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Is the investment grass really greener in the US?

Whilst attending the Sydney Property Expo last week, I spoke with many investors who were excited about the fact that our dollar is almost at parity with the US greenback.

The way they saw it was that overseas assets were “on sale” for the first time in living memory.

In fact they could barely contain their enthusiasm as they told me about the bargain buys to be had in the American real estate market. Who could pass up a detached 3 bedroom house for a tenth of the price that you would pay here in Australia?“How much can I lose? Surely the prospect of being able to pay $20,000 to $40,000 cash for a property is something you would be interested in?” I was asked by one attendee.

“Not at all,” I replied. “ What you are suggesting is speculating not investing and I certainly don’t buy a property because it’s cheap. In fact my first question would be; what’s wrong with it that it is so cheap?”

We all witnessed the phenomenal crash of the US housing market during the global financial crisis; with some prices falling by as much as 40 to 50%, but these speculators (they’re not really investing) seem to have forgotten about this devastating collapse far too quickly.

They are being tempted, amongst other things, by the high Aussie dollar, which is allowing them to buy into overseas assets at virtually a one-for-one currency basis. But I see a lot of problems with this type of hit and miss investing.

Firstly they are buying distressed real estate in remote locations of the US. I can guarantee you would not find cheap properties in Los Angeles or New York! And the reason these properties are going for a song is that no one else wants to touch them.

These are not what I would call “investment grade” properties.

The locals know that this type of property is a bargain because there is a significant imbalance in the supply and demand equation; generally speaking, demand is almost non-existent and there is an oversupply of housing.

On the other hand in Australia we have constant demand for properties from a growing population and in some areas we have an undersupply of properties. This contrasting supply and demand ratio is what has underpinned our property markets during the Global Financial Crisis and has seen values increase over the past couple of years.

To make matters worse I have read that a further four to five million USA properties could go into foreclosure over the next few years.

In a recent article in The Australian, marketing manager for House Buyers USA (an Australian-owned business that renovates and sells homes in the US) John Jones, says he is busy putting Australian property investors into foreclosed properties that have been renovated and tenanted.

But at what cost?

“People have had to bale out of houses that might have been worth $120,000 to $130,000, and these properties are coming on to the market at around the $20,000 to $40,000 range because there are only cash buyers buying them.”

Yes and for very good reason! Those properties were probably never worth $120,000 and they may not be worth $30,000 today and banks won’t lend against them.

Jones adds, “When you’re only spending around $40,000 and getting a renovated property in America that is rented out and returning you about $100 of positive cashflow a week, it’s attractive.”

This is another fundamental flaw when it comes to speculating on overseas property.

In my opinion, you should always invest for long term capital growth, not the immediate gratification of a much smaller rental return that comes with positive cashflow real estate. You will never get rich from rental income (on which you pay tax), but you can create substantial wealth from property that generates strong, long term capital growth.

Peter Jacob, managing director of specialist high-net-worth advisory firm Alphington Private Investor Services, cautions investors to be careful about buying property in another country.

“I would be very worried that Australians, with their love of property investment, might be looking at these markets as if it is the Australian context, but these houses might well be cheap for a very good reason,” he says.

“Generally speaking I think these properties are in substandard locations. Put it this way, while high-net-worth investors are certainly looking to go into US equities at these exchange rates, we don’t see much interest in US property.”

My advice is similar. Regardless of market ups and downs, interest rate movements, the general economic environment or a skyrocketing Aussie dollar, you should always look to proven, high growth areas when it comes to property investment. In Australia, this generally means inner and middle ring suburbs and bayside real estate, as scarcity means these properties are always in strong demand.

Investing sensibly will make you money, speculating will not.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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