Some Home Truths About US Property

A few years ago I appeared on a breakfast radio show that bought a home in Detroit for a couple of bucks, and offered it as a prize to listeners.

Some time later, while touring through America, I came close to visiting that same neighborhood – courtesy of a wayward GPS that took me into the heart of downtown Detroit.

I’m a white guy. Driving a convertible. It’s close to midnight.

GPS: “Turn left.”

Barefoot: “This is so not the way to the Detroit Holiday Inn.”

Man sitting on the porch of his (five-dollar) home: “Hey surfer boy … you lost?”

There are a few times in my life I’ve been genuinely scared. That was one of them. I lived to tell the tale – but I’m not so sure about the person who ‘won’ the radio prize.

I fear it’s a similar situation for the increasing number of Aussies who are taking advantage of a strong Aussie dollar and a weak American housing market to purchase bargain basement homes in the US.

Australia lays claim to the most expensive property in the world, which makes the US property market look cheap in comparison – but there are more than a few catches.

Wanna buy a kitchen?

The real estate agent who sold us the place warned us about squatters – homeless people who move in once the bank forecloses on a property, and leave after they’ve stripped it of the kitchen, bathroom and any other fittings that can be sold for a few bucks.

Getting good-quality rental managers in the US isn’t cheap, or easy, and in the worst-affected areas finding good-quality tenants is nearly as hard as it is to get them to pay rent. When you factor in annual property taxes, rising insurance costs and the minefield of Australian tax laws, it’s a hassle and a half to do it yourself.

That’s why there are an increasing number of property outfits setting up shop offering to help Aussies make a killing by buying discounted US property – I’ve seen some claim that investors can achieve ‘28 per cent returns’ with their help.

For years I’ve been writing about investment spruikers promising things that are too good to be true. So before you make Eve’s mistake (see box), ask yourself a couple of questions:

Why aren’t Americans – some of the most enterprising people on the planet – taking advantage of the ‘investment opportunity of a lifetime’ that’s occurring in their own backyard?

And, if it’s such a good deal, why is a property outfit flying across the other side of the world to bring it to you?

Eve buys some discounted US property

In 2005 Eve, a single mum from the suburbs of Sydney, was approached by ‘buyers agents’ offering her properties in the US, that they claimed “stood to make her 20 per cent a year returns”.

She was told of the wonderful buying opportunities in the US city of Buffalo, New York. “It actually turned out to be more of a sales pitch, but the rental returns looked really good, so after a few more meetings I ended up buying three homes.”

Here are her US property ‘bargains’:

A six-bedroom home (split into three apartments) for $US79,500, which she was told would rent out for $US18,000 a year – a 23 per cent (gross) return.

A four-bedroom apartment for $US51,900, which she was told would rent out for $US11,400 a year – a 22 per cent return.

A single family home for $US34,900, which she was told would rent out for $8,100 a year – a 23 per cent return.

Converted to Aussie dollars, the three properties (plus the spotter’s fees paid to her US real estate helpers) ended up costing her $250,000 – which she paid for by mortgaging her family home.

Sadly, it didn’t take long for things to go sour.

“The properties have been completely trashed at least a half a dozen times”, says Eve. So far that’s cost her $95,000 in maintenance and repairs.

All up she spent around $350,000, and she stands to recoup about $37,000 – she sold one for $US8,000 and another for $US19,000, and has the last one, which has been completely looted, on the market for $US10,000.

Hopefully another Aussie investor doesn’t scoop up her ‘bargain’.

Tread your own path!

Instead, get your start in investing using my guide here.

Photos: Google Earth Street View