Lately I have been receiving e-mails from real estate agency Mondinion, headquartered in the United Kingdom, advertising preconstruction opportunities to buy individual rental units in hotels, senior care facilities and apartment buildings. These opportunities are typically accompanied by guarantees of rental income for a period of two or more years and an optional buyback from the seller at higher price after a few years. (Mondinion is not the seller, but just an advertising platform.)
As it has been 4 years since my last UK valuation assignment, I cannot comment on the merit of these investment opportunities, which are mostly in the UK. It has been my observation over the last 33 years, though, that when properties are being built for investors rather than occupants, that is the sign of a real estate market entering a bubble phase.
If owner-occupants cannot outbid investors, that is a sign of weakness. Investors enter these transactions expecting that negative cash flows will be rewarded by ever-increasing property price appreciation, but such a market collapses on itself when there is an insufficient number of renters to occupy all units and cover the investor’s ownership costs. In Southern California I saw this happen in the early 1990s and starting again in 2006. Home prices plunged afterwards.
Recently, Mondinion advertised a couple of U.S. investment opportunities in areas I have appraised in.
The first opportunity was that of rental homes in the Detroit metropolitan area. Curiously, the advertisement stated that this investment was not suitable for U.S. investors, raising the question of “how can an investment unsuitable for U.S. investors be suitable for foreign investors?” Another questionable claim was that all of this seller's properties were in "safe neighborhoods".
Having a friend make an inquiry, I was informed of a 900 sf, 3 bedroom, 1 bathroom rental home, built in 1955, available in Inkster, Michigan, a western suburb of Detroit, for the price of $48,000, guaranteed to produce $9000 per year in rent. The owners paid $26,500 for this home on 4/23/15 and have assumedly renovated it since then.
Checking a demographic research web site, I found that this forecasted rent was close to the estimated median rent of $738 per month ($8856 per year) for Inkster. I was also pleasantly surprised to find that the official living area (per tax assessor) was 1036 square feet. What was more sobering was an estimated local vacancy rate of 16.9% (better than Detroit’s 22% vacancy rate), and a population decline of 37% in the last 50 years. More troubling is that NeighborhoodScount.com rated Inkster as having a higher crime rate than 93% of Michigan communities, with a violent crime rate three times the Michigan average.
I sometimes consult data-aggregating web sites such as Trulia.com and Zillow.com to garner real estate market information. All analysis is done by computer, which is not as accurate as a competent and honest real estate appraiser. Trulia has estimated the median home value in Inkster as $42,300, having declined 50% in the last decade. Zillow placed the median home value at just $40,900. Zillow estimates that this home has decreased in value by 14% in last month. CoreLogic indicated home sales in the last month in the $38,000 to $43,000 range.Here’s the rub. Depopulating urban areas experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure. The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton. This usually means increasing vacancies, despite gallant leasing efforts. Rents are so low that only the lowest cost renovations make any sense, too. Even then, new space gets built, hastening the demise of the older buildings.
Trulia.com report on the subject property and its neighborhood
Some of the English rental properties I see advertised on Mondinion tend to be located in cities that I have traditionally thought of as obsolete industrial cities, too, but I have no current information on current market conditions.
The other U.S. real estate opportunity sent by Mondinion was located on the south side of Chicago, where I once lived. Similar problem, except that Chicago has become the murder capital of the U.S., and many of the murders are on the south side.
Just today I received another marketing e-mail from Mondinion promoting rental properties in Cleveland, another depopulating Rust Belt city.
This Inkster investment is being marketed without any guaranteed rents, but the seller will manage the property for you for 10% of gross rental income. Such a high rate is typical of problematic housing markets.
I have also seen other properties marketed with short-term guarantees of rental income. “Guaranteed rental income for the first two years” is a seller promise that should be interpreted as a sign of weakness, not security, because an adequately performing rental property does not need to be sold with any such guarantees. It is almost tantamount to saying that Year 3 is going to be a crapshoot because tenants are currently so hard to find. Do not be surprised to see that the property’s previous asking price has been inflated to more than cover the amount of these guaranteed rents. Can the guarantor remain solvent if real estate prices decline?
This reminds me of a phrase I have sometimes read on Craigslist:
“Only a scammer will ‘guarantee’ your transaction.”