DO CASH FLOW POSITIVE RENTALS RESIST DECLINES BETTER THAN OTHER ASSETS

by Tim Herriage

DO CASH FLOW POSITIVE RENTALS RESIST DECLINES BETTER THAN OTHER ASSETS

by Tim Herriage

by Tim Herriage

British Row HousesOne of the first blog subjects highlighted in this newsletter was the prediction that English property prices would plunge if Britain decided to leave the European Union. The irony is not lost in this decision to “leave Europe” much as the United States had done “leaving Britain” some 240 years ago. Chaos was predicted to follow, but not if you are a cash-flow positive landlord. What can U. S. investors learn from this?
Now three months after the Brexit vote life goes on relatively unchanged. Sure there has been some reordering of status quo, but the net effect has been minor. Buy-to-let investors income, expenses and loan repayments have stayed the same as they are all still paid in U.K. Pound Sterling.
LESSON FOR AMERICA IN BENIGN BRITISH REACTION
A British monthly economic analysis, PropertyInvesting.net, reports that the impact of Brexit so far “looks to be more benign than most people thought. It’s early days yet, but a few directional pointers so far are,

  • There is no indication of a property price crash.
  • The economy looks to have slowed down, but it still seems to be growing.
  • Pound Sterling’s 20% drop in value has created a minor retail boom in London and other areas, probably because: 1) foreign tourists are coming over looking for bargains; 2) locals are buying expensive items before prices start rising; 3) confidence is not being impaired as much as envisioned.

The rising house price ripple effect out from London continues with the strongest property price rises in places like Glasgow, Liverpool and Nottingham – how long this continues is another story.”
ECHOING AMERICAN SUPPLY & DEMAND
“The drop in the value of the Pound has made it about 20% cheaper for rich overseas investors to pick up London property however the amount of transactions has dropped, the amount of homes being built has dropped, the amount of new properties coming to the market has also dropped to a new low – hence the market is fairly quiet for now and stable as demand meets very low supply.
It’s early days, but the U.K. housing crisis is likely to worsen as builders hold back from starting new projects – further reducing supply. This should support prices as long as unemployment does not rise. Immigration continued to run at record levels further putting pressure on housing.”
This sounds familiar even though “reported with an English accent.”
“The draconian and market distorting new taxes on buy-to-let landlords (Ed. unlike the U. S.) will reduce rental supply and lead to higher rents we believe.” (Ed. However in the U. S. we have the burden of more stringent consumer mortgage lending and Consumer Financial Protection Bureau – Qualified Mortgage rules stimulating rental demand and delaying first time home buying decisions.)
AMERICAN PARALLELS
As hard as this might be for American investors to believe, markets like the UK, Australia, South Africa and New Zealand is significantly more competitive than it is the U. S. They are far smaller countries, with statistically shallower, more monolithic markets. Real estate markets in the U. S. are different and larger.
These small markets experience trends and attempt strategies that come and go more quickly. The ones that show merit are often successfully brought to the U. S. such as Institutional rental funds and lending to rental investors. Frequently real estate investors from these countries find our markets so affordable (and profitable.)
FUNDAMENTALS ARE UNIVERSAL
Financial rules in all markets are identical, as are boom bust cycles, but provided a real estate investor invests in a well-located attractive property that ensures there is balance between the capital invested to the income derived, most investment risks are minimized.
Profitable rentals are one thing, but risks are added if there is urgency to generate cash through a buy, renovate and sell strategy. If holding time is extended for any number of reasons, extended days on market, etc., margins can shrink and go the wrong way.   Understanding your spreadsheets before you go into a deal will help. Variables like financial capacity, how long you can hold the property and what the property has to sell for are questions best answered before your purchase. 2020 REI Companies Consulting Services can help you with planning more assured investments by giving you the tools to do this. 2020 REI Consulting.

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