Why invest in US property?

If you are a frustrated UK property investor who is struggling to get double digit yields then can I say - I know how you feel! Property prices have gone mental in the last 5 years with many areas offering yields below the actual borrowing rate. In simple terms, when (and if!) you rent it out you are still out of pocket. After mortgage costs, insurance, management fees and repairs you are at a loss. All you have to look forward to is the capital gain, but with prices static or even falling the situation only gets worse. This is why the wise UK property investor has stayed out of the market.

Everyone is talking about investing overseas. Personally it never interested me. What is the point in investing in another country, with different laws, languages and cultures. It always amazed me how the normal person on the street, who has only ever bought the house they live in, would part with a few grand for a reservation fee for a property that hasn't even been built yet in a country they have only been on holiday to.

If you ask them why they have bought, they would claim it will have excellent capital growth potential. If you ask them further why, they will say when it joins the EU the prices will go ballistic like they did for Ireland. If you ask them what's the yield they'll look at you sheepishly and ask you "What's Yield?". No, No, No, No, No, NO! Basing a financial decision based on 'ifs', what a slick saleperson has said or the past is absolute nonsense.

So Why Invest in the USA? Well quite simply: There isn't anywhere else!

Forget all the European countries - its done! For countries already in the EU like France and Germany that were worth investing in have already shot up, just like the UK market. For countries outside the EU like Croatia, Bulgaria and Latvia DO NOT TOUCH! The laws are underdeveloped, they suffer from corruption and over bureaucracy, build quality is poor and the yields are CRAP! Wages are so low that even though you may buy a property for £10,000 you'll be lucky to get £80 per month rent on it.

Outside Europe I would only ever consider investing in Australasia or Northern America as these are established markets. South America, Africa and Asia seem too far behind all the other western countries. There may well be some good investments out there but my fear is that on the horizon there will be some kind of coup and my investments will be handed back to the nation leaving me completely out of pocket.

That just leaves Australasia and North America. Well guess what - Australasia is done! In Australia they are talking about negative gearing, which simply put, is all about buying a property that loses you money every month to shelter your annual earnings for tax - how desparate is that?

So by default North America, on the face of it, seems to be the only place left.

They Speak English

I don't know about you but I like to be able to communicate with all the people that surround my investments. If I can't it worries me. Call me paranoid but this is my wealth your talking about. If I have to rely on someone else to translate for me and they make a mistake its ME who pays for it. If I get a contract to sign and the translation is only 99.9% correct then I face the risk if the other 0.01% is wrong. This 0.01% could cost me everything I'm worth. So investing in English speaking countries removes the translation risk.

The yields are FANTASTIC!

We have found areas that yield up to 100%. Yes 100%. That means payback of 1 year. This means you get to own the property in 1 year if you reinvest all the rent received back in to the property. This means greater than a 1000% return on the money invested if you borrow to make the investment.

I have written many books on property investment and I recommend you go for a 8.5% yield in the UK. My criteria are tougher for properties abroad. Since we have foreign exchange risk, management risk and political risk I am more than doubling my criteria to 20% yield. This means that any property we buy must have an annual rental price equivalent to 20% of the purchase price. The easy way to work out what rent to get on a monthly basis is to: “double the purchase price and then knock off the two zeros"

So if we see something for $40,000 we want: 2 x $40,000 = $80,000, knock off the two zeros gives: $800.

So if its up for $40,000 and the rental value is $900 per month then we'll take it. If its $600 then we'll leave it.

So why are the yields so high? Well because property prices are so cheap! Property in the UK used to be cheap. Back in 1997 property prices in the UK in some areas used to yield 100%. If you don't believe me check out historic property prices in Newcastle, Middlesbrough and Burnley to name but a few areas. But something happened to the UK property market in 1997 that changed the market forever. This 'something' caused prices to double and even quadruple in some areas. This something is basic economics which is to easy to understand especially if you are an accountant.

This something has yet to happen in the USA. This something WILL happen in the USA. If you're wondering what this something is I will tell you if you become a client of mine. If you're wondering when this something will happen well I can't tell you that. Why? Because I don't know! All I know is that it will happen. I reckon it will happen in the next 5 years but I could be wrong.

The Law

The law in the USA is based on English Law. There will be differences due to adaptation but in essence there will not be major deviations that leave you scratching your head wondering why there is such a law. A lot of the other countries have strange practices and procedures to work within the law that really only make sense to the locals because that’s the way its done out there.

If you're time and money is not valuable to you then spend your time and money understanding the ins and outs of Czech Property Law. There are plenty of professionals out there waiting to 'help' you through the maze. They'll gladly take your money off you. My time and money is far too valuable to be wasted on learning the system for one small country with the hope that I'll make a capital gain based on a load of ifs and maybes.

My opinion

Over the last 12 months the interest in our USA property sourcing service has quadrupled. We started sourcing back in 2005 on a small scale as an alternative to traditional UK investing. Since yields in the UK have diminished rapidly and potential monthly profits from rent seemingly an impossibility we have seen a trend towards clients using our USA service.

At first I felt a little uncomfortable with this shift. I was always a UK investor and I have always advised my clients to build a portfolio on home grounds and at best only diversify to overseas by no more than 10% of portfolio value. However you cannot argue with fundamentals. My fundamentals in property investment are this:

Invest in a property with a healthy yield (greater than 10%) in a rentable area.

Borrow the maximum amount of funds to make the property purchase.

Get someone else to manage the lettings.

Now all of the above needs to be held up if you are going to make money through property. Its no great surprise when I tell you that fundamental 1 is now no longer possible. I know this because I spend my time looking for deals all day! The best I can find is a yield of around 8.5%. This is very unexciting. Now the USA abides by all of my three fundamentals:

Healthy Yields: We source properties yielding no lower than 20%.

Maximum Borrowings: We can get 80% Loan To Value mortgages for UK residents for American properties with NO minimum purchase price or valuation. This means you can buy USA properties with putting down only £2,000.