Are hundreds of Australian investors going to lose millions of dollars in the American property market? It might be!
Prices for American properties are so low and the Australia dollar is so high that an investment in “the home of the brave and the land of the free” seems like a really good idea.
You’ll be told by those Aussie spruikers that you can buy a house in USA for as little as $50,000 and rent it out for about $200 a week. That’s a 20% return. Does this sound wonderful?
Unfortunately, buying real estate in America is a very bad idea.
Ask yourself an obvious question. If these American properties are such a good deal, how come the locals aren’t buying them?
Right now, interest rates on home loans in America are very low (around 4% for 30 year fixed-rate mortgages). That means an American family can borrow $50,000 and pay just $2,000 in interest each year! Why, then, would that same family pay rent of $200 per week when they can buy the property for a far lower payment? Something just doesn’t seem right, does it?
You have to ask yourself: What price are the locals paying for similar properties? If the locals are not buying the properties, then you shouldn’t touch them either.
In some areas there is no rent because the properties are abandoned. Even if you are lucky and do rent your property out, “You need an armoured Humvee and a bullet-proof vest to collect the rent.”
If you really want to check out the American real estate market, do it properly. Buy a ticket to the United States and check out the market for yourself. Under no circumstances should you buy property on the advice of an Australian company alone. Do the real research by yourself.
Again, $50,000 sounds like a cheap price for a property. However, there are Australians who have bought houses in the United States for $50,000 and cannot re-sell those houses for $25,000.
So, be warned Aussie investors. Don’t be ripped off by buying American real estate.
I applaud the sentiment of this post (trying to protect unsuspecting Aussie investors) but the author may not appreciate the fundamentals of the U.S. property market as they currently stand.
First, we agree that anyone who isn’t a U.S. citizen and doesn’t live there day to day should use caution when considering an investment in U.S. Property. Why? Well, the laws are different, the purchase and sale process is different (eg title insurance is something most non U.S. people have never experienced), banking can be difficult and above all the TAX situation will be complex. In short, you don’t know what you don’t know! What you need is less hype and more facts.
Now to address the author’s statement
“Ask yourself an obvious question. If these American properties are such a good deal, how come the locals aren’t buying them?”
As a U.S. citizen, with twenty years of experience and hundreds of deals under my belt I can tell you why locals aren’t buying: They’re scared, they don’t have any capital, banks won’t lend to them, and lastly some cities are haemorrhaging population and probably will never recover.
Each point briefly:
My personal property portfolio of about 8 U.S. properties lost over half its value in the GFC. When that happens to you, you’ll be scared too. Once bitten, twice shy. Now apply the same shock to a family who thought their personal residence was worth say, $600k and they owed about $350k on a mortgage. After the GFC, instead of having an asset worth a quarter of a million, they now owe more than the house is worth. Oh, and I forgot to mention, millions upon millions have lost their jobs, and their health insurance. If this was you, do you think you’d be brave enough to invest?
Second, where are they going to get the capital to put 20-30% down on an investment property? Their assets have just lost half their value (the stock market went down too!). As I just mentioned, they have lost any equity in their personal residence so borrowing against that is a non-starter.
Third, banks just aren’t lending. They got burned badly by the subprime meltdown and now that old adage attributed to banks ‘you have to prove you don’t need the money before we will make a loan to you’ is truer than ever. And, if you apply for a loan and they see you owe more on your house than it’s worth…what is a banker to think? Of course that presumes you haven’t fallen behind on your mortgage payments because you lost your job or your variable interest rate loan spiked.
Fourth – which city to invest in. As someone who was born in the suburbs of Detroit, I can tell you first hand, why property there is super cheap… because no one wants to live there (I live in Brisbane now. Much nicer!). The same is true for many cities in what’s often referred to in the U.S. as the ‘rust belt’ states. On the other hand, the baby boomers are retiring in droves and moving to sunny places in the Southeast and Southwestern USA. When the author refers to’ locals’ in his argument, it makes it sound as if the U.S. is a homogenous market. Trust me, it is anything but.
The bottom line is that locals are buying U.S. real estate (if they are cashed up). I know because I’m one of them. Also, many bigger players are now buying tens or hundreds of houses at a time with venture capital. These smart people see the opportunity of contrarian investing at a time when you can get a 30 year fixed invest loan (yes you read that right!), at around 5% or maybe even less.
So, if you’re prepared for a steep learning curve and you have a tolerance for some risk, the U.S. property market may be your ticket to a lifetime of positive cash flow and extraordinary capital gains.
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