Prices / Market

Why did the US property market collapse?

The simple answer is the banks lent too much (110% loans were not uncommon) and when the world markets went into the recession, retail sales fell, people lost their jobs, and were then were forced to spend less resulting in a further drop in retail sales and reduced spending etc, etc and ultimately a total economic collapse.

Is the market going to collapse again?

Possible, but very, very unlikely. The prices we are buying at are typically 30-50% below the previously sold values and often at ½ of the replacement cost.

What is the average cost of the properties we buy?

The US has a diverse range of properties and prices from $100M Hollywood mansions down to a $1000 trailer park accommodation, but the properties we buy/sell will generally be in the USD$40K and $100K range with net yields ranging from 10-20% (no finance).

Incidentally, we have seen some spectacular 3000+ sq ft homes for $150-200K returning a net 7-8% or even some others returning 15-20% leveraged. Email us here if you would like to know more about these options.

Any comparisons between NZ and US markets?

A brief overview of the pros and cons of both the NZ and US property markets.

Pros

For Investors who must have good cash-flow and earn income from their investment, the US market is almost unbeatable. Like for like (in cash-flow terms), US properities will always out perform NZ properties. This means show us an NZ property returning a net 1-2% and we'll show you a comparable US property returning 10%,  show us NZ 10% and we'll show you 20% or 30% or 40% etc.

Relatively low risk in terms of capital cost. For example, with USD $200K, we could buy 3 or more, three-bedroom homes on 1/4 acre sections in a major US city of a million plus people, whereas with the same money in NZ, in a comparable city, we could scarcely buy the letterbox and driveway for one house.

The US market has hit a 30yr low in terms of their property prices and the NZ dollar is at a 30yr high enabling us, at this time, to buy a lot more property for our money.

Cons

Whilst the US banks continue with very restrictive lending policies and although the US market is widely expected to experience steady capital growth in the years ahead, we suggest Investors looking for the really big capital gains from their property investments should stick with NZ. Certainly unless the NZ government and/or RBNZ intervenes with some radical 'market-cooling' strategies, the NZ property bubble should continue to out perform most other international markets in terms of capital growth. 

Exchange rate adds an element of risk that is not present when investing in the local NZ property market. In particular, Investors should carefully assess the following two situations carefully before Investing in any international property: 

i) If the New Zealand dollar strengthens against the US dollar, then the Investor will realise a loss when and if they bring the original capital investment back to New Zealand.

ii) Investors who wish to borrow and buy US property should borrow from US loan facilities, so that a shift in exchange rate does not impact on debt servicing costs. Conversely, if an Investor borrows from a New Zealand bank to buy US property, they should carefully assess risk and the cost of servicing debt for each point movement in the exchange rate.

How much do the properties rent for?

One agent told us that rentals for the upper end of the market are calculated as 1% of the purchase price. Therefore a $150K property would rent for $15,000 per annum. However, this formula doesn’t hold true for the B and C grade properties as a $40K property can rent for $8K per annum. For the properties we buy, rents are typically $650 - $1100 per month.

How big is the rental market?

Quite simply, the rental market is huge because banks still will not lend money, and if they do, it is only to a person who so well off they don't actually need the bank anyway.

Even now, 2 million US people each year are losing their homes in a foreclosures (mortgagee sales) and besides that, the Americans like renting. In the US there are millions of section 8 (social welfare) tenants that have no intention of trying to save and own a home and will likely rent for their whole lives.

N.B. section 8 tenants can be the best from an investors point of view, because they stay long term, the rent is guaranteed because it is the US government and the tenants generally do not misbehave out of fear of losing their section 8 status.

The type of properties for the best cash yields?

Duplex, triplex and cheaper properties invariably offer the best cash yields. But, the cheaper properties don’t always offer the best long term investment prospects from a capital growth point of view.