In the recent round of seminars I conducted, there was no shortage of curious attendees who asked me whether I thought the US housing market represented a prime investment opportunity at present.
Understandably, they felt that given the unswerving strength of the Aussie dollar (which is now beyond parity with the greenback) and the fact that stateside properties were going for a song, how could one lose by adding American assets to their portfolios?
My response was always a resounding, “I wouldn’t even consider going there!”
In a recent report on news.com.au, David and Libby Koch expressed similar concerns about the US housing market as those I discussed with these eager investors (or perhaps I should say – speculators).
They call these punters “vulture” investors, keen to pick at the bones of a beaten and battered property market that is yet to pull itself out of the ruins of collapse.
The Koch’s suggest that even though Australia is the most expensive residential property market in the world right now, the enticement of cheap buys in the US is something to be avoided at all costs.
Well to begin with, 13% of all US houses are currently sitting vacant and in the worst state of Maine, the vacancy rate is a whopping 23%.
In addition, property prices in America fell by another 3.1% in January, representing the seventh consecutive month of falls and taking the total average drop in prices since the GFC to 30%.
In many instances, the value of mortgages held on properties is actually higher than the property values themselves due to the fact that 23% of housing loans are “under water”, and with existing home sales down by 10% in February, many houses that were worth $450,000 three years ago are now being flogged for $35,000 and some even as low as $1!
Sure, all of these combined factors might seem to point to a very compelling opportunity to seek offshore investments in the US, but there are far too many unknowns when it comes to overseas property investment.
As the Koch’s suggest, “Investing directly overseas not only carries the usual investment risk but also a currency risk. If the currency goes the wrong way, a perfectly good investment can be wiped out by currency losses.”
“You can’t borrow without a social security number and the paperwork is so complicated that you’ll need expensive accountants to handle it.”
“Don’t forget that all income earned in the US will have to be declared as “foreign-sourced income” in your Australian tax return each year.”
Then there’s the difference in property management administration in the US as compared to Australia, where the real estate agent who does your bidding will charge 10% of the overall income generated and you’ll have to fork out a lot more for repairs and maintenance costs. Not to mention that the likelihood of extended vacancy periods is pretty high right now.
Of course if you think the potential to nab a bargain is still too difficult to resist, consider that old saying, “you get what you pay for”. In other words, the home that’s going for a song is cheap for a reason – quite simply, no one wants it and in most cases, there’s not even a willing tenant for the property. Or if there is, it’s a less than desirable one who is happy to live in a dodgy, economically ravaged neighbourhood.
The Koch’s say, “With vacancy rates at 13 per cent, renters have a lot of choice, so your property will need new carpets, kitchens and paintwork. Then there’s the costs associated with keeping tabs on an asset halfway round the world, such as international phone calls, flights, US accountants, etc. It can all add up.”
“A lot of people would think they could buy 10 properties in the US for the price of one in Australia. That’s 10 lots of tenants, 10 property managers and 10 times the tax and accounting bills.”
“Also, don’t be fooled into thinking prices can’t go down further. That’s what a lot of investors thought a year ago and have now been caught by the latest double dip.”
I’ve given my thoughts on USA properties in previous blogs here:
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