The case for US Real Estate Investment
The mortgage crisis in 2007 and the ensuing financial breakdown caused massive destruction of asset values between 2007 and 2009. US homeowners who had overextended themselves with a mortgage and home equity loans had their property foreclosed. High foreclosures rates combined with the lenders sudden tightening of lending standards to create a perfect storm. This led to severely depressed real estate prices.
While prices remained high in hip areas such as Manhattan and San Francisco, a firesale was on for most parts of the US. From Phoenix to Florida, from Texas to Michigan investors saw net yields in their teens whereas treasury yield went near 0.
Many houses traded at a severe discount compared to the value measured by building replacement value. This means that buying recent or new houses could be done for less than what it had cost the developer to build a new house. This happened not only in rust belt cities where the population has been decreasing since the 50's such as Buffalo (NY), Cleveland (OH) or Detroit (MI) but also in growing areas where the secular demographic trend has caused the population to increase over decades. Over-development in Sunbelt states such as Nevada, Florida, and Georgia caused prices there to fall precipitously.
This is a unique opportunity for investors. Here is a country whose law enshrines property rights that guarantee that the house will stay yours, where income and capital gains taxes are low and even lower for non-resident foreigners, where the market is the most transparent thanks to websites such as Zillow and Trulia, where every property can be inspected with google street view, where free appraisals online and where an independent professional property inspector can check a house for defect for $300, and email you the detailed report with pictures before you make your choice. And now, this country has the most affordable homes in the world, and the highest differential between rental yield and mortgage rates.
When such fundamentally low prices are available, property selection and management execution do not need to be excellent. The investment is given so much of a tailwind that the general outcome is a success. There are serious caveats to this, but you should do fine unless you as over borrowing or getting into shady deals.
Different types of properties are suited to different business strategy depending on whether the investor rental income or capital gains. I propose the following 4 profiles in increasing order of rental yield. You will be able to identify the kind of property you are dealing with based on their rental yield.
