How to make money from US property

by John Fitzsimons on 25 June 2011  |  8 comments
Tweet

US foreclosure market offers once-in-a-lifetime opportunity for shrewd investors, explains guest blogger Nigel Gough.

The extraordinary collapse of the real estate market in the US, coupled with stubbornly high unemployment, has led to a sharp rise in the number of foreclosed (repossessed) properties over the past few years.

In certain states, foreclosed properties are selling at 40%–50% below market value (BMV), resulting in a once-in-a-lifetime opportunity for cash-rich investors seeking high yields and significant capital appreciation in the medium- to long-term.

It’s therefore the perfect investment to fund your children through university, give them a deposit for a house or indeed build up your own pension pot.

Risks and rewards

One argument to say US foreclosures are low risk is that the properties are selling at prices many investors will be more than comfortable with. The price of a foreclosed property in Atlanta, with three or four bedrooms, a large garden and often a swimming pool, is equivalent to the deposit required on many UK properties.

For people sitting on large cash deposits earning next to nothing in the bank, they can therefore be an attractive proposition (note that you cannot take a mortgage out on foreclosed US properties — they are cash purchase only).

A second argument in favour of US foreclosures is that the US property market will eventually recover and when it does the potential capital returns are exceptional for anyone buying at current prices.

To give you an idea of how discounted these prices are, many of the properties that can be snapped up for £40,000 now were selling for £125,000 three or four years ago. It’s hard to believe that they won’t be back to this level in 10 years’ time.

Generation rent

Saying that, people often ask what happens if the property market stateside never recovers, or doesn’t recover for a far longer period than anticipated.

If this is the case — and you can never know for sure even though this is highly unlikely — the main thing is that the rental income is so strong on these properties that you will at least get your money back in around seven years.

Indeed, there is strong demand for rental property in the US right now and this looks set to continue in at least the short-medium term. People are either wary about committing to a mortgage or are unable to secure one full stop, which is underpinning the rental market. In short, your property is highly unlikely to sit empty.

When we speak to potential buyers, whether they will be able to find tenants is certainly one of their more common concerns — and this is understandable. However, as mentioned above there has been a sea change in the way people view property stateside following the crash. As in continental Europe, renting is increasingly seen as a viable alternative to purchasing.

Another concern people raise is that the property they are buying is so far away from home. This is true and some people will find this difficult to accommodate. All we can say is that if you are investing in a US equity fund through a UK-based fund manager, it’s essentially the same thing: your money is outside the UK.

This brings us onto the final risk: currency movements. Your rent is naturally paid in US dollars and therefore will have to be converted back into Sterling. Many of our existing clients tend to wait until the exchange rate is in their favour and then switch at the right time. Alternatively, it is possible to use hedging strategies provided by all foreign exchange brokers.

Purchase process

The property purchasing process itself is straightforward. Once a property has been selected, a deposit of 10% of the purchase price is paid by bank transfer or cheque. For the peace of mind of our clients, all funds are deposited in an escrow account set up by UK solicitors, Viva-Law. 

At that point, a US-based legal partner of Belgrave Group sets out to transfer the ownership of the property into the investor or company’s name. This process can take up to two weeks and likewise the balance of the purchase price must be transferred within 14 days of the deposit. Once all the funds have been received and the title deeds transferred, the purchase is complete.

Regarding rent, this is collected by the management company that Belgrave Group works with — and which will already have sourced, vetted and installed a client on your behalf. Your rental payments will be paid into your chosen bank account each month.

Nigel Gough is director of Belgrave Group, a firm which offers a holistic overseas property buying service.

What do you think? Is US property a good investment at the moment? Or would the distance from your investment put you off?