Economic news coming out of the United States of America is mixed to say the least.
Within a week we might hear about employment rates recovering and housing starts improving, while also reading about the looming threat of the United States defaulting on its debts and the disastrous effects this could have on the world economy.
This varied news, however, is unsurprising when you think about the sheer scale of the nation. The country has the fourth largest land surface area in the world, almost 20,000 kilometres of coastline and is home to over 313 million people.
In addition, the country has the largest economy, with its gross domestic product (GDP) amounting to $16.2 trillion in 2013.
Australia, on the other hand, is ranked sixth in the world when it comes to land size, has over 25,000 kilometres of coastline, but only around 23 million people.
Our economy, which has experienced 21 years of uninterrupted growth, still operates on a much smaller scale than our US counterparts. Australia’s GDP in January 2013 was around $1.57 trillion.
Given its size, the USA therefore has a number of micro-economies and property markets all operating at the same time. To simply look at ‘whether the economy is recovering’ or ‘how the property market is performing’ may be too simplistic.
Indeed, one of the biggest mistakes investors make when approaching the US market, according to wHeregroup director Todd Hunter, is thinking of the market as a single entity.
“People tend to think in very general terms,” he says. “It’s like saying ‘What’s the Australian market like?’”
Australia has over 500 Local Government Areas (LGAs), so Mr Hunter says it isn’t wise to think of Australia as a single property market – let alone the USA.
“Looking at the USA broadly, yes it’s definitely recovering, but you need to look more closely at the various towns and cities,” says Mr Hunter. “You look at some property markets in Texas and they’re red hot at the moment. Properties are selling within hours – not days – within hours.
“But then you have other places like Detroit in Michigan that are completely dead.”
US Invest’s chief investment analyst, Lachlan McPherson, agrees and says if Australians are going to succeed in the US property market, they need to understand it.
“The biggest thing they need to do is understand the market they’re investing in,” he says. “The market is huge. There are 50 different states, all of which have their own micro- economies.
“So I think the first analysis that needs to be done needs to be from a macro-perspective: Why are you investing there? What’s the future? What is the economy driven by? And why is it going to grow in the future?”
This is not a strategy for those who like to ‘drive by’, ‘see’, ‘touch’ or ‘check in on’ their investment properties.
The dollar divide
Australians who are considering investing in the US property market need to be aware that they’re not simply mimicking the Australian investment process but with US dollars, according to Mr McPherson.
Instead, there are new prices, processes and procedures to deal with. These differences can be intimidating for property investors, especially when combined with the changing fortunes of the Australian dollar.
In October 2010, the Australian dollar achieved parity with the US dollar for the first time since it became a freely traded currency. This value was short lived – indeed it only traded above US$1 for a few seconds.
Over the next year though, the Australian dollar fluctuated, occasionally going beyond parity for extended periods of time.
The Australian dollar has now settled below parity, but Mr McPherson says investors would be wrong to think they have ‘missed the boat’ simply because the dollar isn’t at the record highs.
“I think the [Australian] dollar is probably the biggest misconception,” he says. “If we look at the [Australian] dollar on a long-term average, it’s actually still very strong. Long term, most economists predict the [Australian] dollar will sit around [US]80 cents, so even getting in now, there is still tremendous opportunity.”
Darren Wallis, CEO of G.J. Gardner Homes, agrees and says for a long time the Australian dollar was probably overvalued. He believes the dollar is still in a good position and investors can now capitalise on Australia’s strong international position.
Don’t buy too cheap. What’s super cheap is super cheap for a reason. Anything less than US $50,000 is unlikely to be a good investment.
Risks and rewards
Investing in the US property market is not for everyone.
Dallas, Texas – a market which Mr Hunter identifies as having immense potential – is more than 15,000 kilometres from Sydney, Australia, so this is not a strategy for those who like to ‘drive by’, ‘see’, ‘touch’ or ‘check in on’ their investment properties.
Investing in an international market is more suited to those who are looking to diversify their assets and leverage off a different economy.
“I think the US market is particularly suited to investors who currently have assets in Australia, whether they are shares or property,” says Mr McPherson.
“By investing in the USA, they’re instantly leveraging themselves to another economy. They’re diversifying their assets away from the Australian economy and they’re able to instantly benefit from the recovery of the US economy.”
Mr McPherson says the US market could still suit some first-time Australian investors, but he says they’re likely to see fewer benefits.
“First-time investors could still get a great investment in the United States. But the investors who are going to benefit most from this strategy are existing Australian investors who need to diversify their risk,” he says.
Indeed, he argues that sections of the US property market may even be in a stronger position than Australia.
“Every economy has risks, but I think if we were to compare Australia and the USA, Australia may even be more susceptible to a decline in house prices than the USA,” Mr McPherson continues.
“Australia is seeing capital growth in house prices and has been for decades, yet there hasn’t been a correction. The economy is under pressure, yet house prices are still at record levels.
“Now if we look at the USA, a lot of the house prices are still below construction costs, so that’s why it makes so much sense to be investing in the market because you’re acquiring assets that are below what they cost to build and are far below what they were worth prior to the financial crisis.”
Sam Saggers, director of Positive Real Estate, warns that despite the appealing prices, you need to do your due diligence.
He says Australian investors are often left underwhelmed by their US investment escapades. These investors, he says, are attracted to the potential high returns and profits – but are often left frustrated.
“After the global financial crisis [GFC] hit, many Australian investors flocked to the USA in order to capitalise on the capitulation of the housing market there. However, investors were met with limited success,” he says.
Using your SMSF to invest in the USA
Property in the USA is becoming an increasingly popular asset for Australians with a self-managed super fund (SMSF) – but is an international property market too risky for your super?
Australian investors who are managing their own super are looking to get “more bang for their buck”, according to US Invest’s Lachlan McPherson.
He says many SMSF trustees in Australia are keen to diversify into property, but they don’t want to tie too much of their fund to a single asset.
The advantage of US property, he explains, is that prices are lower. You can thus have a property in your SMSF without taking up too much of the fund.
“At the end of the day, in the USA, you can do it with a lower sum of money.
“It’s a great way for Australians to diversify their investments. For too long, we just haven’t been getting the types of returns we’re expecting from our super, so I take my hat off to those people who are taking it into their own hands and getting a piece of the US market, which will really help them grow their fund.”
Mr McPherson says some of the international risks can be mitigated if investors look in the right areas.
“More so than ever with superannuation funds, investors should be taking a more conservative approach to areas they’re investing in,” he says.
“Low purchase price, high yielding properties probably will not be the best strategy for someone investing with their SMSF. If you invest in a working class area like Dallas, for example, where employment is very strong, housing price affordability is excellent and the population is growing by 10 per cent each year, that’s the sort of conservative investment you want for your SMSF.
“If you’re investing in your SMSF, the one thing I can say is ‘be conservative’.”
He says that even though there are definitely bargains to be found, not every cheap property is a good deal.
“The United States has cities with populations larger than the whole population of Australia,” he says. “Many look like great investment options, but there are a lot of bad areas in cities and you can’t know where they are without having boots on the ground.
“A real estate agent will generally not tell you that you are buying in a bad area. As a rule, I believe that the cheap properties that look like a steal are in suburbs you wouldn’t walk through.”
Where to look
The US property market offers savvy investors some great opportunities – but not all ‘cheap’ areas are going to offer you rewards.
In July of this year, Detroit became the largest US city to file for bankruptcy and it remains plagued by high unemployment and abandoned buildings. Mr McPherson says investors need to do extensive research on international markets and think about their own risk profile.
“There have been a lot of companies selling US properties all over Australia and a lot of people have been burnt. It’s given the United States a bit of a bad reputation. It’s not that it’s a bad place to invest, but you have to remember the streets aren’t paved with gold,” he says.
“You have to do your research, you have to understand the market and invest wisely.”
Mr Hunter points to a number of areas in Texas that are presenting solid opportunities for informed investors.
“If you look at places like San Antonio, Dallas and Houston, growth has definitely already occurred and there is more growth on the horizon,” he explains.
“That’s largely due to employment because they have low tax rates and low company tax rates.”
Mr McPherson says there are similar opportunities in Atlanta, Georgia.
“Atlanta was hit very hard by the financial crisis, so it’s a very affordable market now. But it has a very strong, diverse range of industries supporting it,” he continues.
He says companies such as Coca- Cola, Delta and UPS have headquarters in Atlanta and offer good, stable employment opportunities for residents.
Mr McPherson also highlights Charlotte as somewhere investors should pay close attention to.
The city in North Carolina is now the second largest banking centre in the USA, after New York City.
Mr Hunter says wherever you decide to invest, you should steer clear of properties built before 1980.
“Pre-1980 lead-based paint was used on houses,” he says. “In a few states now, if you buy a property from that era, you actually have to get the property repainted internally and then get certification to say that you can now let the property.”
Mr Hunter says investors should also keep in mind that the structure and demographics of US cities differ greatly from those of Australian cities.
Generally speaking, he says, the outer suburbs are more desirable to families than the inner city.
“It’s often the exact opposite of somewhere like Sydney, where people want to live in the heart of the city and close to the CBD,” he explains.
Mr McPherson says investors should also ideally be looking for properties between US$150,00 to US$160,000.
“That’s the area of the market where we still see great value, but you’re still investing in quality areas and more often than not, you’re investing with great tenants,” he says.
“You get working families in quality areas near good schools – and you’re not going to get that in lower-end properties.
“There are great opportunities for Australians in this section of the US market because it’s difficult to get into the housing market in Sydney unless you have a significant amount of savings.”
Investing in the USA: Pros and cons
- Market upswing: Consumer confidence is returning to the US market, according to G.J. Gardner Homes’ Darren Wallis, and the property market is relatively close to the start of the upswing. Investors are in a good position to capitalise on the improving market.
- Stamp duty: “Australians pay tens of thousands of dollars on a property in stamp duty,” says Positive Real Estate’s Sam Saggers. “Transferring a title of a property can literally cost you as little as a few hundred dollars in the United States.”
- Good returns: There is no doubt that there are many property markets within the USA where property prices are far cheaper than Australia’s capital cities, so there is the potential for strong rental yields and cash-flow positive properties.
- Property managers: Positive Real Estate’s Sam Saggers says as a rule, if you don’t like property managers in Australia, it’s likely you will struggle overseas.
wHeregroup’s Todd Hunter agrees and says a large number of property management companies in the USA still rely on doorknocking to collect rents, and have not implemented automatic debit systems.
- Too good to be true: US Invest’s Lachlan McPherson says when you’re comparing Sydney property prices to some markets in the USA, it can be easy to get flummoxed by the numbers – how can they be so cheap? He says good investments can be purchased from around US$80,000 – but he admits some offers are too good to be true.
“Do your research and understand the market,” he says. “Don’t buy too cheap. What’s super cheap is super cheap for a reason. Anything less than US$50,000 is unlikely to be a good investment.”
- Financing: Getting finance for an investment property in the United States can be difficult, according to Mr Hunter. He says, however, that if investors are serious about their US investment portfolio, they need to be prepared to travel.
“The banks generally work at a branch level, so it can be very difficult for an international investor to get finance,” he explains. “Fears of terrorism have also made it more difficult and the identification process more complex.
“I think investors should really be prepared to go over there if they’re going to invest there.”
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