While most of us don’t play in the same league as Mr. Buffett. Investors worldwide try to mimmick his strategies in hopes of achieving even a fraction of his success. So, when Buffett hands out free investment tips, the world takes note.

Recently in a TV interview, Buffett surprised those who have been bearish on real estate. He said: “If I had a way of buying a couple hundred thousand single-family homes and a way of managing them, I would load up on them.” (See video interview below)

Too bad Mr. Buffett doesn’t know about Tandem Uehling! We could certainly introduce him to the best providers of turn-key rental homes in the country, and point him to experienced property managers in those areas.
Most of us normal folks would be happy with a dozen or so rental homes, which would provide a steady retirement income and would be much easier to manage than a few hundred thousand. It must be tough for guys like Buffett who need a place to invest millions, and even billions of dollars at a time. Sometimes they have to pass on good deals simply because they are too small.

That’s why single-family home investing is best suited for individuals, and not hedge-fund managers. We are able to pay closer attention to our properties, which helps keep up the quality of the neighborhoods, bring in the best tenants and stay on top of the management.
Personally, I’m happy that this time around, Buffett isn’t suited to take his own advice. This is the time for the small-investor to get ahead. Thanks for leaving the good real estate deals for us, Warren! This is our playing field.

Buffett also added that if houses are bought at low rates and held for a sufficiently long period of time, single family homes perform even better than stocks. Of course, this is something we’ve been saying for years. It’s nice to finally hear it from a man whose net worth of around $50 billion is made up almost entirely of stocks.

His final bit of advice is for buyers to take out a 30-year mortgage and refinance if rates go down. I’m sure he envies the leverage available for home-buying that simply doesn’t exist in the stock market. Where else can you get a loan on an asset and pay less than 6% interest, take three decades to pay it off, and keep all the cash-flow and appreciation along the way?

Thanks for endorsing our industry, Mr. Buffett! Your wisdom will wake up the masses who have been so frozen by fear that they just can’t see a good deal, even when they’re living in it.

See the interview for yourself.

Property as an asset class dovetails right into an Australian investors psyche as Australians are true believers in brick and mortar. It’s not just a belief but it’s a trust that over time, property will appreciate.

The standard protocol for an Australian property investor is to purchase the property, with borrowed funds and wait until time passes allowing the property to appreciate. Once there is sufficient equity accumulated with the property growth, it is then refinanced in order to extract that equity. That equity is then used as a deposit on a new investment property where time passes and the scenario is repeated. This occurs over and over again, over a long period of time accumulating more assets, more debt and more income.

Historically, interest rates in Australia are more than the rental income generated so this strategy will be negatively geared, unless manufactured growth is implemented. This portfolio will grow in size, debt and income until some day in the future when the acquisition process ceases, thus the debt stops increasing and the growth of the income increases to a positively cash flowing state.

The component in this strategy that works against the investor is time. Time is the secret sauce that the investor requires to make the strategy work and be positively cash flowing. Until the property portfolio is built up and ceases adding more debt, the investor will have a hard time cash flowing positively.

Accompanying time as a major component to a successful Australian property portfolio is an increasing or appreciating market. In an appreciating market, this strategy can work very well. The more properties the investor can purchase the quicker they can reach their goal of portfolio size generating the amount of income they strive.

Unfortunately, the last eight years hasn’t been that strong a market and in general, nationally it’s been mostly flat. There are specific pockets that have done better than others but for all intent and purpose, the general market has been flat. A flat property market prevents the equity from materialising, thus no capital to build the portfolio. Valuers don’t help either. In a flat market, valuers tend to be more conservative with their valuations making it that much more difficult to extract equity.

Have you ever heard the term ‘asset rich but cash flow poor’? This is what happens in a flat property market when the investor realises they are not receiving an appropriate amount of income but have a sizable asset and debt position. Is there anything that can be done to mitigate this situation? I believe so. I believe that by diversifying into the US property market, the investor will derive the cash flow any property investor would dream of. We can increase the investor’s cash flow by almost three times without adding any more capital or debt. As a matter of fact, we can lower the debt by 100 per cent of the amount of the assets.

Here’s how we do it:

Let’s make a few assumptions. Let’s assume we are dealing with a $5 million Australian property portfolio at an 80 per cent LVR, generating 6 per cent rental income and the current interest rate is 6 per cent for debt service. Let’s also assume that we can get a 70 per cent LVR loan at 5.75 per cent fixed in the USA (which we can do) and generating 13 per cent rental income. Let’s assume that the Australian dollar and the US dollar are trading at parity.

Chart 1:
$5,000,000 = $4,000,000 debt and $1,000,000 equity =  300,000.00  Revenue
-240,000.00  Debt Service
AU $60,000.00 Cash Flow

Chart 1 shows a $5M portfolio at 80% LVR generates $60,000 p.a. in cash flow. When we sell half the portfolio we lower the asset position in Australia by $2.5M which consists of $2M debt and $500k equity.

Sell $2.5M of Aussie property to invest in US property
$2.5M = $2M of debt and $500k equity in Australia
Take $500k and convert to US at 70% LVR = $1.5M investment capital (approximately)

Chart 2: 
$1,500,000 =$1,000,000 debt and $500,000 equity =  195,000.00  Revenue
-57,500.00 Debt Service
US $137,500.00 Cash Flow

Chart 2 shows the power of $500k equity in the US property market once leveraged with a 70 per cent LVR loan. The investor will have $1.5M of investment capital where $1M is debt and $500k equity. This $1.5M invested will generate $137,500 p.a. in cash flow.

So what does the total portfolio look like?

Total assets drop from $5M to $4M, a decrease of $1M. Total income increases from $60k per annum to $167,500 per annum ($60k/2+$137,500), and increase of 2.8 times. Total debt outstanding decreases from $4M to $3M, a decrease of $1M.

The benefits

– 2.8 times greater cash flow without adding any more equity.

– Greater growth potential on the basis that the US market is close to or at the bottom of the cycle. Potential foreign exchange gain over time with the Australian dollar historically trading at $0.80 to $1.00 US dollar.

– Diversification of assets and cash flow; Diversification into two separate currencies.

S. Gregory Uehling is Director and Principal of Tandem Uehling. He is a dual Australian/USA citizen who has lived in Australia for the past 11 years. Greg has had his own Australian based Proprietary Limited Company for over 8 years with financial planners and accountants topping his client list. Greg visits the US regularly while providing his tailored services to his customers in Australia. Tandem Property USA is a wholly owned brand of Tandem Uehling.

Greg can be contacted at [email protected], www.TandemPropertyUSA.com or follow him on Twitter @TandemProperty

The median U.S. home price has declined 26 percent since a June 2007 peak to $170,500, according to data from Washington-based National Association of Realtors. Photographer: Chris Rank/Bloomberg

Vincent Selleck, whose Sydney-based 888 U.S. Real Estate started finding foreclosed U.S. homes a year ago for Australian investors, received almost half of all inquiries in the last two months.

“We’ve been swamped since the Australian dollar reached parity with the U.S. dollar,” said Selleck, 52, who handled 1,300 queries in the last 12 months, more than 530 of them in the past two. “At the beginning, people were quite skeptical. In the past two months, the spike we’ve seen is incredible.”

Selleck is among a growing number of real estate agents who have set up to lure Australians — who are armed with a currency that surpassed the U.S. dollar in October for the first time since 1982 — to buy in the U.S., where an average home costs 62 percent less than its local equivalent. Morgan Stanley estimates about 6.5 million U.S. homes face repossession, on top of the 2.5 million that have been seized since 2005.

The median U.S. home price has declined 26 percent since a June 2007 peak to $170,500, according to data from Washington- based National Association of Realtors. The average house in Australia’s eight capital cities cost A$460,000 ($453,000) in the September quarter, according to RP Data, a Brisbane-based property researcher.

About 2,000 U.S. homes worth about $400 million were purchased by Australian and New Zealand residents in the year to March 31, according to the most recent report from NAR, making up about 1 percent of non-U.S. buyers. Canada, Mexico and the U.K. made up about 42 percent of the $41 billion worth of U.S. homes purchased by non-U.S. buyers in the period, according to NAR.

Touting Bargains

“Australians won’t have a major impact on the national market,” Thomas Lawler, founder and president of Lawler Housing and Economic Consulting in Leesburg, Virginia, said in a telephone interview. “But they could potentially have an impact on certain local markets; parts of Florida, Texas, for example, where any influx of capital for buying is important.”

Arizona, California, Florida and Texas accounted for 53 percent of U.S. homes bought by foreign buyers, according to NAR.

Selleck and others like him are trying to connect more Australians with foreclosed homes in the U.S. Property companies, on both sides of the Pacific, are offering services that include finding and renovating the homes, vetting tenants, property management, and setting up limited liability companies.

Melbourne-based realtor Andrew Allan’s My USA Property has had a 10-fold increase in inquiries in the past two months to between 400 and 600 a week, he said. Sydney Chase, a Sodus, New York-based real estate consultant, plans to travel to Australia for the second time in a year in April to meet a growing pool of potential investors, he said.

Dollar Surge

Their proposition: investors can buy properties that would cost as much as A$1 million in Australia — such as a four- bedroom, two-bathroom house with a pool in Sydney or Melbourne – – for about $50,000 in cities including Atlanta and Dallas.

Australia’s dollar, which peaked at $1.0183 last month, was trading at 98.43 U.S. cents yesterday and has climbed 9.7 percent this year versus the U.S. dollar, the second-biggest gain among Group of 10 currencies. Since its low of October 2008 following the collapse of Lehman Brothers Holdings Inc., the Australian currency has surged 63 percent.

Michael Collins, 34, who moved to Atlanta from Sydney and started Top Rental Returns at the beginning of this year, said buyers can expect rental returns of as much as 20 percent on such deals, a rate unheard of in Australia.

More Renters

More Americans will be renting as U.S. foreclosures climb and homeownership — at a 10-year low of 66.9 percent in the third quarter — continues to drop, driven by near-10 percent unemployment and the end of a government tax credit for homebuyers, said Stan Humphries, chief economist at Seattle- based real estate data provider Zillow Inc. That can translate into attractive returns for investors, he said.

The number of homes offered in foreclosure auctions averaged 110,000 a month in the third quarter compared with about 98,000 in the same period a year earlier, CoreLogic Inc., a Santa Ana, California-based real estate information company said in a report yesterday.

In contrast, Australia’s housing market is about 40 percent overvalued and 70 percent of landlords make losses on their rental properties, said Gerard Minack, Sydney-based global developed market strategist at Morgan Stanley.

Risks

Michael Bridges, who paid $51,500 to buy a four-bedroom, two-bathroom house in Covington, an eastern suburb of Atlanta, through Collins’s company, plus another $9,000 for renovations, expects his investment to be worth $150,000 in another 10 years, a rate of increase he says he could never hope for in Australia.

Bridges, 40, visited the U.S. twice after doing research online and stayed with Collins and his business partner Bronwyn Douglas for a week before paying them $4,000 to buy and manage a property for him, he said.

A tenant moved into the home last weekend, paying $1,200 a month, said Bridges, who owns a business that makes refrigerator magnets. He already has two investment properties in Melbourne’s suburbs, and plans to buy another nine houses in Atlanta next year, he said.

Investors should be wary, said Chris Gray, chief executive officer of Sydney-based real estate investment consultant Empire.

“They pitch it as a pro that it was $250,000 and you’re getting it for $50,000, and you’ll get rent on that,” he said. “But the property might actually be worth only half that. Or they might not get a quality tenant, who doesn’t pay the rent or trashes the property.”

‘Very Dangerous’

Dan Pennington, sales director for Property4peanuts.com, run by Maidstone, U.K.-based agent The Foreign Property Shop, also warned investors against “bidding blind.”

“This can be very dangerous as you could purchase what looks like a good cheap property but it may have $10,000 worth of debt and need $20,000 spent on it to bring the property up to code,” Pennington, who has sold properties to 24 Australian buyers between August 2009 and November 2010, said in an e-mail.

Atlanta, Dallas, Memphis and parts of Florida are among the most promising areas to buy in, driven by the prospect of population and employment growth, said agents including Australian Matthew Dunne, co-founder of U.S.-based HouseBuyersUSA.com, and Greg Uehling, who has built up Sydney- based Tandem Uehling’s U.S. property business over the past year. Detroit, California and Las Vegas are places to avoid, they said.

Florida Homes

Aran Dunlop, 28, moved to Cape Coral, Florida, from Melbourne in July and set up Dunlop Capital LLC to buy foreclosed properties in the state, and to avoid the “risk of a significant decline in the Australian market,” he said. Since he moved, he’s bought two foreclosed properties: a stand-alone home in Fort Myers for $15,600, and a pre-fabricated home on its own lot in the same city for $2,400.

He’s spent $13,000 and $7,000, respectively, on renovations, and rents them out for $750 and $400 a month, he said. Dunlop, who worked in Singapore as a bond sales trader until February, used his own money for the purchases, and is now in the process of buying three apartment buildings with a total of 62 units for $1.1 million, which he’ll borrow to finance.

“The market is pretty close to the bottom,” said Dunlop, whose company plans to own about $10 million of property and expand into Atlanta in the next year. “You get very high rental returns. Even if the property value stays where it is for a long time, you can make a lot with cash flow.”

To contact the reporter on this story: Nichola Saminather in Sydney at [email protected]

To contact the editor responsible for this story: Andreea Papuc at [email protected]