The Benefits and Risks of Investing in US Property
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie, billionaire industrialist.
Many people believe that investing in real estate is the easiest and most convenient way to earn passive income. And it is true. Property is a good investment because you don’t have to do anything (except maintain the property) and just wait for it to earn money by renting it out or selling as fixer upper. Property investment has a lot of potential and a lot of people are attracted to it.
But even good things carry some risks with it, especially investing in a foreign market.
What are the disadvantages of investing in a property in the US? Is it worth it?
Distance. One of the major deterrent in foreign property investment is location. You’re here is Oz and the property you’re going to buy is thousands of miles away from you. How are the papers going to be processed and most importantly, who is going to process them for you? Next, how are you going to visit and inspect the house, making sure it’s a good investment? How will you manage the property later on if you manage to acquire it? Buying and maintaining a property abroad is a huge challenge unless you have someone to take care of all of these for you.
Unfamiliar market. Transacting in a foreign market can be confusing, especially if you are not familiar with the rules and policies that exist in their industry. The process of buying a house in Australia is so much different from buying a house in the US. The terminology is different, as well as the processes.
Financing. US lending organisations usually impose stricter requirements for foreign investors and most banks require at least 30% deposit of what you are planning to purchase. For example, if you’re planning to buy a $600,000 property, you’ll have to deposit $200,000.
Taxes. As a foreign investor, you’ll have to file tax returns in both countries. So if you buy a property in the US, that means you have to file tax returns both in the US and Australia. Australian residents are also taxed based on worldwide income, which includes net rental income, income from offshore bank accounts, etc.
With cons like the list above, investing in the US market may seem like a risk, unless you seek assistance from a business that specialises in this area. By doing this you are learning through their experiences, therefore they mitigate most of the risk for you. Using a professional company means that you will have all the necessary recourses to allow the transaction to be seamless or as seamless as investing in property can be.
Now let’s look at why investing in the US market can potentially be a great strategy to include in your investment portfolio.
Lower interest rates are possible. Buying a property in the US usually means lower interest rates by at least 1%-3% compared to Australian interest rates. Lower interest rates mean lower interest repayment, and if you are able to access the mortgage system this can be a real bonus.
Affordability. US properties are priced considerably lower than other foreign destinations. There are many cheap properties that young investors can take advantage of, especially in distressed markets.
Higher rental return. The average rental return on a US property is around 10% and can be up to 17%. Most US properties are cash flow positive and have a stable rental return. When purchasing in Australia to achieve the same rental return in Australia, the cost of purchasing the property is higher though.
Diversification. Buying a property in the US could help you build an international portfolio. Having properties abroad could help you minimise investment risk, especially if you do your research well and you partner with a good property management company. You can also save on tax because these locations have different tax brackets and you might fall into smaller income bracket in other countries.
Perfect timing. The markets are now beginning to rebound after the global financial crisis and there are many quality homes available for low cost. It is a good opportunity for investors who are just starting out or those who want to explore other markets.