Combine the continuing strength of our dollar against America’s Greenback with a flailing US housing market where historically low values are fostering bargain buys and you have the perfect ingredients for adventurous Aussie property investor’s looking to cash in on opportunities in “the promised land”.
According to data from the National Association of Realtors based in Washington, Australians invested around $600 million in U.S residential properties in 2010 alone.
I mean, how could you possibly pass up homes going for half their pre-GFC value at fire sale prices, particularly with local spruikers making lots of noise about growing rental demand and an economy in recovery mode?
It all sounds too good to be true!
Well, here’s where I burst your bubble and let you in on a little secret…it IS too good to be true for a number of reasons, not least of which is the inherently high risk, speculative gamble of parking your money in a property market you have very little knowledge of.
So let’s take a look at the numerous reasons you should stick to the local real estate market for pure investment to make money…isn’t that what it’s all about?
It’s cheap…for a reason!
I’ve had a number of clients discuss the prospect of investing in the US housing market with me over the past six or so months. After all, it is the latest craze and everyone wants in on the action.
One of the main things I hear is that American property is cheap as chips at the moment and the opportunities presenting themselves are too good to pass up.
But if you stop for a moment and ask yourself; why are people virtually giving homes away in some areas, suddenly “cheap” doesn’t have as much appeal.
Most of the trouble started for US housing when the sub-prime crisis hit. Banks had been throwing money at borrowers with little regard for their capacity to repay the debt prior to the GFC. When times got tough, millions of home owners simply walked away and left lenders to bare the burden of their unpaid mortgages.
We all witnessed the fallout from this, with some of the biggest banks in the country closing their doors and the US financial system collapsing almost overnight.
Opportunistic vultures have pounced on ridiculously under-priced property as thousands of homes sit vacant and started what’s known as “flipping” in investment circles.
A popular practice in America, this involves buying a “bargain” and then on-selling at inflated prices to unsuspecting buyers. Who better to target than overseas investors with no idea of what their getting into? In fact, a number of profiteering scammers have even set up agencies specifically targeting Australian purchasers looking to cash in on the downfall of America’s property market.
Too many houses for too few people
With lenders scrambling to recoup their funds as home owners literally fled (and continue to flee) in the cover of night, thousands of vacant properties have flooded the market at fire sale prices.
It’s been reported that some real estate has fallen in value by as much as 50 to 80 per cent in states where the economic downturn has had the direst effects. But it seems the worst is yet to come.
The saturation of stock is set to increase over the next few years, with experts predicting another 4 to 5 million foreclosures and as a result, a further fall in house prices.
In towns where unemployment has gone through the roof, people are leaving en-masse and “ghost towns” are becoming common place in areas that relied on one or two industries, which have since been forced to shut up shop, for their economic prosperity.
It is in these locations that most Aussie investors are finding so-called ‘bargain buys’. But with no knowledge of the local markets, they are often buying into bad neighbourhoods with rocketing vacancy rates, where the prospects for securing a halfway decent tenant are actually slim to none.
Some states can’t even give property away as crime rates soar and people make every effort to get the heck out of Dodge!
An ailing economy
Let’s face it, the one time world leader in economic prosperity has caught a very bad financial cold and the prognosis for future recovery is pretty bleak.
Ratings agency Standard & Poor (I didn’t make that up), grimly did an about face on the economic outlook of America in April, pronouncing it had changed from stable to negative.
In response the share market took a nose dive, while the flailing US dollar just keeps getting weaker. Then there’s the bane of Barak Obama’s life right now – an increasingly high unemployment rate and a national deficit of $A13.421 trillion.
Can we fix it? “Yes we can!”…or can we? It seems the government is yet to agree on just how to do that.
Essentially, the recovery that many Australian investors are banking on is not likely to happen any time soon. In fact I’d lay odds on that we are yet to see the bottoming out of the US economy, with too many fundamentals working against the possibility right now.
Get a haircut and get a real job…if you can
As mentioned, Obama is having a terrible time of it since gaining power, particularly with unemployment at record levels in some of the hardest hit US states.
The US Bureau of Labor Statistics reported unemployment at 9 per cent in April this year, however double digit figures are more likely in areas that have all but lost their primary industries.
Experts forecast that unemployment will remain high well into 2012 and while this might seem like a boon for landlords with more people forced to rent than buy a home; stop and think for a second. What type of tenant will you be getting? The most likely answer is one who has no job and no ability to maintain rental payments.
So how do you intend to chase the likely arrears that will add up as your less than desirable tenants fail to meet their financial commitments?
It can be hard enough to get wayward tenants out in Australia where we have a fairly robust system in place to deal with rent arrears. But in the US, it’s nigh on impossible! Landlords there have less rights than tenants and are at greater risk of litigation.
Then of course you have to find a reliable property manager from thousands of kilometres away who will collect your rent on time. It all sounds like a rather costly headache for what is meant to be an inexpensive investment doesn’t it?
And what about the requirements of the US tax system, which you’ll be required to meet even though you’re an Australian investor? Do you know how it all works?
I’m not telling you that you should never invest in an overseas property market. Nor am I telling you not to go anywhere near US real estate.
What I will say is that what appears cheap in the short term, can end up being very costly down the track and with this type of speculative investment, you should never outlay any money that can’t afford to lose. It’s that simple! Seeking further property advice? See how we can help you!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).