Why Australians are Gobbling Up U.S. Real Estate (and 5 Things We Can Learn From Them)
Foreign investors are gobbling up U.S. real estate. What do they see that so many Americans don’t?
On this episode of the Real Wealth Show, Kathy Fettke offers 5 reasons why Australians and other foreigners are gobbling up U.S. real estate, and why you might want to join them.
1 – Low Home Prices
Australian real estate is expensive, and affordability is at all-time lows. Sydney has a median home price of AU$760,000, which is simply cost-prohibitive for the average person. Many Aussies feel discouraged and fear they will never be able to come up with the large down payment needed or to qualify for that size of a loan.
That’s why the Australians I’ve met get so excited and hopeful when they see the low price points in U.S. markets that have not fully recovered yet.
They realize they can buy a couple of homes outright for what might be a down payment in their high priced market. The same is true for Californians and New Yorkers, and this is the reason Real Wealth Network was created originally.
2 – Positive Cash Flow
Generally when home prices are high, cash flow is low. In some high priced markets, cash flow is actually negative!
Why would anyone buy a property that costs money every month to own?
In markets where property tends to appreciate in value over time, investors are often willing to take the hit on negative monthly cash flow in hopes of gaining equity overtime.
Sometimes it works, but this is very risky business. We know that markets cycle every decade, and what goes up must come down. Owning negative cash flow property that’s also declining in value is no fun.
The worst time to gamble with negative cash flow property is when a market is already over-valued and unaffordable. Home prices in Sydney increased 12% last year, leading many to believe a bubble is forming – especially since these gains do not fall in line with economic growth of 2.7%.
Nevertheless, Australians still buy properties with negative cash flow because they are often advised to do so by their accountants. This “negative gearing” offers much needed tax deductions.
But once the Aussies discover they can own U.S. property that is 1/5th the price of their real estate, has positive cash flow and offers excellent tax deductions, they can hardly wait to book their flights!
After all, what’s better?
- Property that might appreciate but also might be in a bubble, has negative cash flow and tax benefits or…
- Property that is just at the beginning of its growth cycle, has positive cash flow and tax benefits.
3 – Taxes and the Coveted 1031 Exchange
In Australia, it’s quite expensive to buy and sell real estate so holding for the long-term is recommended.
One of the largest transaction fees is the “stamp duty,” which is a tax imposed on the purchase or sale of real estate, home loans and some insurance. Aussies are often shocked to discover that the U.S. does not have stamp duty. They are even more surprised to learn that U.S. investors can defer capital gains upon the sale of their property through the 1031 Exchange. They can’t believe those gains could be completely avoided once the property is passed on to heirs after death.
Add to it that some U.S. states don’t even charge income tax, and some have incredibly low property taxes…
All these tax savings contribute to higher monthly cash flow – and that cash flow comes in the form of strong U.S. dollars.
The Australian dollar is at a 6-year low versus the U.S. dollar due to the recent decline in commodity prices and lower demand from China. Receiving cash flow in U.S. dollars offers an excellent hedge against falling Aussie dollars.
Americans need to realize that acquisition and sales costs are much lower than in other countries. Closing costs can be as low as $2,000!
Again, it’s so easy to take things for granted when we don’t know how good we’ve got it.
4 – Financing is Back!
Financing has been tough for Americans to get since the 2007 mortgage meltdown. It was nearly impossible for foreign investors to obtain… until recently.
Several hedge funds met their quota of rental homes and have now turned to lending. They are offering blanket loans to investors – letting them cash-out on properties they bought previously with all cash.
Australians who have been getting 10-12% returns from their cash purchases are happy to be able to use leverage to increase those returns substantially.
Americans, take note!
Foreigners envy our ability to acquire 30-year fixed rate mortgages, and we tend to take it for granted. This kind of loan simply does not exist in other countries.
Why? Because it makes no financial sense! Would you lend money to someone and not expect it back for 30 years, at only 5% interest? Of course you wouldn’t! Inflation will be higher than that so essentially, it would be a loss.
The only reason this loan exists is because the U.S. government subsidizes them in order to stimulate our housing market.
The GSEs (government sponsored entities) have created a standardized security that is sold into the market composed of thousands of individual loans. This allows the security (not the mortgage) to align yields with a shorter term (6.5 years), which is more desirable to investors.
And while you might scratch your head and wonder why the U.S. taxpayer is subsidizing the mortgage market, go ahead and get mad… but also get even! Get as many of these low-interest, 30-year fixed rate mortgages as you can! It’s like getting free money and making money from it.
Fannie and Freddie currently offer up to 10 investor loans per borrower. You might be surprised how easy it is to qualify for an investor loan on a $100,000 property. It can be less than a car payment.
When you acquire rental property using 80% of this cheap bank money, your returns can shoot up past 20% annualized.
Believe me, the Aussies and other foreigners would give anything to have this opportunity. But for now, they must settle for 50% down and 5-8% interest rates.
5 – They Don’t Pre-Judge a Market
Most Australians have visited tourist towns like New York, Los Angeles, San Francisco or Las Vegas. But they likely haven’t visited cities like Pittsburgh, Indianapolis, or Cleveland. In fact, they’ve probably never even heard of these markets!
This helps them choose markets based on fundamentals, rather than be swayed by old reputations or pre-conceived notions.
It’s not uncommon for me to ask a room of Californians what they think of Pittsburgh, and still hear talk of steel mills and pollution. In reality, the city is now one of the “greenest” in the nation!
When you take an Australian to Pittsburgh, they will tell you it’s a beautiful, chic city. Yes, chic! Pittsburgh has transformed, but most Americans don’t know that yet. Unfortunately, that also means they’ll probably miss out on the opportunities there, and other metros that have reinvented themselves.
So Americans, look for job growth and cities that have reinvented themselves – and let go of old beliefs that are no longer true today.
It’s always good to get out of the U.S. in order to gain a new perspective. Even though this was my 5th year speaking for this group, I still learned something new.
And one last thing I’d like to share about our Aussie friends:
They are so kind and positive! Australians are among the nicest people I’ve met. This serves them well with their long-term investments. Why?
I’ve seen Americans treat our property providers and property managers as if they were servants.
In contrast, the Aussies send gifts, treat the teams to dinners, and offer to host them if they ever visit Down Under. This kind of camaraderie not only makes the service providers want to do a better job, but also makes the entire process of investing more enjoyable for everyone.
In 2005, we saw that affordability was out of whack in California, but Texas had the opposite problem. Jobs were abundant, the population was growing like wildfire, but the housing market hadn’t caught up yet.
We helped many Californians sell their bubble property at the peak and exchange it for Texas property that was just at the beginning of its bull run. Investors who listened not only saved their nest egg when the California market crashed, but also quadrupled their cash flow.
Today we have the same opportunity to sell high-priced property in California, New York and Sydney and exchange it for high cash flow property in emerging real estate markets.
Let us know if you’d like a list of areas where we think have the greatest chance of appreciation tomorrow and cash flow today. Visit http://www.realwealthshow.com.
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