Overseas property investors who want to be successful investing in US real estate need to review overall property trends, according to property experts.
So what should you consider when investing in US real estate? Here is some real estate investing advice when you’re looking to invest in property outside your local market.
Tax Rates and Population Growth
Kristina McPherson, a real estate agent at The Corcoran Group in Palm Beach, Florida, says investors interested in long distance properties may want to look at states with no income tax or low sales taxes such as Florida and Texas. Some cities in those states also offer tax incentives to real estate investors
Many look to invest in real estate markets within an hour’s drive of a metropolis that has a growing population with job growth. Those areas include areas such as Phoenix, Atlanta, Dallas and Houston.
Investors can use US census information about the population and economic growth to help target areas, McPherson says. Look for real estate trend information such as the number of renters versus owners, household income and other demographic data.
She said: ‘You can look at all of that information and make a determination on which specific city in a state that you want to invest in.’
Once investors identify a desirable city, McPherson says the potential buyer should work with a local real estate agent who understands the market. McPherson says property values can change significantly from street to street.
She said: ‘It really varies on the specific location. If you’re two blocks off the intercoastal [waterway] here, it’s suddenly a different price than if you’re right on the intercoastal.’
The biggest mistake a novice investor who is long distance can make is not partnering with a local real estate agent and property manager on a rental property.
In addition to helping investors find and manage properties as well as locate a tenant, these contacts will have a strong sense of the local economy and give investors updates if there are economic activity or changes that may affect housing prices.
Investors also need to look at the interest rate and the capitalisation rates, known as cap rates, which is the rate of return a property generates. The cap rate minus the cost of the debt is known as the spread. Five to seven years ago, investors wanted a spread that was three to four percentage points between the cost of the debt and the cap rate. That spread is now as low as one percentage point.
If an investor’s interest rate is 4 per cent and the cap rate on a multifamily unit is 5 per cent, the investor makes 1 percentage point on that spread.
When it comes to US real estate investment and investing, people should also be mindful of whether rental income can support the price they pay for a property, whether it’s a multifamily unit or a single-family household.
US real estate investor, Noah Rosenfarb, says a general guideline is for the property’s price to be about 100 times the rent for sustainable cash flow.
‘If the rent is $1,000 a month, then you should pay $100,000, he says. ‘If you’re going to buy a condo for $250,000, you should hope that the monthly rent is $2,500. If it’s only $1,800 you’re going to have a tough time servicing the debt, paying maintenance, covering the taxes and so on.’
Short Term Rental
The rise of companies like Airbnb and Vrbo has led to a growing number of people in the short-term rental space, creating another option for US real estate investment.
Investors in this US real estate market niche should consider aspects unique to vacation rentals such as comparing the yields on long-term rentals versus short-term rentals, the length of the tourist season and whether the property is close to a major city.
For example, if you buy a property in a ski resort, is it also available for summer holidays like hiking trips in the area? If so, then you’re also likely to have occupancy in the summer months, too. If it’s near a major city, long-term rentals may make more sense.