San Francisco may be better than Sydney to invest in property, reports Nigel Bowen.
Jason Dunne is a concierge who dabbles in property.
Over the past two-and-a-half years, one of his investment properties has nearly doubled in value. You might think there’s nothing noteworthy given Australia’s turbo-charged property market. But Dunne’s property is half a world away from Australia’s booming capital cities.
“In mid-2014 I made the mistake of believing Sydney property prices were near their peak and sold a two-bedroom flat I owned in Lakemba [a western suburb of Sydney],” he says.
“Back then the Aussie dollar was around parity with the greenback. Plus, US property prices were still recovering from the crash of 2008. I used some of the money I made from the Lakemba sale to buy a four-bedroom house in Atlanta, which was a bank foreclosure.”
The property cost Dunne $A75,000 (about $US73,000 at the time) and he receives $US900 a month rent for it.
“Now that the US economy has recovered, it’s valued at $US120,000,” he says. “As I’d expected, the Australian dollar has headed back to being worth around US70¢. The house is now worth about $A160,000 and generates $A14,000 rental income a year. You don’t get those kinds of rental yields in Australia.”
Dunne has heard plenty of horror stories about buying in foreign countries. However, his experience has been incident free.
“I looked into buying in the US right after the GFC [global financial crisis] but it was all too complicated despite the bargains on offer,” he says. “Fortunately, Ray White got into the business of facilitating Australians buying property overseas. That made everything much easier. Ray White International charged an upfront fee of $A3000-odd and takes about an 8 per cent cut of the rent, but handles everything.
“I didn’t fly to Atlanta to inspect the house and never will. I’ve got a good tenant and haven’t had any maintenance costs or any other dramas. I don’t earn enough to pay tax in the US, but even if I did I’d get an offset from the Australian Taxation Office. My only regret is I didn’t buy two or three American properties instead of one.”
Jason Dunne’s investment property in Atlanta is delivering attractive rental yields.
While house prices have continued to grow in Australia, weekly rents remained comparatively soft. Gross rental yields on capital city homes for February 2017 dropped to 3.1 per cent for houses and 4.0 per cent for units, according to the CoreLogic Hedonic Home Value Index released March 1.
And with housing costs in Sydney and Melbourne 12.2 and 9.5 times median incomes respectively, as cited in the 13th Annual Demographica International Housing Affordability Survey, it’s unsurprising even the most parochial investors are considering their options.
It’s difficult to determine how much overseas property Australians own. One widely quoted source is an ATO analysis of tax returns for 2013-14 showing about 705,000 Australians (5.4 per cent of the population) were earning money from “assessable foreign income”.
Research conducted in 2016 by realestate.com.au showed 23 per cent of those in the market for an investment property would consider buying overseas and 12 per cent were actively looking to do so. Realestate.com.au now offers visitors to the site an international option, with 3 million listings from 56 nations. The three most popular options are the US, Britain and New Zealand.
Ben Kingsley is the founder of property investment firm Empower Wealth Advisory and chair of Property Investment Professionals of Australia.
He warns that “investing overseas has many more risks than investing in domestic residential property”.
What risks exactly? “Ownership risk, political risk, currency risk and property maintenance risk,” he says. “I wouldn’t recommend novice investors purchase overseas.”
Kingsley does concede that buying in foreign lands can work out.
“People mainly do it for practical reasons,” he says. “They see what seems to be a good investment opportunity – such as the US after the GFC – and believe they can make quick gains. Alternatively, they form an emotional connection with a place while travelling and want to buy into the dream of owning something there. A property that both serves as a holiday house and delivers returns via a serviced apartment or holiday-letting set-up.”
Kingsley emphasises buying overseas will be, at best, time-consuming, and, at worst, tragic.
He suggests the following points are essential to consider:
1. You’ll need to do independent research and pay local professionals – law firms and accountants – as well as a global real estate agency group for advice.
2. Tax arrangements will vary and you may have to pay taxes both in the country the rental income is generated and Australia.
3. Australian banks won’t lend to you if you’re buying property overseas. If you borrow money overseas and the Australian dollar tanks, then you’ll be facing higher repayments.
4. If the country you’re investing in is politically unstable or has high levels of corruption, you could find yourself in a vulnerable position if something goes wrong.
5. Even just dealing with issues such as maintenance will be more difficult than would be the case with an Australian property.
Questions to ask
It’s relatively straightforward for Australians to buy property in New Zealand, the US, Britain and much of Europe. Buying in Asian countries ranges from complicated to impossible.
Depending on what country – and sometimes what state/region – you are buying in, you may or may not:
- be subject to local taxes
- have to pay stamp duty
- be restricted to buying certain types of property
- only be able to buy leasehold
- have to worry about squatters or vandalism
- be required to take out expensive insurance.
“People should get some experience with investment properties in their own backyard before attempting anything more ambitious,” Dunne says.
“Foreign property markets work differently. That means you can’t expect to just sit back and enjoy strong capital growth over the medium-to-long term, as has long been the case in Australia.
“Also, the temptation to get carried away with the thought of making a killing or owning property in an exotic location needs to be resisted. As with any investment opportunity, you need to make a well-researched and rational decision then hope for the best.”