If it sounds too good to be true, it probably is
I hope you’re not thinking of investing in US real estate.
I know some Australians are considering it, having been encouraged by promoters offering properties at 70% off. After all, who could pass up a detached three-bedroom house for a 10th of the price that you would pay here in Australia?
There’s even a new listed US residential property fund, where 1,500 Australians have ‘invested’ funds from their self-managed superannuation.
I’ve heard it all before – there are places in the US where houses are virtually being given away, are cash flow-positive, loans are easy, rents are great and so on and so forth.
The reality is there are no free lunches. I learned a long time ago that not all that glistens is gold, and while investing abroad has always had its risks, in my opinion buying cheap and nasty properties in the US at present is a sure-fire way to lose money.
The reason some promoters are offering Australians these properties is because they can’t sell them locally. In many areas of the US 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.
That’s right – there are some places in America where you can’t give a home away at any price! Doesn’t that make you suspicious? Something just doesn't seem right, does it?
So let’s look a few reasons not to invest in the US:
1. An unhealthy economy Let’s not beat around the bush, the US economy is poor. Well, it’s worse than that, it’s in real trouble. I’d listen carefully to a recent warning made by Rupert Murdoch, one of the smartest business people around, when he cautioned that the US economy will be at a standstill for almost a decade. Currently the US government debt levels are at a staggering 80% of GDP. In contrast, in Australia this figure is 6%.
2. Massive Unemployment With an official unemployment level of 10%, but a more realistic figure close to 20%, and you’ll find unemployment is even higher in the back waters where you can buy these cheap properties. Sure unemployment means more tenants than home buyers – but how are they going to pay your rent?
3. Huge Oversupply There are current millions of properties sitting vacant in certain parts of the US, and up to 20% of current home owners have negative equity in their homes – this means their debt is more than their homes are worth.
4. More foreclosures forecast I’ve read that a further 4 to 5 million US properties could go into foreclosure (get taken over by the mortgagee) in the next few years. Economist Robert Shiller, co-founder of the Standard & Poor’s/Case-Shiller home price index, recently suggested that prices may drop as much as 25%, after inflation, over the next five years.
Then there are the currency risks, tax issues and property management issues. Do you realise that in many areas of the US the property manager goes around collecting the rent personally and rents are paid in cash?
Over the years I’ve spoken with many people who have invested (well, I’d call it speculated) in the US, and I haven’t met one Australian property investor who has made money out of it in the long term. The only people I’ve seen profiting from the US property market are the spruikers who promote these schemes.
Sure a $40,000 property sounds cheap, but what many Australian’s don’t realise is that in some cases the promoter has already added 50% to 100% to the purchase price. This means the promoter finds a property for $20,000 to $30,000 and sells it to an unsuspecting Australian (and particularly New Zealand) investor for $40,000.
Even though Australia has one of the most expensive property markets in the world at present, we have a booming economy plus a constant demand for properties from a growing population at a time when we have an undersupply of properties in some areas. This contrasting supply-and-demand ratio will underpinned our property markets.
There are some great investment opportunities in Australia at present – there is no need to look overseas.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.