In the Real Estate page of this site we talked about the benefits of properties producing positive cash flow. We also briefly touched on the state of the USA real estate market. Now it’s time to dive deeper and look at Real Estate Investing in the USA – Benefits and Risks attached to this market.
In countries like Australia, Canada & New Zealand residential property prices are very high – as high as $400,000 and even more depending on the city. For example Melbourne and Sydney house prices have gone through the roof, the median house price is AU$669,000 for Melbourne and AU$800,000 for Sydney. If you compare that to the US real estate price point you can buy a multifamily unit or an apartment complex with 8 units in states like Georgia or Florida. Are you beginning to see the power of the US property market here! Lets compare apples to apples and talk about residential property. The median property price in both Georgia & Florida are around US$200,000. Don’t forget this is just the median house price and there are many properties under the average house price. We haven’t even started to talk about the foreclosure market in the US yet. This is where you can get good properties from around US$80,000. You can get properties for even cheaper price but then you may not get good tenants.
Loans are available to both local and foreign buyers. Foreigners can get up to 60% value of the property. US Banks are quite strict (due to the bad lending practices that led to the 2008 property market crash), they are not as sophisticated as some other western country banks and may at times be a pain to deal with but if you have the patience you can see rewards.
No stamp duty or tax on purchase
Guess what there is no stamp duty for properties purchased in the US. For an average property in Melbourne that would be around AU$35,000. If you can afford that you can buy a property in the US. I would suggest you invest a little more to ensure you are not buying at the bottom end of the market though. Can you see the benefits of the US property market now?Hold on there is more!
Cheaper to do rehab or renovation
In the United States materials and labour are considerably cheaper compared to other developed countries. In Australia if you have to do a complete renovation (known as rehab in the US) of your bathroom it can cost anywhere between AU$30,000 to AU$60,000. In the US it would be around US$5,000 to $10,000. This also means when you have to do any maintenance to the property as a landlord you are not going to fork out a huge amount of money as long as the property is in good shape when you buy it. Building and pest inspection is a must before purchasing any property and costs under $1,000.
Availability of 30 year fixed interest rate
Read that heading again! Yes the US has 30 year fixed mortgage options even for foreigners. Interest rates will go up we just don’t know when exactly. We are seeing the record lowest interest rates ever and imagine you can fix your rate at around 5% for 30 years. Yes, please. Compare that to Australia where you can only get 5 years fixed interest rate. Ouch!
3rd largest population in the world
Many people know about the strong US economy (2nd largest in the world behind China) but don’t know US has the 3rd largest population in the world behind China and India. What does this mean? The 313.8 million people, all need a house to stay somewhere. Especially when 30% to 40% are renters.
50 states offer diverse markets
Unlike in Australia where there are only 4 major capital cities (Melbourne, Sydney, Brisbane and Perth) where you would invest, the US has 50 states all with diverse economy, price point and tenant profile. You have multiple options and real estate markets. A cash flow investor might buy a property in Tennessee, an investor targeting growth might buy in Texas and an investor wanting both cash flow and growth might buy in Georgia.
Travel costs can be tax-deductible
This one is a bonus if you are travelling for business purposes, say for looking at and buying property. If you spend most of your time at Disney world or sight-seeing in New York city then be aware of the tax man.
Benefits of stronger currency
The currency can be a double-edged sword, good and bad. Currently the US dollar is strong and if it continues this trend your future rental income will have a positive gain when you bring it back to your home country even though you may have to put in more when you are purchasing. If the US dollar keeps going up then it will be harder to keep buying US real estate as you may have to put more money down for each property that is around the same price.
Let me give you an example: Lets assume an Australian is buying a US$100,000 property and he will need AU$132,000 (US$1 = AU$0.75) before accounting for any closing costs. The closing cost in US is negligible as there is no stamp duty.
Scenario 1: Good
Lets say you get US$1,000 in gross rent. Lets assume you get US$200 cash flow each month after all expenses including the loan repayments. That is AU$263 (US$1 = AU$0.75). If the US currency keeps going up and the conversion is US$1 = AU$0.65 then the same US$200 now gives you AU$307.
Scenario 2: Not so good
Lets say the US$100,000 property hasn’t gone up in value. Now the conversion is US$1 = AU$0.65 then the same US$100,000 property will cost you AU$153,000. If the currency keeps heading this way then you would have to reconsider your strategy.
Easier to find cash flow positive properties
There are plenty of cash flow positive properties in the US unlike in Australia. If you don’t know the benefits of cash flow positive properties then go here.
Typical net rental yield in a US property
Why is investing in the US is so profitable? The gross yield in Australia for a rental property is typically 5% of the property value. In US the gross yield can be as high as 20%. This means the rental properties in US can pay for all expenses and put cash back in your pocket. This cash flow is what you need to escape the 9 to 5 life and get out of the rat race. This doesn’t mean all properties in US are good, you would still need to analyse all aspects of the property and the market.
Watch this short video about the Texas economy – Texaplex!
Where ever you invest in real estate you will have vacancy at some point in time. How long and how often, you may never know but we need to factor in a vacancy allowance when we do the numbers for the property to see if it is still going to be cash flow positive.
Again any property will have maintenance. If you buy a brand new property this may be very less. You would have to conduct a building and pest inspection to make sure the property you are planning to buy does not have any major issues. Here again you would have to put in some funds for maintenance when you evaluate the property numbers to make sure the property is still cash flow positive.
US is a very litigious country
In Australia its very common for investors to buy property in their own name. This is not a good idea in the US. You need to protect your personal assets and also limit liability if the unforeseen happens. Say a tenant slips and falls in your property and sues you. If you bought the property in your name then all your personal assets are exposed. If you have a company set-up in the US then your liability is limited to what the company holds; in this case it will be the property. The entity type to set up will be based on whether you are investing alone or with partner(s). The cost of setting up a company also known as a LLC (Limited Liability Company) is very cheap in the US, it costs about US$1,000.
Location could be a weak spot
There are some bad areas to invest in the US. The city of Detroit for example is bankrupt; the property market is in a major decline. People are moving out and there is no job growth. You will need to do some research in whichever city you want to invest in. If you have good advisers they can guide you as well. Alternatively some basic research online will help.
Property Management could be a weak link
Finding a good property manager is always a key to any real estate investment but they say it is hard to find good property managers in the US. If you have gone to the extent of purchasing a property and did all the research by the time you get to hiring a property manager you would have some contacts and you could simply ask them for referrals to good property managers. It is also a good idea to speak to the property manager before you hire them. You can find questions or check-lists to ask your property manager online.
Dealing with unethical vendors
If you want to invest in the US then you have to find honest and reliable people to work with. Watch out for big company’s trying to sell you a package with the property, loan and a tenant in place. These are called turn-key properties but are priced higher because of the convenience. As always do your research. The internet has made investing anywhere a reality and take advantage.
To be financially free you need to create cash flow for life. I am not saying you need to buy US property but asking you to think outside the box and not follow what everyone else is doing because it’s the expected norm. If you like the idea of cash flow positive property then it doesn’t matter which country you buy them from.
I will take you through the US property investing further in my next article.
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