Underwriting deals in declining markets

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Underwriting deals in declining markets

Nikhil P.
New York, NY · Member since 2017 · 8 posts · 4 votes

Any investors out there knowingly investing in markets in general decline? 

My hometown is effectively a rust belt city.  Population is exactly the same as it was when I was born and median income has stayed relatively stagnant.  However the deals I have done there were really easy to diligence because I know the town, and I now have a great property manager who keeps finding me neat deals (he also shoots down a lot so I know he is honest). 

I have made a concerted effort to diversify my exposure into cities with more promise, but so far it has been a lot of work with little treasure. In the meantime, my PM keeps finding attractive deals in my hometown. I have ignored them for some time, but any deal is a good deal at a certain price - it just means staying conservative on underwriting.

What do people in barely stable/declining markets use as underwriting rules of thumb? Some thoughts on areas to be more conservative:

- LTV

- Rent growth assumptions (I always assume 0% - should we be thinking about declining rents?)

- Cost growth assumptions

- Vacancy

I would love to hear from people with experience in barely stable/declining markets. Thank you for your contributions.

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  • Jennifer S.
    Investor · London · Member since 2017 · 160 posts · 82 votes
    7y

    Hi Nikhil, I'm not expert on this kind of market but wanted to flag how bad the situation has now become regarding tax and rental properties if you are subject to UK tax. If you have enough wealth /income to justify the non dom fee to keep income offshore, first congrats! but then ignore the following info. 

    So the pretty bad news at least according to my UK tax advisor is that the buy to let tax law change here in the UK extends its long arms abroad. So while the US government treats my mortgage interest as a cost, the UK government doesn't. Ouch. 1031 exchanges may help in the US but they are not recognised in the UK. Not giving advice here just tips so hopefully message wont be blocked. I think there's also a UK tax problem if you put a property into an LLC in the US to avoid the UK tax problem regarding mortgage interest. My advisor sent me a PDF of this and it referred to a high court decision and said there was still some grey areas after the court ruling. For me it's starting to get into the too hard camp and I'm starting to look at other investment areas. I'm in the UK medium term barring total economic meltdown from Brexit should that occur, so the tax situation is what it is for me until I make it big enough to pay the non dom fee perhaps

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  • Jennifer S.
    Investor · London · Member since 2017 · 160 posts · 82 votes
    7y

    Also if you are an all cash property buyer, again congrats!! And ignore the above which deals a lot with the problems of how mortgage interest is treated. Although the capital gains problem is still out there

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