It sounds too good to be true

Written by Jonathan May
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The “too good to be true” scenario is something that we hear quite a lot.  Low prices with high returns is the basis of this disbelief!!  However, with a little understanding all becomes clear.

Firstly, the price.  Real estate prices are at the level they are as a direct result of the global financial crisis in 2008/9.  Families lost their jobs, could not find re-employment, used their savings and borrowed from other family members in order to pay the mortgage, which kept up the payments for a year or two, until all their resources were gone.  Banks then foreclosed on the property and sold off to asset management companies and other speculative companies for as little as 10 cents in the dollar.  This happened on a scale never previously seen and left many families without a home but still needing a place to live.  They subsequently rented the very same properties from the asset management companies, in many cases using money provided by the state by way of benefit.  With nobody being able to obtain mortgages because of their now “bad credit” history and no jobs and the banks not lending as they did before, the house prices slumped to approximately a tenth of what they once were.

Forward to now, 7 years on from when the majority had their homes repossessed and the situation in Cleveland is very different.  The motor manufacturing and heavy industry that was once the mainstay of local employment has made way for a booming healthcare industry, specialist technology and manufacturing organisations, retail and leisure companies.  The likes of Dan Gilbert of Quicken Loans have helped to completely regenerate the city and it is now a thriving, cosmopolitan, vibrant centre with a fantastic food culture, the largest theatre district outside New York City and many other positive and unique attractions such as the Rock’n’Roll Hall of Fame!  This has made Cleveland a city that people want to be part of and live in.  This is the reason that the rents are as strong as they are, delivering in many cases an ROI in excess of 20%.  You might ask why these people do not buy and the answer is simple, their credit history prevents them from obtaining a mortgage or any significant lending (defaults and foreclosure remain on file for 10 years) and it will be another 3 or 4 years before a lender would consider them and even then it is likely to be unaffordable due to the size of deposits required.

What does this mean for the investor?  Stable house prices meaning there is little risk of capital depreciation or loss.  A robust rental market delivering a consistent and healthy return on investment.  A long term income generating asset that will appreciate in the coming years.