Can we fail to see the irony in American real estate investment? The fact that the very sector that rolled the global economy-crushing snowball, is now making the rounds as one of the best investments on the same global market.
Most of the world is still feeling the effects of the financial crisis and for many it will get worse before it gets better, but for investors residential property in the US is certainly back on the menu. As a result of the millions of repossessions prices are low and rental demand at an unprecedented high, boosted further by the constrained mortgage market – another great irony lies in the fact that the financial crisis caused the mortgage glut, which is now fuelling the rental-boom and driving investment appetite.
However, it is not all peaches and cream; here are some things to be aware of if you are considering investing in residential property in America.
Massive Repossession Problem Doesn't Just Mean "Loads of Bargains"
Across the US there are millions of homes owned by banks having been repossessed from their indebted owners. Surely, this presents tens of thousands of bargain investment properties capable of making extremely good rental yields and with excellent potential for capital appreciation. But it also presents some problems: one is the effect repossessions can have on a neighbourhood. Many of the areas worst affected by repossessions have come to look run down and depressed. Repossessions drag down values, and this can then lead to more repossessions as those who are going underwater perhaps strategically default rather than pay more than their home is worth – they bail out as it were.
On top of that the properties themselves are often run down and in need of a great deal of repair and restoration in order to make them liveable.
Thankfully there is an almost ready made solution to this problem. The fact that the US rental market is booming is no secret, and many companies are thriving off it. One business model is to buy up repossessed properties in bulk, employ local tradesmen to do them up and sell them on the international market. This is an incredibly successful model; the companies have permanent loose listings with major agents and portals around the world, and they regularly take the leads across the pond and find them a property to fit their needs/budget. They are constantly buying and refurbishing and selling off properties as they become ready, investors get a good deal, local tradesmen get the work (which goes down well with investors) and the affected neighbourhood’s look the better for the refurbished and resold properties.
Across the Pond is a Figure of Speech
America is not like Europe, where dozens of countries are within a stone's throw (well a 747's throw anyway), America is out there on its own in the middle of the Atlantic, figuratively speaking. So unless you are in South America, the chances are America is a substantial length flight away. This isn't a problem for holiday home buyers, but if you are trying to manage and maintain a rental property or properties it can become a big issue.
Of course there are many reputable rental management companies that can take care of the day to day running of the property, finding tenants etc, and you can take out insurance for maintenance on big things like the boiler and such like. However, many of the aforementioned companies are selling off properties with tenants in place, often having purchased on a short sale before the bank repossesses. These deals are great, because the tenants are vetted and rental management is often free for a period of time as part of the deal.
There's No Such Thing as a Free Lunch
And there's no such thing as an armchair investor, at least not in the early years, that is until you have managers managing the managers of your multi-property business. Even if you buy a refurbished unit and have a competent lettings agent, you will still be called upon in the early stages to make decisions and possibly even to carry out work, pay for work to be done etc etc etc.
Go Into it for the Long Haul
If you get a great deal on an American property, it is a near-certainty that said property will make a great deal in capital appreciation, but this may not happen for a long time. In fact, it is most likely that it will fall in value, possibly quite substantially during the early years, as other homes in the area are sold-short or repossessed. Thus, it is essential that you go in with a plan to hold the property for at least 10 years, but 20 or more is even better.
- Thursday 28 June 2012