Snapping up US property can provide high rental returns, positive cash flow and diversification, but be careful about investing from afar.
There are many reasons why Australians are turning to the US market for investment opportunities: a lower capital outlay, competitive interest rates, capital growth potential and global diversification.
However, like any investment strategy, investing in offshore real estate comes with a series of risks-- notably a lack of knowledge of the local property market, a foreign tax system and extra administrative costs.
US property has fallen in value in the years following the financial crisis. Combined with a favourable exchange rate between the US and Australian dollars and relatively stable rental returns, there is a unique opportunity for Australian investors to tap into the US market if they go about it the right way.
Understand the benefits and drawbacks of investing on US soil before you make a decision.
Pros and cons of investing in US property
- Accessibility. For young investors who have a small deposit, the US is an appealing market due to the perceived affordability of US property. The low entry cost has been achieved due to low demand in distressed markets such as Phoenix, Arizona.
- Lower interest. US mortgages generally come with interest rates that are lower by 1%-3% compared to those offered in the Australian market. This means that Australian investors can potentially lower their interest repayments if they can secure a competitive rate.
- Cash flow positive. Many US properties are cash flow positive, which means that the rental returns are relatively high (and stable). For example, a four-bedroom house in Arizona or North Dakota could generate around $250 in weekly rent. While you may be able to achieve a similar rental return for a property in Australia, the purchase price in Australia would be much higher. Typically, you can earn a rental return of around 10% on a US property.
- Capital growth potential. Although you need to do extensive research to understand the US market and the suburbs that are likely to secure long-term capital growth, there is opportunity to find properties that have high rental return and capital growth, which can help you build your equity.
- Diversification. A diversified investment strategy involves investing in different property types across different markets. By investing in US property, Australian investors can minimise their investment risk if they do their research and purchase in a good location. Global diversification can allow investors to pay less tax, as their holdings are spread across different nations, which may mean that they fall into smaller income brackets in different locations.
- Finance restrictions. US banks impose stricter lending criteria for foreign investors, which can make it difficult to obtain finance. In addition, most banks require you to put down a hefty deposit, which is normally around a third of the buy rate. For instance, if you were purchasing a property for $750,000, you would need $250,000 deposit.
- Lack of local knowledge. A major risk of investing in US property is a lack of knowledge of the local economy and property market. While you can research online, there are some things that can’t be researched from afar. While the numbers for a suburb may add up and it may appear good on paper, buying a property unseen can be problematic, as the images online may not reflect the structural integrity of the property. It can be difficult to get a feel for a suburb and secure a reliable tenant without visiting the area, particularly if you don’t have access to reliable data on unemployment or crime rates for the suburb. Also, the terminology, the insurance and tax system and the way that mortgages are structured is different, which means you need to do twice as much research.
- Taxation admin. If you buy property in the US, you’ll need to complete and file a tax return annually in both Australia and the US, which means more paperwork come tax time. Generally, US property held by a foreign investor will be subject to additional requirements as stipulated by the Foreign Investment in Real Property Tax Act. As an Australian resident, you are taxed on your worldwide income, including income from offshore bank accounts, rental income from an overseas property and capital gains on overseas assets. Visit the Australian Taxation Office (ATO) website for more details about your tax obligations as a foreign investor.
- Costs. Investing in an overseas market comes with additional costs such as help from local experts and extra administrative costs. You’ll need to account for local property taxes, insurance, management costs, and ongoing repairs and maintenance. To own a property in the US, you must have a US bank account, which you must set up in person. This means that you’ll need to travel to the US in order to finalise the paperwork – a flight that could set you back $2,500.
- Limited rights. It’s harder to keep track of your tenants and the condition of your property when you’re not physically there. US legislation gives more rights to tenants, so even if they don’t do the right thing, the landlord may be sanctioned.
- Distance. A good mortgage underwriter, quality tenants and experienced property managers can be hard to find, particularly when you’re managing the property from afar and in a different time zone. The logistical challenge of being a foreign property owner means that you’ll need to do extra research.
- Exchange rate risk. Investing in any global market comes with a degree of exchange rate risk. Both the AUD and the USD are subject to fluctuations, which could affect the amount of income you receive. You should never speculate on the exchange rate; instead, focus on a long-term strategy.
- Scams. The Australian Securities and Investments Commission (ASIC) warns Australians who want to invest in the US property market about various scams. Take caution when you’re approached by a US property investment specialist, as some of them take advantage of foreign investors who know little about the market. Some agents may promise unrealistic high rental returns, or they may not disclose information about a low socio-economic suburb.
If you want to buy a property in the US, here is a guide to the general process.