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Weighing Risk Vs Reward For Long-Term Subsidized Renters

19 Apr
view form the air of a surburban housing estate in cincinnati

Weighing Risk Vs Reward For Long-Term Subsidized Renters

20% Net Rental Yields? Could This Be For Real?

I’m receiving emails and alerts daily from U.K. real estate promoters touting U.S. property investment opportunities to their British investor lists.

One such mailing I received this week promises a net yield of 20%.

Florida has been a big seller to Brits and other Europeans for decades. The 2008 real estate crash cleaned some of them out… but global property investors can have short memories. It wasn’t too long post-2008 that new U.S. opportunities were being pushed out to U.K. buyers.

Detroit has been promoted in a big way on the other side of the pond for the past several years… and, now, Cleveland is on the radar of U.K. promoters.

It is in Cleveland, I’m led to understand from the mailing that landed in my inbox this week, where I can earn those 20% net yields.

I admit it. The promise got my attention. I couldn’t help but look more closely.

The British promoter touts that they don’t take a commission on the transaction. Instead, they charge a flat fee.

That flat fee amounts to 12% of the current average purchase price, which is US$33,000 according to the listings I saw.

After doing a little math, I realized that that cost is not included in the calculation for the net yield. Factor in the 12% transaction fee, and the net yield projection is reduced to about 17%.

Too Good To Be True?

Still phenomenal… and still, as any experienced property investor would suspect, too good to be true.

The Cleveland houses being peddled are reported to have sitting renters that would carry over to new owners.

Reading carefully I noted that many are Section 8 tenants, meaning they receive rent subsidies from the government. Some investors like that. They see it as a guarantee that they’ll receive their rent.

You should be aware, though, that that’s only the case if the subsidy is sent to you directly, rather than to your tenant. (Editor Samantha Russell addresses this risk of buy-to-let investments in her report about her ill-fated experience with one subsidized tenant in the U.K. in this month’s issue of my Global Property Advisor.)

You can decide for yourself if a subsidized tenant is a good thing… or not…

Meantime, these Cleveland properties are long-term, low-income rentals with rents twice what the cost of ownership would be if the tenants were able to get a mortgage. Are those rents sustainable?

The promoter doesn’t include any allowance for maintenance or repairs… or for unpaid rent. Expect those to be higher than average compared with renting middle-income housing or short-term vacation rentals. High double-digit rental yields come with high risks.

After making adjustments for what’s missing from the promotional materials and backing down the publicized 20% net yield to something more realistic (you’d still probably end up in double-digit territory), I admit I was tempted by the opportunity… even given all the recognized risks…

Until I remembered one of my fundamental rules for investing in real estate:

I don’t do unfurnished long-term rentals in a location where I’m not spending enough time to be able to manage the tenants myself.

An experienced rental manager is the key to good rental returns with any rental property anywhere in the world.

However, the best rental manager can place a bad tenant. If you’re not there to deal with a non-paying tenant yourself, your rental manager has to do it… and, frankly, they don’t get paid enough to spend a lot of time on anything other than standard procedures. It’s the rare rental manager anywhere, in my extensive experience, who could be counted on to deal with a long-term tenant who stops paying rent and just refuses to move out.

That mess is going to be on you, the owner.

I’m taking a pass on those rentals in Cleveland.

Lief Simon