Interest in buying property in the USA has been trending among Australians. But what pitfalls await? How can they be successfully navigated to ensure profitable real estate investments?
Blogger: Matthew Stubbs, founder, InvestUSA
What are the most common mistakes made by Australian investors buying property in the US?
24/7 Wall St. evaluated data from the IMF, profiles of ultra-high-net-worth (UHNW) individuals and RealtyTrac. The findings ranked Australians as one of the top 10 international buyers of property in the USA last year. Australians represented 11 per cent of prospective international buyers (3rd highest). This represents an increase in interest of over 121 per cent.
Let’s look at seven common mistakes Australian property investors make, and how to overcome them.
1. Rushing in
It’s easy to get caught up in a frenzy and to gloss over the less fun details when investing overseas. The US is really big. And there are many properties and vendors. Some investors are happy provided they are getting into a pretty off-plan development, in a well-known city with the promise of mediocre yields. Yet, this is hardly the recipe for sustainable long-term financial success. Never mind maximising wealth preservation and ROI. While watching the numbers, reading the fine print, and taking a little time to learn about new processes might not be as appealing as making it to the next international yacht show or Formula 1 racing event, it will ensure that you can continue to enjoy those luxuries.
2. Waiting too long
In the reverse, there are some Australian investors self-sabotaging their financial futures and investment portfolios by dragging their feet. Being trapped in ‘analysis paralysis’ can certainly freeze, if not at least dampen cash flow and wealth building. In contrast to the dramatic rise in interest in purchasing American property noted above, the US National Association of Realtors 2014 report tallying international home-buying activity virtually fails to mention Australians by name at all. ‘Asia/Oceania’ buyers are all lumped together in annual statistics. Although this group made up 32 per cent of international clients purchasing in the US, it suggests many have yet to make the move. Asset prices and interest rates are only headed in one direction for the foreseeable future. Those that delay will only pay more for the same assets, and in turn miss out on that percentage of potential equity and income gain.
3. Relying on the media’s ‘hotspot of the day’
Relying on the press’ ‘hotspot of the day’ article to make a long-term investment has obvious flaws. Australian investors need to look at the real figures, on a local basis. For example, few know that Miami, Florida is ranked as having the highest poverty rate in the country according to the US Census Bureau. It also boasts a single high-rise tower, which is home to two per cent of the world’s billionaires. But a huge percentage of the local population lives on less than $11 per day (USD). You aren’t going to hear that type of truth in most luxury travel magazines, real estate marketing pitches, or top 10 places to buy now lists. Do some serious research, or work with a transparent and reputable property investment adviser.
4. Emotional investing
The above mistakes can often be symptoms of emotional investing. Emotional investing can be very costly. Giving money to a charity, pampering yourself with the latest Gucci loafers, or purchasing your dream vacation home (in an area prone to earthquakes or hurricanes) isn’t really investing. It is donating or spending. Warren Buffett is constantly reminding us of one of the favourite quotes of his own mentor Benjamin Graham: “Investment is best when it is most business-like”. Investing can be fun and exciting. But always make decisions based on the hard numbers, not fancy pictures or ego. Invest soundly first. Then your investments will pay for all the luxury and disposable spending, and good causes you want to support.
5. Failing to understand the process
Buying property in the US is a little bit different to elsewhere overseas. The terminology is different, and the insurances required are different. The legal side of mortgaging property and holding ownership even differs between states in the US. No one will have any idea what ‘Strata Title’ means. You won’t have to have life insurance to use financing. And there may be fewer benefits to buying a new-build versus existing properties in the United States. This is no doubt why converting existing US homes into rental properties has been the focus of the world’s largest hedge funds. And why America’s second-largest home builder just announced that it is turning to building apartments and single family homes for rent, instead of for sale. It’s not difficult. But it is different. Get some guidance on the process and you’ll enjoy stress free and more profitable investing.
6. Fragmented processes
Efficiency is important in any investment process. This may be even more important when investing in a new territory. Too many try to navigate this process alone. They end up trying to work with bankers, attorneys, insurance agents, visa advisers, real estate appraisers, vendors, and property management firms that have no connection, and can’t work together in sync. It doesn’t take a genius to figure out that this creates a lot of room for error and miscommunication. Streamline the process by working with experts that specialise in facilitating a smooth process for international investors.
Savvy property investors know that the net profitability of any investment relies heavily on taxes. There can be taxes on income derived from investing in US property. Yet, there are also a wide range of legal tax breaks, write-offs, and deductions for those that are aware of them. Between LLCs, tax deferring investment vehicles and better accounting, taxes can be greatly minimised and returns maximised.