The pros and cons of investing in US residential property

Today I'm coming to you from inside a plane. I'm writing this post en-route to Dallas, Texas from Sydney. Sure, the main purpose of the trip is a holiday, but I'm also there to observe on the local investment property market.

American property is slowly but surely recovering from its 2008-09 foreclosure nightmare, and while the US economy is not the best it has been, there are early indications that it's beginning to turn around. While I am certainly no economist and am aware that the above sentence is a bold statement, it does ring true when speaking to local agents and experts on the ground. There are certainly markets that are not recovering – in fact, that are getting worse (Cleveland, Houston, and Chicago, to name a few), but many other markets that have bottomed out and now showing signs of a slow recovery. 

Suburbs in cities like Phoenix, Detroit, Seattle, and Houston have taken a huge hit in recent years, with some house values reduced down by over 70%. There are many stories of three-bedroom houses in good suburbs that were once fetching the $300,000 to $400,000 price range. These same houses today can be picked up for a fraction of this cost, many even in the sub-$100,000 bracket.

So, if America is tipped for a comeback, many investors view these properties as “easy growth money”. Effectively; buying at the absolute rock bottom and then playing the waiting game in the years that follow. Sounds great in principle. But the question remains; do the complexities of not only procuring property in this country but holding and managing it from afar equal the potential for gains in future years?

So, my trip will involve some research. I'll be sure to write post more in coming months as I learn about the market and the intricacies of holding property there. I personally have not taken the plunge into the US market. however I am considering it.

But until then, I'll leave you with a list of some pros and cons of US investment property, written from the perspective of one young rookie investor to others like myself.


Pros

• Low entry point. For young investors in their 20s (or even late teens!) on limited incomes (say, under $50,000 per year) and limited initial deposit (say $25,000 of savings), the US is a very appealing market.
• To buy a US property, you must get a mortgage from a US bank. These mortgages are typically one to three percentage points below AU ones, thereby reducing interest and repayments from day one, which is great.
• The biggest pro is that most buys are instantly cashflow-positive. This means that even if the US takes years to recover (resulting in zero capital growth for a few years), the rental returns are still very decent. For instance, some four-bedroom houses in areas of Texas and Arizona are able to command around $250 per week in rent ($1,000 per month). You could command the same weekly rent ($250) in Australia for, say, an outer-suburban two-bedroom apartment, the difference? That 2-bedroom apartment in Australia may cost you $220,000-$260,000 to buy, whereas the four-bed house may only cost $100,000 to $120,000. Already, you are ahead here.
• Prices in some markets have bottomed out so much that there is nowhere to go but upwards. As in, the houses can't get cheaper because at the rates they are now, they literally cover the cost of the bricks, roof, and fittings, with the land value being that of basic rural acreage. So there is very little chances values can actually get “worse” in such places.
• With that said, there is a great opportunity for capital growth. While it is a gamble in terms of knowing which cities/states are likely to recover first; there is certainly excellent potential for a property that is both high on rental-return and capital growth (which is a rarity in Australia).

Tax benefits. I need to explore these further; but my basic understanding is that it could be tax-advantageous for those earning under $50,000 a year to hold an investment property in the US.

Cons:

• Whilst entry costs are low, they are not without their complications and restrictions in terms of finance. For example, the minimum mortgage product a bank will sell you is $50,000 of mortgage (actual value of the loan). Yet they still command a hefty deposit (typically one-third of the buy rate). So if you're buying a $75,000 house, you'd need $25,000 down as deposit/savings, a $50,000 mortgage, plus other buying costs (legals, fees, inspections, research, etc,)
• You need legal counsel in both countries when settling a US buy, so in other words, doubling the legal cost you'd spend in Australia.
• One of the biggest barriers is this: there is a perception that you can pay a local company in Australian to help find you an American investment. This is true, but sadly there is no way to avoid a trip to the US. Why? To legally own property in the US, you must have an American bank account. To set up an American bank account, you must do it in person, in America (physically signing documents in person and not by fax/email). There's no getting around this. So, instantly, you're adding (at minimum) $2,000 to your overhead costs to do a fly in/fly out to get a bank account. You could get one in Hawaii, which is cheaper travel costs than the mainland, but if you're flying all that way, might as well have a holiday! If it's viable though, try to go to the neighbourhoods/suburbs you're considering, while you are there, to get a feel for their amenity, stature, position etc.
• You really need a local buyers’ agent/specialist to help find the best property for you, which in itself isn't a con, however, this involves additional costs.
• I'm yet to fully explore the tax complications (and benefits) of US property, but you'll need to file a tax return annually in both countries, so in other words, more admin. Plus for your US tax return, you'll need to pay a professional to help you, so there will be more costs.
• Managing real estate agents, regardless of what you think of them locally are infinitely worse in America! They care less, command more of a cut of the rent, and sometimes don't bother to screen tenants properly. This is especially bad because American laws are set up to protect the tenant more than the landlord. You cannot rely on the agent to sort good quality tenants
• Further, ever wonder why American inner-city areas can be so dirty, yet suburban housing estates in those same cities can be so pretty, clean, and tree-lined? Well, most city councils enact an “owner pays” approach to violations in keeping the neighbourhood clean. For example, if a tenant continually ignores water restrictions and washes his car on the footpath at hours in violation to rules, a large fine is issued. The problem? It is not issued to the tenant, but rather the property owner. This makes you liable for your tenants' local mishaps. Similar fines exist for rubbish on front lawns, improper use of refuse/recycling bins etc. In effect, you will have to pay for your tenants' bad behaviour.
• Your tenant could also break the lease without penalty. In Australia, your agent would get the tribunal involved and blacklist the tenant, making it harder for him to ever source another rental. This system doesn't really exist in America. A deposit is not always mandatory, meaning that a tenant will just rent a competing property to yours that isn’t charging such a deposit. There is insurance to help protect landlords, but these policies are quite expensive.

Cameron McEvoy is a property investor and maintains a blog, Property Spectator.