US property: If it looks too good to be true, it usually is

I hope you’re not thinking of investing in US real estate.

I know some Australians are considering it, having been encouraged by promoters offering properties at 70% off. After all, who could pass up a detached three-bedroom house for a tenth of the price that you would pay here in Australia?

There’s even a new listed US residential property fund, where 1,500 Australians have ‘invested’ funds from their self managed superannuation.

I’ve heard it all before: there are places in the USA where houses are virtually being given away, are cashflow positive, loans are easy, rents are great and so on.

The reality is there are no free lunches and investing abroad has always had its risks. In my opinion, buying cheap and nasty properties in the U.S.A. at the moment is a surefire way to lose money.

The reason some promoters are offering Australians these properties is because they can’t sell them locally. In many areas of the USA, there is an oversupply of housing and demand is almost non-existent. That’s right – there are some places in America where you can’t give a home away at any price. Doesn’t that make you suspicious? Something just doesn’t seem right, does it?

So let’s look at a few reasons not to invest in the States

1. An unhealthy economy

Let’s not beat around the bush – the US economy is in real trouble. I’d listen carefully to a recent warning made by Rupert Murdoch, one of the smartest business people around, when he cautioned that the US economy will be at a standstill for almost a decade. The US deficit for this financial year, which ends on September, is expected to reach $1.4 trillion.

2. Massive unemployment

With an official unemployment level of 9.1%, you’ll find unemployment is even higher figure in the back waters where you can buy these cheap properties. Sure, unemployment means more tenants than home buyers – but how are they going to pay your rent?

3. Huge oversupply

There are currently millions of properties sitting vacant in certain parts of the USA and up to 20% of current home owners have negative equity in their homes – this means their debt is more than their homes are worth.

4. More foreclosures forecast

I’ve read that a further 4 to 5 million USA properties could go into foreclosure (get taken over by the mortgagee) in the next few years. Economist Robert Shiller, co-founder of the Standard & Poor’s/Case-Shiller home price index recently suggested that prices may drop as much as 25%, after inflation, over the next five years.

Then there are the currency risks, tax issues and property management issues. Do you realise that in many areas of the USA the property manager goes around collecting the rent personally and rents are paid in cash?

Over the years I’ve spoken with many people who have invested (well, I’d call it speculated) in the USA, and I haven’t met one Australian property investor who has made money out of it in the long term. The only people I’ve seen profiting from the American property market are the spruikers who promote these schemes.

Sure, a $40,000 property sounds cheap but what many Australians don’t realise is that in some cases the promoter has already added 50% to 100% to the purchase price. This means the promoter finds a property for $20,000 and $30,000 and sells it to an unsuspecting Australian or New Zealander investor for $40,000.

While Australia’s property market may be one of the most expensive in the world, it is underpinned by a booming economy, steady demand and an undersupply in key areas. This contrasting supply and demand ratio will buoy our property market.

There are some great investment opportunities in Australia at present – there is no need to look overseas.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.