are still below what it would cost to build the new house. A $100,000 house would still cost $150,000 to build new, so there’s no reason for developers to build new houses. This means contractors are busy rehabbing and upgrading existing homes, which pushes prices up towards the replacement cost but we still have a long way to go in many areas. Buffalo’s west side is the latest area to get to around par on build cost/replacement cost, but the main investment areas we work in (South Buffalo, Blackrock, Riverside, University, Cheektowaga) are still around 50% below rebuild cost. Buffalo also remains one of the most affordable housing markets in the USA. (s) On top of this, as a failsafe, gross yields are still over 15% giving positive cashflow, even with a mortgage. This leads me to conclude that Buffalo is still nowhere near bubble territory –however, there’s never room for complacency. If rents stay the same, and prices rise another 50%, then it becomes attractive for builders to increase the supply of homes, which always puts downward pressure on prices. When that day comes we can re-evaluate our options, but for now – if it’s not profitable for builders to build, then we’re not in a bubble.

Further reading:

We have a quickly changing list of houses for sale (examples below!) Prices range from $25,000-$300,000+ . Gross yields range from 8% to 30%.  We can arrange financing if required. 

Just drop me a line on the email below with a brief outline of your needs. We can begin the relationship by matching you with something that fits what you’re looking for, and build from there.

Please also see our 6% guaranteed product – for all you guys sitting on cash in the bank earning nothing. We guarantee the income for 5 years (and can extend by mutual consent) and of course since you own the home you get the capital growth too!

The ones to put as examples could be 172 Millicent – 2/2 double, rented for $1150 per month, sold for $78,000. Gross Yield 17.6% 

and 142 Roesche – 3/3 double, rented for $1500 per month, sold for $115,000. Gross Yield 15.6%

Please contact us for more details: Email: info@abbotsinchcapital.com

Phone: +1 716 436 1296

Following on from the more general article above – no matter what the current economic outlook, take the following into account when you buy and you’ll see through the next downturn without flinching – 

Buy primarily for Cashflow. Do not ‘Buy for capital growth’

Right now I’m in Cebu, Philippines (much of our back office work is done here). The city is the middle of condo boom, the like of which I’ve seen before, and it didn’t end well. Gross yields are 4%. ‘Investors’ are buying for capital growth. Thousands of new units are being built right now, lending for locals has been loosened to USA 2006 levels, and everyone suddenly thinks that buying a condo to Airbnb is the way to riches. I remember witness a very similar scenario in 2006 in Las Vegas, when the salesgirl tried to convince me that the 4% gross yield that wouldn’t cover the mortgage didn’t matter because you were ‘buying for capital growth’ Anyway we all know what happened next. 

Buying this way amounts to pure speculation, rather like buying tech stocks where no one really knows what they even do, if anything. The certainties are there though – easy lending, leads to speculation and overbuilding, leads to oversupply of rental property, leads to falling rents and empty condos, leads to investors losing money and selling for a loss. 

I avoid this kind of market. In Buffalo the houses we are buying are still cheaper than build cost, so there’s no competition from new builds. However I do notice that now the market has tightened up, the quality of rehabs have improved tremendously and competition for good quality tenants has increased. However, good quality long term tenants are prepared to pay premium rents for a house in good condition that is managed well. And the owner of that house, with strong steady cashflow (sure, plus the bonus of capital growth) is where you want to be long term. 

Buy in a location with strong Tenant Demand

Another mirage of the young and hungry condo salesmen is the idea that there is a never-ending rental demand. If you build 500 condos and sell them all to ‘investors’, then the market has just jumped off a cliff in terms of oversupply. Perhaps wiser to check out a market where tenant demand vastly outstrips supply. There are numerous reasons and situations for that. One I mentioned above is a place like Buffalo (and this is common in a few cities across USA) where the new-build cost is higher than the cost to buy an existing house so new houses in that segment of the market simply are not being built (why would you build a house and sell at a loss when you can simply rehab an existing house?) A few cities saw giant influx of tenants (North Dakota Oil boom towns, for example) but this isn’t a sustainable business model. Best to stick to places where you still have that built in equity, and therefor a build in over-demand for the houses. 

It is also worth being sensitive to increasing and decreasing local demand in different parts of cities. 

Take a mortgage by all means – but don’t over-leverage

One thing that caught out many investors in the last crash was when they were left with a mortgaged unit and no tenant. You can still make money in a rough market if you don’t have any kind of mortgage and can afford to reduce the rent a bit to keep you in positive cashflow until the market inevitably recovers.

Buy a house that works, not a money pit

On the flip side of the coin, it’s often tempting to buy a house with the highest gross yield you can find. However if a house has an on paper yield of 45%, you can put money on it that there is something wrong with it. Be careful of houses in bad condition. Sometimes the tenant will still continue to pay, but any tenant who is prepared to live in a dump is not likely to be your ideal tenant. You are also going to have ongoing issues with the city, and as the house deteriorates, the cost of rehabbing it goes up. Best to just avoid the issues and focus on a house that’s already in good condition that can get you a good positive cashflow.

Take into account the bigger picture

When you are looking at possibilities, check out the broader economy in a city. Is it booming? If so, why? Is that sustainable? How are the city finances? Many US cities can not fund their pension obligations (i.e. Chicago) and could easily end up like Detroit. Again steady she goes is usually the best ‘bigger picture’ to go for – this investment isn’t really meant to be exciting, its meant to let you afford an exciting life.

So, I know what you are all thinking. Probably the same as me – Ok its January 2019 now, the US and my real estate portfolio had a decent year, especially in the capital growth department. But what next? Is it still good value? Is it overpriced? How does it compare with Europe in terms of the prospects? Do I buy a few more now or do I wait in case there’s a correction?

I find it’s always good to logically think through the potential scenarios in this case, and then make a decision based on the most likely.

Here are three potential scenarios

1. Economic growth remains strong

These are big broad questions – there are many different scenarios, so we need to just focus on those most likely. If the GDP growth remains over 3% then on one hand that’s great news – a strong economy means people have money to spend on rent or to buy houses. It’s also likely that interest rates will keep rising to keep growth in the sweet spot and not overheat the economy. It’s not rocket science to consider that this will dampen house price growth, at least at the medium/upper end where mortgages are higher. However with our sweet spot at around the $60-$150k level, most buyers here are cash buyers so aren’t likely to feel much of a pinch from rising interest rates. Rising interest rates tends to mean inflation too, so that’s likely to mean a general rise in rents and prices.  In short – not bad for a buyer, and good for those already in the market. If the current full employment remains, immigration remains relatively low, and utility bills fall (as is predicted) then inflation busting wage rises will creep in as employers have to pay more to keep good staff and have general staff shortages. This will bear out in rent rises too.

 
2. Economic growth decelerates

If, like some say, the interest rates have already gone too high and are negatively affecting the housing market and economy, then we have a slightly different scenario. If the edge is taken off house prices and the annual % growth slows (Buffalo prices grew at an inflation busting 13,2% in 2018) but a fall is unlikely. If unemployment rises substantially over the current 3.8% then wage growth may stall and with that the rapid increases in rent we saw in recent years could pause or even reverse. Lower rents could also mean investment level property is hit in price to keep gross yields steady. This is good news for new buyers but not so great for those with existing portfolios. However it’s more of an opportunity to pick up more at good value than time to bail out.

 
3. Economic growth stays steady

Although 1 and 2 both have good and bad points, things remaining healthy as they are is probably the best overall scenario for investors. Gently rising rents, gently rising house prices, and no disturbing news in a stable economy is every investors dream – boom and bust is good fun while the party lasts but rarely makes for happy investors.

It could well be argued that we’re due a full on crash in later 2019 or early 2020. None of the structural problems have really been fixed. The ‘bubble of everything’ looms. There’s a lot more pressure on the USD as the world currency, although on balance the sheer size of the US economy means that any risk of US losing its world hegemony are slim. Lending has increased this last year, as has the risk appetite from the banks, but we aren’t anywhere near the days of the 125% LTV mortgage for homeless drug addicts that epitomised the early to mid 2000’s. (Buffalo wasn’t affected by the following house price crash at all, interestingly enough, unlike neighbouring cities like Cleveland)  However, house price growth since has been stellar, so in a crash situation there would certainly be some fallout.

So what should I do as an investor or a potential investor? If you think things are in boom-time territory, and a crash is coming, then perhaps look at taking profits and/or ways to short the market, and get back in when things bottom out. If you think the growth will continue, then it’s really fine to build up your portfolio, making sure you’re insulated against a crash by focusing on cashflow, avoiding over-gearing, and choosing ‘recession proof real estate’ where you can. (see my book with that name on amazon for more in depth analysis.)

There is a school of thought that says that in an ever uncertain world, you need a solid foundation to your assets. Something where you win through times good and bad. Some people used Gold, or Government Treasuries for this, some maybe would consider corporate bonds or cash. 

These assets have one thing in common – while they’re generally considered low risk, and don’t make much profit, they’re easy to liquidate if times get tough. 

So where to invest the rest? How racy you want to be really reflects your own risk profile, and since you’re reading this newsletter, it’s likely you know where you stand on this. Equities and Real Estate have both been perennial favourites over the years (as well as more recent options like bitcoin, but perhaps that’s a subject for another article) Equities and Real Estate have a lot in common, but also sport some key differences.

If you’re buying commodities or equities, it’s most likely you’re looking at a liquid asset that you can sell easily if need be. The downside of this is of course the risk is higher but the returns in the past year have been less than stellar, (The Dow fell 9% so far this year)

Typical equity buyers don’t gear (the companies they invest in do though). When they do, they buy derivatives, like CFD’s or Options, which often takes out the cashflow but multiplies the potential gain and potential loss. 

Cashflow is also not strong, with typical yields ranging from 1-5%, so investing in equities is generally a ‘capital growth’ play with less of an income emphasis, which means a bad year in the stock market doesn’t tend to be compensated with decent cashflow.

Real Estate, or rather the real estate that we buy, is different in a number of ways – 

Like with shares, returns come in the form of both cashflow and capital growth. However expectations should be a lot higher – prices in Buffalo are up 13.2% year on year according to Zillow.com and are expected to rise 15.1% in the year ahead- rather better than the equity prices this year. Detroit and trendy Portland were flat. Chicago is up 2.1%, while other major markets (Houston, New York , LA, San Francisco) rose 5-7%. Curiously the other ‘local’ markets like Pittsburgh and Cleveland had similar strong years, both in double digit growth. 

While Gross yields have fallen slightly as prices rise more quickly than rents, annual net cashflow is still likely to be 7-10%

Also similar to shares, gearing (via mortgage debt) is easy to do. This tends to increase returns (see my previous article) and due to the slower, longer term nature of real estate is less risky than when trading equity or commodity derivatives.

The trends in real estate are generally more predictable than equities (look at the quick unravel of world equity markets this month, for example) and values are easier to predict, especially compared to newer investments like bitcoin or other digital currencies. As far as I’m aware, it’s impossible to accurately value digital currency because its value is based simply on what the market guesses its worth. With real estate there is a tangible physical commodity backing the investment (the land, plus the bricks and mortar and its income potential) which (unlike gold or bitcoin) has a fundamental use that isn’t going anywhere (people will always need to live somewhere) Buying an asset that costs less than it would cost to build (like the houses we buy in Buffalo) always seems like good value.

Although it’s a commodity of sorts, and enjoys many advantages over equities, cash and commodities (higher expected returns, lower perceived risk) Real Estate is not as liquid as either. It can take months to exit from a real estate asset, even a residential one. But while no asset class is perfect (otherwise we’d buy nothing else) the robust, inflation beating returns of real estate assets on a long-term basis should be a cornerstone of any serious portfolio. A solid income producing base allows you to take your chances investing in whatever digital whatsitsname gizmo of the day, safe in the knowledge that when you lose your shirt on that, your houses will still be there, producing income.

We’re just completing our first portfolio mortgage for an overseas client here in Buffalo. Mortgage Lending on a portfolio is in effect, the ‘magic ingredient’ in an investor’s portfolio. While the costs can be higher than regular bank lending, the lending for foreigners is quite competitive and user friendly, and of course Increases our ROI enormously.

To show the difference, here’s the deal we just did without lending and with lending. The buyer took a $500,000 mortgage over 10 years (30 year amortization) with a portfolio value of $770,000.

Let’s look at the portfolio if you just bought it cash –

-$770,000 – let’s say 14% Gross Yield and 10% net yield.

-Net return = $77,000 per annum on $770,000 expenditure = 10% ROI

So, in short –

With 0% capital growth = 10% ROI

With 5% capital growth = total 15% ROI

With 10% capital growth = total 20% ROI

Let’s look at the portfolio with the lending –

-$1.4m – let’s say 14% Gross Yield and 10% net yield.

-$500k loan so $270k expenditure plus closing costs of $21k = $291,000.

-Net return = $77,000 per annum income minus $35,000 in loan interest (@7% interest rate) on $291,000 expenditure = 14.4% ROI (assuming interest only – return would be higher with amortization)

With 0% capital growth = $42,000 = 14.4%

With 5% capital growth = $38,500 + $42,000 = 27.6% ROI

With 10% capital growth = $77,000 + $42,000 = 40.89% ROI 

So, as you can see, even with this simple comparison, the income increases when less capital is deployed. The effect of the mortgage lending acts as a multiplier for capital growth gains. But even without capital growth the return is over 40% higher in % terms.

If you’d like to look at mortgage options for your portfolio, give me a call or email, and we can look at what’s the best way forward.

For more information and/or to set up an informal chat about your investment requirements, please contact me on alan@abbotsinchcapital.com

The UK government has, for reasons unknown, been using UK buy to let investors as whipping boys for years now, but of late has really stepped up the assault.

Landlords are seen, at least by the media, as bad, exploitative people for simply providing a service that people want, need, and are willing to pay for. We’ve taken it lying down to date, because its usually tax on what was in the past a very profitable business.

However, the latest changes in the law are likely to be the straw that broke the camels back. Starting from next April, landlords will no longer be able to deduct mortgage interest from their rental income before tax. (http://www.theweek.co.uk/66688/multi-property-buy-to-let-owners-face-squeeze ) This means that landlords that were previously just about breaking even, will no longer be doing so, and many are likely to simply sell up while they can. (Heres an example – http://www.spectator.co.uk/2016/02/buy-to-let-investing-just-became-a-very-very-bad-idea/ )

In London, it looks like more needless government intervention is likely to make life worse for both landlords and tenants. Letting agents will no longer be able to charge letting fees. (http://www.bbc.com/news/business-38065249 ) Anyone with an ounce of common market sense (except for the government evidently) will know that the fee will simply flow into higher rents, but this takes time and is likely to mean more landlords selling up, less supply, a less attractive proposition to new landlords, and higher rents for tenants.

So what are the options for non-corporate UK buy to let landlords? (large corporate landlords are largely exempt here)

1. One option could be to hold on and take the battering, hoping that increasing scarcity could in turn increase rents to compensate for the tax increases and other limitations/regulations. And hope that more don’t come. Realistically this is more of a ‘head in the sand’ option – the government isn’t likely to stop this assault (which is bizzare seeing as the bulk of small landlords would normally be conservative voters) and the ways to make money in the business are getting harder and harder.
2. Another option could be to sell up and buy in a location where the boot is on the other foot, so to speak. One good example could be in USA, where a real estate investor has just become president. With the right guidance, the whole process is simple and profitable, even cash on cash.

1. Donald Trump being president is great news for real estate investors. He understands the business very well and has already indicated that he’ll make lending easier again, which is likely to bring up prices in ‘investment grade’ areas (which currently don’t have too much lending)
2. Taxes are much lower (starting at 15%, but almost all expenses can be written off).
3. The culture is very landlord friendly in USA, as are property rights vs squatters rights for example.

As our existing investor group will tell you, with Abbotsinch Capital (www.abbotsinchcapital.com) you’ll have a relationship with an established local and transatlantic team that can help you find the right tailored USA investment, with the kind of return you haven’t seen for decades in UK. We provide all the hand holding along the way (including Attorneys, LLC setup, bank accounts, insurance, and of course full service property management and after sales service) We look to grow with you, and provide a safe, secure environment in which to continue to build a portfolio and prosper for the long term.

For more information and/or to set up an informal chat about your investment requirements, please contact me on alan@abbotsinchcapital.com

It’s the question everyone has been asking me this week, so I decided to take a stab at an answer.

Trump (and Clinton’s) campaign were both characterized by rubbishing the others reputation and determinedly avoiding any kind of policy detail. So we now have a President of the most powerful nation on earth, who actually doesn’t have any set in stone ideas, policy, or overarching philosophy. Donald Trump has been a Republican, then a Democrat, then Independent, then a Republican again (https://en.wikipedia.org/wiki/Donald_Trump#Involvement_in_politics.2C_1988.E2.80.932015 ). However, as a republican president, we do have some general ideas on which way his policy will have to lie, to get things through republican dominated congress and senate.

So what do we know?

He’s a real estate investor, like us. 
This is probably the most important aspect for you and I. He’s one of us. He understands how we think, how we make money, and what issues affect us. Whether it’s a case of easing on taxes, or something else, this can only be positive.

He understands the issues surrounding the crash of 2008, and what needs to be done to make sure this doesn’t happen again. While his hands are largely tied with regards to the privately owned federal reserve bank, Trump knows that while the crash was caused partly by mis-regulation, he also knows that the market has been hobbled ever since by the reactive over-regulation of the banking industry that followed the crash. A balancing out of this will allow more real estate lending and more money into the industry, pushing prices up but tempered by the likely small but steady increase in interest rates and inflation that will cycle through his first term in office.

He’s likely to cut tax and cut spending. As a ‘small government’ republican, he’s likely to reduce entitlements, although this is by no means certain despite his campaign rhetoric. He’s flip flopped on tax, and currently proposes a top rate of tax of 25% – http://www.marketwatch.com/story/donald-trump-raises-his-proposed-top-tax-rate-for-individuals-2016-08-08 – although he also alluded to a top corporation tax of 15% which is better.  This will mean he’ll have to cut somewhere – I’d love to see him cutting corporate welfare (by far the most wasteful welfare expenditure in USA – http://thinkbynumbers.org/government-spending/corporate-welfare/corporate-vs-social-welfare/). Trump, unlike Hilary Clinton is less beholden to corporate sponsorship and therefor could be the ideal candidate to focus on this.  Reducing spend on Nato by forcing the other countries to cough up a larger share will also make a much bigger difference than cutting entitlements, (which I suspect will be very difficult to reduce substantially without a lot of pushback). However with unemployment at record lows in Buffalo, and our focus on working tenants, a reduction in Welfare entitlements is likely to have a marginal negative effect on our investments here.

He wants to Reduce Immigration.
We have a double-edged sword with this issue. Most of the negative affects will hit cross border businesses in Southern USA near the Mexican border. However, Buffalo has long been one of the major beneficiaries of USA refugee intake, especially from SE Asia. It has not only increased the population and tax base, but the people are generally law abiding, family oriented communities. They make great tenants and often end up opening local businesses. Reducing the number of new arrivals, while it wouldn’t have a negative affect, would have a less positive affect. On the plus side, a lower supply of ‘cheap’ foreign labour would likely lead to an increase in salaries as there would be less people willing to do low paid work, perhaps allowing for larger rent increases over the longer term.

All in all, while like most of you I’d rather have seen Gary Johnson in the White House, realistically id rather, on balance, be in the hands of a seasoned real estate investor like Trump than a career politician like his adversary.

The New York Daily News, one of the US largest circulation tabloids, has finally discovered the newly emerging Buffalo and its burgeoning cultural scene. Read about it here