I have a very different type of message to share today. I hesitated about writing this, partly because it will be controversial and also because I prefer to be positive rather than negative.
However people are being hurt financially by buying the wrong types of US properties, and l feel compelled to do what I can to help prevent that.
If you're thinking of investing in US property through a company other than Universal Events, or if someone you know is thinking of doing so, then please use my notes below to help with your due diligence. There is the potential to do very well out of the US market and many Australians are setting themselves up financially during this short window of opportunity. However most Australians are new to the US market and find themselves unsure of how to undertake the same level of due diligence that they would on a potential investment in Australia, and this is where they can come unstuck.
It's just on a year since Universal Events became involved in US property and started educating our clients about the exciting opportunity it presents at this point in time. During that year, I've:
- personally travelled to the US 3 times (specifically for property investing, plus a couple of trips for other reasons)
- met & spoken with many experts working hands-on in this area
- bought 2 properties (and counting) for myself & Karen
- helped my (retired) parents get started in the US property market
- accompanied our first Phoenix property tour and watched our members educate themselves, then progress to buy their first investment properties; and
- I've learned a LOT about the US property market that I didn't know before.
Along the way I've also learned some “insider info” what other players are doing in this market, who is treating their clients fairly and who isn't, some of the scams that have been run, that sort of stuff. Today I'm going to share that information too with the goal of helping people avoid getting caught.In no particular order, here are my tips on safely investing in the US property market.
Economic drivers still matter
I'm still shocked whenever I see other companies promoting investment in Detroit or Las Vegas. Those companies are still operating so obviously people are buying from them.
We've been pointing out the drawbacks of these markets since we started: when people are leaving a city in large numbers (Detroit) or where the economy is struggling from a tourism slowdown and unemployment is high (Las Vegas), you simply cannot have a thriving property market.
I've had clients in our seminars tell me they could get higher rental yields than we were discussing in both those cities, I suspect the reality turned out very differently.
One client told me he was pressing ahead with buying in Detroit because, The city is offering tax breaks to business and that will attract companies back to the area. In my book that's pure speculation. I would prefer to invest where companies ARE expanding and where new jobs ARE being created, not where they MIGHT be created in the future, if everything goes to plan.
Las Vegas reminds me in many ways of the Gold Coast: boom & bust cycles driven largely by the tourism industry. A large part of the population work service industry jobs with low hourly wages and rely on tips to pay for discretionary spending. Unemployment in that city is near 25% at present. There's simply no way I'd be investing there any time soon, until those factors turn around.
TIP: As always, before you invest look for the economic factors that will drive the local property market forwards: employment growth, population growth, demographics especially age & income, business investment, government investment in infrastructure. If you can't tick those boxes for a particular city, then it's not likely to have much growth in property values and you should be very cautious about investing there.
Be cautious about buying in the snow belt
There are no major cities in Australia where it snows regularly, so very few of us understand the costs involved in maintaining an investment property in an area which does have substantial snowfall each year. I've spoken to clients who've been caught out in this way, by buying properties where the yield after expenses turned out to be far less than they expected.
Just some of the costs you'll encounter in the snow belt include: boiler maintenance; county (i.e. local council) charges for snowplough work to keep the streets clear; cost of keeping the footpath outside your house clear of snow; replacing the roof every few years due to accumulating damage from the weight of snow; water damage from snow, especially in spring as it starts to melt; higher insurance costs; electricity or heating oil costs for properties where the landlord pays (e.g. some apartment complexes have group rather than individual meters and bill these costs back to the owners).
TIP: If you're looking at these colder climates in the US, be very careful that you have realistic estimates of all these costs factored into your assessment of the potential investment. Personally I prefer to stay out of snow country entirely and invest only in the southern sun belt of the US where it never snows.
Watch gross vs net rental yields
I've noticed that many other companies quote gross rental yield figures for US property, presumably because the bigger numbers are more attention-getting. The trouble is that, as a percentage, the costs that come off that figure are usually much higher than you'd see in Australia. So if you look at the gross figure you are not getting a realistic picture of the potential investment performance.
For example, for a condo (apartment) it is not uncommon to see
25% gross rental yield!!!
advertised, but when all the costs are taken out that could translate to
12% net rental income
Now don't get me wrong: a 12% net income is still great in my book and a figure you would rarely see in Australia, certainly not in a major city of 4.4 million people. But if you'd based your investment decision on getting something close to 25% then you're going to be sorely disappointed.
Our buyer's agent always quotes net income figures for properties he is showing to our members, after deducting:
- Property taxes (i.e. council rates)
- Home Owners Association (i.e. body corporate) fees, where applicable
- Property management fees
- Utilities, where applicable
We think that provides a much clearer picture of a potential investment than gross rental figures do.
TIP: be aware of whether you are being quoted gross or net figures, and make sure that if you aren't given net figures then you have all the numbers you need in order to work them out yourself.
Watch state & county debt levels, tenant-friendly laws
In the last couple of years you've probably seen news stories covering the fact that some state and county governments in the US are carrying huge debts. California is the best known example, it has run up debts that dwarf those of many entire countries. Worse still, some governments are still running large deficits each year which they have yet to cut.
If you invest in those regions, there are two main risks that I can see:
- The governments may have to cut back substantially on services in order to balance their budget. We can see this happening in Detroit, where the shrinking population has left a large hole in the budget, partly being closed through deep cuts to police, ambulance, hospital and fire services. Lack of services in the area then hurt property values.
- Governments may then raise taxes substantially in order to collect revenue for interest costs and debt repayments. Local governments collect a substantial part of their revenue from property taxes, so expect to see them increased along with other taxes. You may not be able to pass on all of the increase in costs to your tenants, so your net rental income may fall. High taxes may drive businesses out of the state “something else we are starting to see in California“ which could depress the property market through falling employment.
The laws around landlord/tenant relations also vary widely from state to state in the US. Some states, like Arizona, are quite landlord-friendly. For example, you can have a delinquent tenant evicted within 30 days. Others, like California, are weighted heavily in favour of the tenant it can take many months to complete the process of evicting a tenant who has stopped paying rent.
That's two strikes against California in my book, and one reason why you'll never see us buying homes in that state.
TIP: check out the state & county governments carefully before investing, to ensure the investment climate is favourable.
Deal with companies that have been around a while and have a reputation to protect
I hesitated to write this point, because at Universal Events we support entrepreneurs and we love to see people having a go, launching businesses and pursuing their dreams. So this is not as strong a recommendation as some of my other points, but I think it needs to be said.
Along with legitimate entrepreneurs, new markets like this one can attract fly-by-night operators. People who hang out their shingle, sign up a bunch of clients, then disappear without delivering on their promises. I have definitely seen some of that in the US property market for Australians.
TIP: if the company has been around much longer than the current post-GFC US property opportunity for Australians, or if they do business in a number of other areas besides US property, then you can take some comfort from that fact. If not, be extra careful.
By the way, one of the things I like about our main property sourcing partner in the US is that they have been buying and selling foreclosed homes for 11 years now. They entered that market, created systems, wrote some sophisticated software and were well established long before the GFC hit. When it did, their business increased more than 10 times almost overnight but they were ready for it and they already knew what they were doing.
Look for repeat clients
If a company is doing the wrong thing by their clients, then they may sell a property here and there to new buyers but they will not be able to build up a base of happy, repeat customers. That's one of the best indications that you've found a legitimate operation.
TIP: look for companies who have smart, sophisticated clients who have returned to buy again and again.
Watch for scams: free flights, rental guarantees etc
Look, we all know how it works: if a company is offering you free flights to visit the US, then you can be sure they're going to recover that costs when you buy a property through them (and then some, most likely).
What you may not have seen is the rental guarantee scam, which works like this:
A company offers you a property with assurances that it will rent easily for a very high yield. In fact, they will guarantee the rent at that price for 12 months how about that!
What you don't know is that they've bought that property very cheaply indeed, because it is in an area with poor rental demand or because the property itself is unappealing to renters. So they've simply built the cost of a year's rent into your buy price, and saddled you with a property that you can't rent for anything like the quoted rent.
TIP: before buying a US property, talk to an independent property manager and get their estimate of achievable market rent for that property. If they will inspect your property prior to purchase that's ideal, but even a drive past the property should let them use their their market knowledge to estimate your likely rent quite accurately.
Beware of too much vertical integration
As an Australian, if you're investing in property thousands of miles away in the USA, you definitely want to have a reliable team of people supporting you. A turnkey or packaged solution definitely appeals to long distance investors.
However, I get a bit nervous when I see all those things being done by a single company. How can you be sure that the best company to source properties for you is also going to be the best at doing property management? Could they also be the most efficient at doing renovations? The best accountants? Are they going to do the best job at finding finance for you?
The answer in each case is almost certainly no. The best service providers tend to be specialists; they do one thing and focus on doing it well. Good accountants work for accounting firms or in their own practices, they don't work at property buying companies. If you were buying an investment property in Australia you would look for independent specialists in each area and it should be no different when you're investing in the USA.
TIP: beware of companies that are very vertically integrated, instead build a team to help you with a competent expert in each field.
What are we doing at Universal Events?
OK I've restrained myself from making a sales pitch in this post because my sole reason for writing it was to pass on the information above. Whether or not you or people you know ever buy from Universal Events, I hope that the information above will help you avoid losing money on a bad US property deal.
So all I will say about our own US property membership program is that we designed it to avoid every one of the risks I've listed above.
We don't have any events scheduled for US property at the moment, if we do then we'll announce them and we hope that you'll choose to join us there.