Door opens to US market
If you're feeling encouraged to take advantage of the strong Aussie dollar and low American house prices, you'd best be aware of the attached risks before you take the plunge, writes Jason Clout.
If you're feeling encouraged to take advantage of the strong Aussie dollar and low American house prices, you'd best be aware of the attached risks before you take the plunge, writes Jason Clout. Many investors have been taking the plunge into US real estate, lured by the combination of a strong local dollar and dirt-cheap properties stateside. Former captain of the NRL team Canberra Raiders, Alan Tongue, is one of them - you can read of his experience, right - and you may even be thinking of joining him. After all, there should still be opportunities for the enterprising investor when your own slice of the American Dream can be bought for as little as $30,000.The collapse in the US property market has left properties in Sydney or Melbourne priced about 15 times or more what you might pay for a similar house in the US. Of course, a low price isn't the same as a good investment and there are a raft of other issues to keep in mind before rushing off to build a US property empire.For one, the exchange rate may go against you that is, it might go even higher. That would dampen your US-dollar returns. Another problem is it is almost impossible to accurately gauge the relative values of properties in different countries. What can look like a cheap house overseas may in fact still be too expensive if it sits in a depressed area and is badly in need of repairs.At the pointy end, there are numerous tax and funding issues to be reckoned with for those who want to invest directly, which is why you may prefer to go through a local investment fund (as our case study, Alan Tongue, has done).Finally, there is what the chief executive of McGrath Estate Agents, John McGrath, calls "the sleep-at-night" factor. The US housing market remains in the doldrums in many parts of the country. Ask yourself this: what will you do if you buy in the US, only to find that your property's value is still declining and you can't get a tenant?The smart moneySome savvy American investors reckon US property is one of the better investment opportunities right now. Investment guru Warren Buffett, for one.The US-based head of global investment solutions at UBS, Curt Custard, recently described parts of the US property market as "the biggest steal" out there, particularly beachfront properties in Florida, where he said investors can pick up good properties for half their former price. While the value of homes on the outskirts of Las Vegas may never recover "there's only so much beachfront land available," he says.There are undoubtedly some bargains in the US that, in time, you can turn into a profit. But the chief investment advisor at US Invest, Lachlan McPherson, says rather than heading straight for the biggest discounted property, and betting on a rebound in prices, a well-chosen place can deliver returns even straight away."The opportunity exists to get what we consider high cash-flow properties providing 10 per cent to 15 per cent from day one," he says. "If you combine this with the high Australian dollar, a purchase price considerably less than the cost of construction and, most importantly, strong property management, you have what is likely to be a high-yielding investment."Property experts argue that "multi-family developments" - which include apartments, detached, semi-detached, duplex or mixed-use properties - are one of the better investment bets in the US.Demand and supplyA report by Linneman Associates for Quadrant Real Estate Advisors found individual family homes were 66.3 per cent of all households in the third quarter of 2011. That percentage has declined from its peak in 2004, reflecting the problems many of those families have had in retaining their properties. Younger people have been especially hard hit, either not being able to hold a job or, if they are working, unable to save the required 20 per cent deposit to enter the home-ownership market.There are about 634,000 "multi-family" properties on the market. But that is down from the 1.1 million that were empty a few years ago.But demand for dwellings is enormous. The US population grows about 1 per cent a year, or by approximately 3 million people. Given these households will have about 2.28 people each, that means about 5.3 million new households by 2015, according to Linneman. Close to a third of those will rent. The bottom line is that demand for these multi-family dwellings will "benefit significantly from the US economy's recovery over the next two to five years," the Linneman report's authors explain. "As consumer confidence rebounds and job formation resumes, those who had put off renting an apartment or buying a first home during the recession will form new households, which will result in a surge in demand for housing."Buyer bewareIn a country with such distinct regional differences, it's critical to check what you are buying. For example, Florida has no state tax but New Jersey does, McPherson says. "Detroit and Phoenix have a major oversupply of property and Detroit in particular has lost a large proportion of its population. This means renters are hard to come by. However, Atlanta and some parts of Florida have very high rental demand due to high foreclosure rates, coupled with an increasing population."Florida is a good example of how things can differ widely even in the same state. While areas on the west coast of south Florida, such as Lehigh Acres and Fort Myers, have major oversupply, if you head over to the east coast there is the opposite problem with high rental demand and lack of supply."Manhattan and parts of Colorado have had little drop in prices, McPherson says, which means rental yields aren't high enough to justify an investment.One group has decided to concentrate on a specific part of the US. Dixon Advisory's US Masters Residential Property Fund just buys properties in Hudson County, New Jersey, which is near New York.Dixon's managing director of funds management, Alex MacLachlan, says the region is within an easy commute to Manhattan and offers good public transport, proximity and a big population. Normally diversification is one of the tenets of investing but MacLachlan says Dixon felt it needed to take a different approach when it came to US property. "We think you need to concentrate on an area to understand it properly we actually believe it's harder if you are looking after multiple locations," he says. "There's a strong team in the US working for us. We thoroughly check the properties we buy for the fund and we do the property management ourselves."Tricks and tax trapsBanks in the US offer very good rates - as low as 3.5 per cent fixed for 30 years - but have strict rules about lending to foreign citizens. The bottom line is: you will be probably better off trying to finance the property in Australia. There are two methods of doing it in the US but neither is straightforward.For you to access the best financing deals, you will most likely need to go through one of the companies which specialise in buying US property as they have contacts with the US lenders. The second route is expensive. You can go to private lenders but they will charge 8 per cent or more for the loan. So you may find a better deal through lenders in Australia.Invest in the US and you are going to be subject to taxation over there. For people who invest directly, that can raise an issue you won't have faced in Australia, namely the "estate and gift" tax, which bites when you bequeath the property to someone else.A private client services partner at Ernst & Young, Ian Burgess, says it can apply to US property held by Australians."The current estate and gift tax rate is 35 per cent of the value of the assets and is proposed to increase to 55 per cent in 2013," he says.Burgess adds net rental earnings and capital gains in the US will also be taxed at both the US federal and state levels. The combined tax on rent, for example, can exceed 40 per cent - and you'll need to fill out federal and state tax returns. Capital gains tax varies depending on the length of time the property has been held.Also any net rental or capital gains have to be included in your taxable income. Offsets for the taxes paid in the US are usually allowed but there are complex rules. You also need to consider the implications if you are buying the US property through a self-managed superannuation fund, as the US tends to just "look through" these entities to the individual beneficiaries, he says.The perils of buying distant propertyTHE chief executive of McGrath Estate Agents, John McGrath, says you have to be careful before embarking on a US property venture. Sound property investment is based on good knowledge of an area. And McGrath says that is hard to attain from a great distance.If you are intent on buying, he suggests at least jumping on a plane and checking out the planned investment with your own eyes.Yolande Barnes from Savills Residential Research says US property does "look cheap at present by international standards"."On the US market in general, I would just say that there is a world of difference between the prospects for recovery in different cities," she says."Oversupplied markets like Kansas and rust-belt towns like Detroit are suffering deep structural problems and will not see housing market recovery for a very long time, if ever. One of the most exciting opportunities I have seen in the Detroit area involves converting residential lots back to agricultural use the land is actually worth more that way."The global cities of the US New York, Chicago, San Francisco and LA are a different kettle of fish. Land supply is constrained, demand sound and the recovery story believable. Oil areas such as Houston and Dallas can also be added to the mix if you don't mind additional exposure to the price of black gold.Overseas raiderFORMER captain of the NRL's Canberra Raiders, Alan Tongue, took the plunge into US property last year."With the Australian dollar at such a level, and what has happened to property prices over there, it just looked like a very good opportunity to invest," he says. "There are parts of the US where the market has fallen by around 50 per cent."But Alan, who has been involved in investment property before, does not see it as an easy or short-term process."One of the questions is, 'Has the market in the US bottomed or not?' One of the risks involved is that it could have further to fall," he says."But there are indications it may be picking up a bit, so we'll have to see."Alan has been impressed with the returns from his first 12 months with the US Masters Residential Property Trust, which has Dixon Advisory as the responsible entity."Some of the properties have been yielding around 15 per cent, so that has been good."But I'm in it for the long-term, that's what I'm concentrating on."One of the big plusses for Alan was that the properties in the trust are near New York City. It offers more employment and lifestyle opportunities than many US cities."Investing in overseas property is not a step I would have taken on by myself but this has gone smoothly so far."
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free
Join the Conversation...
There are comments posted so far.