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22 | USA OUTLOOK WORDS | Toby Stone


BUSINESS


www.opp.org.uk |MARCH 2012 The Rustbelt returns


“Rustbelt” cities in the north east of the USA - such as Rochester, Syracuse, and Buffalo - are in an unusual position. They missed out on the boom, but they are missing out on the bust, too. They offer residential properties from €20,000 to €40,000 with strong yields of 25% to 35%, and gearings of up to 50%. Some capital growth is possible too as things improve. Can the Rustbelt’s high-income, government-backed real estate


opportunities provide a strong cash-fl ow while protecting buyers against risks of defl ation and infl ation?


emerged through the current downturn relatively unscathed. With a broad- based economy, affordable premises, low cost of living, and some attractive geographical advantages, the city looks increasingly undervalued, which is refl ected in the current yield anomaly. Buffalo lost its industrial base many years ago, so has not been wiped out in this recession in the same way as cities like Detroit. Rather than the declining manufacturing-based economy of popular belief, Buffalo is now home to four large banking headquarters (HSBC US, Keystone Bank, First Niagara and A&T) and is now taking advantage of its cool climate and cheap electricity to establish itself as a key storage and distribution hub. It is also becoming a tourist attraction, being next to Niagara Falls. The city is re-inventing itself and has already left its legacy of heavy


A


fter a tough time during the last recession, the economy in Buffalo has


industry behind. Don’t be put off by the claim that Buffalo is one of the most affordable cities in the US. Like many other ‘affordable’ cities around the world, it has attracted a large number of creative people, which has refl ected positively on the quality of life for residents. There is a strong university,


“Bufallo has developed a broad- based economy with four banking HQs in the city”


and increasing numbers of knowledge- based businesses. However, due to the national


diffi culty in getting loans, most people there have to rent, leaving rents signifi cantly higher than sale values, hence the unusual yields.


But what are the real pros and cons of investing in a city like Buffalo in New York State? Do the numbers work?


The most attractive thing about inexpensive cash-fl ow oriented real estate is of course that you can achieve excellent returns year in year out, with no reliance on capital growth. Income is more predictable and comes on a monthly basis, rather than having to wait to sell or refi nance. £20,000 can get you a fully


renovated and tenanted house, so while the right borrowing helps the numbers, it’s by no means necessary, and therefore takes another risk away from the investor, while maintaining a good hedge against both inflation and deflation.


On the down side, of course the


usual risks associated with property investment are there - it’s possible, like with any affordable housing, to get bad tenants, or non-paying tenants. A new boiler can cost two months’ rent sometimes, and can affect your overall returns. However, because the dollar sums


are small, the risks are reduced. If you are geared and lose a tenant for a month or so you might have to fork out a few hundred dollars to cover the repayments until a new tenant is found. It’s here, on the downside, that having the correct guidance and correct management is crucially important. Investing in Buffalo, as with any


investment, is made harder if you are not there. Overseas property professional, Alan Findlay, chose to move to Buffalo and focus on this investment opportunity. He has since built up a small portfolio of houses himself, and brokered properties to foreign investors from the UK and beyond.


He works closely with local developers and agents. The local developers take on the initial risk of buying the properties, often off-market or via repossessions, then they renovate them using their local workforce. They enjoy both economies of scale, working on enough properties that they have full time teams of workers, and also stronger local contacts than any newcomer could develop. Once they have refurbished and rented the properties, they sell them on with a small profi t, fully leased. This is where Alan comes in,


Green shoots | The city of Buff alo is reinventing itself as a broad-based economy, with the HQs of four major banks there


helping bridge between their local knowledge and his own network of overseas buyers. Local agents manage the properties, and deal with tenants. This removes a great degree of risk, as they have a constant fl ow of new tenants to fi ll vacancies, as well as understanding how to handle late or non-payment of rent. In Buffalo, Alan is focusing on the University district and West Side. The properties there are low-income rentals, and many are Section 8 units, where the government underwrites the rent.


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