Canadians Investing in US Real Estate (Part 1)
Identifying a suitable income producing property
Real estate investor Jan Gao purchased this condo in Florida that features three bedrooms and two bathrooms and is located on a golf course. It was in foreclosure in 2009 and sold for one-third what the prior owner had paid for it. (Shizhong Lei)
Buying a property outside Canada is a managed risk. Unlike a stock that can be worth zero, the physical asset that is a house and land provides a floor to the value.
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The financial crisis created tremendous real estate investment opportunities in the United States. With the dramatic fall in home values, from their peaks in 2006 to their depths in early 2009, savvy investors arguably had the chance of a lifetime.
For Canadians, investing in U.S. real estate is not a new topic. For example, who doesn’t know of a “snowbird”?
While Jan Gao isn’t a snowbird, she began investing in U.S. real estate at the right time.
Gao, an accountant by profession, is principal of Canhome Consulting, a business she started to provide one-stop full services to help investors invest efficiently, and more importantly, avoid potential pitfalls in U.S. real estate investing.
“I love properties. I believe that property investments are one of the best investments in our life,” she said.
While disappointed with returns on equity and mutual fund investments, she was more interested in properties and housing-related professions.
The process Gao went through to identify suitable income-producing properties is instructive, as many Canadians would likely be able to see themselves in her situation after paying off their mortgages and perhaps having reservations about the stock market.
Gao, who is based in Ottawa, looked at Canadian real estate and quickly realized how much cheaper U.S. real estate was, especially after the financial crisis. In fact, Canadian house prices have risen 16 percent in the past five years, according to the Teranet-National Bank Composite House Price Index. Meanwhile, U.S. home prices, as measured by the S&P/Case-Schiller index, fell 11 percent over the same period.
Process of Elimination
For Gao, the process began with examining distressed markets. The key factors were areas with a young, stable work force with renting demand, a good rental market (meaning higher rent per square foot and shorter average days on the market), and relatively easy access for visiting, if needed.
In considering the states of Florida, Michigan, Nevada, Arizona, Illinois, and Ohio, Gao settled on Florida—in particular South Florida.
Florida has nice weather, flights are cheap from her Ottawa base, and, most importantly, housing is affordable. Arizona was a possibility except for the distance from Ottawa, low rents, and state income tax. Florida also does not have state income tax.
After spending considerable time doing online research prior to making her first trip in over 10 years in 2009, she settled on a condo in Hollywood, a city in Broward County about half an hour from Miami.
The counties of Miami-Dade and Broward are less tied to the tourism/theme park-related industries as locations in Central Florida, which could be more adversely affected in a recession.
“Whenever I want to invest, I can’t just rely on one industry,” Gao said. With the good diversity of employment in South Florida, that criterion was met.
Gao also focused mostly on condos or townhouses in gated communities. Single-family detached homes don’t rent as well and have added maintenance and insurance costs.
In 2009, the first place Gao bought was a three-bedroom, two-bathroom condo on a golf course built in 1997. It had all the amenities including a gym, clubhouse, and pool. She purchased it for one-third of what the prior owner had paid, as it was in foreclosure.
The S&P/Case-Schiller U.S. National Home Price Index showed a record decline of 18.9 percent in the first quarter of 2009.
“I knew I could rent it,” Gao said. “It’s all about location, condition, and amenities.” The new condo was rented for $1,400 per month a day after the $95,000 purchase closed.
It was a tricky time to be buying property given the flood of houses being put on the market, and it took several calls and emails to get an agent to respond to her.
Most Canadians will not try to get a U.S. mortgage, and as such, transactions are typically all done in cash coming from Canada. The New York Times reported over the weekend that 65 percent of all homes sold in Miami in the first three months of the year were all-cash deals. This is up significantly from 16 percent in 2007.
Post crisis, the U.S. banking system has been much tougher with its lending regulations, making it much more difficult to take out mortgages. Also, large investment funds have been gobbling up residential properties.
“No one wants a mortgage, it’s all cash sales,” Gao said.
Buying a property outside Canada is a managed risk. Unlike a stock that can be worth zero, the physical asset that is a house and land provides a floor to the value. One almost has to ask oneself: “How wrong can it be?”
This is Part 1 of a two-part series. Part 2 will focus on additional purchasing considerations, mistakes to avoid, and the current state of U.S. housing.