Investing in ‘bricks and mortar’ has long been understood as a solid idea to safeguard your financial future. It’s not uncommon for mum and dad investors to trawl sites like realestate.com.au or domain.com.au looking for a piece of the action.
This type of approach is often backed by the misguided assumption that if they can simply get into the Australian market, the rest will take care of itself. The belief is that after a few years of growth, they’ll be able to quit their jobs, live off the cash flow and sail off into the sunset.
It sounds ideal, but how practical is it?
According to property expert, Michael Yardney, more than 70% of Australian property investors only purchase one property and never do it again. The reality is, they get weighed down with mortgage repayments and growth is slower than they anticipated.
Just like that, their financial security is locked up in a property that costs more than it makes.
Investing in Australian property and wishing for the best is dangerous and the truth is, there are more attractive opportunities overseas.
But unlike the approach taken above, capitalising on your investment and securing your financial freedom, requires more than ‘hope’ as your strategy.
Here’s how to invest in the US property market
Look at any successful company and they all have one thing in common, a sound strategy that enables them to achieve their intended purpose.
Investing in property should be viewed just like business. It makes sense, as both ultimately try to make money and achieve something.
So in order to invest in the $27 trillion US residential property market, there are a few things you need to do. It’s a five-step process called STARR.
S – Strategy
It’s simple. If you don’t have a strategy in place, you’ll end up like the 70% of Australian investors who invested once but couldn’t do it again.
They probably weren’t really aware of what they wanted out of their investment and it’s limited their chance to do it again. They may have assumed investing in Australia was the best option and overstretched just to do it.
As mentioned in a previous blog, you can buy an entire house in the US for the price of a deposit in Australia. So if it’s for an investment, looking overseas is a viable option.
Your end goal will inform the strategy you need to have in place. There are very few limitations to investing in the US and you can purchase a variety of properties like a single-family or multi-family residence, unit blocks or to fix and flip properties.
Whatever it is you intend on achieving, you need a strategy in place to make it a reality.
T – Team
You’re in Australia, so what do you do if you need to inspect a property you want to purchase? Jumping on a plane the following day for the 20 hours just to do a walkthrough is not feasible.
That’s why you need to build an ‘on-ground’ team who can do the inspections and deal with tenanting on your behalf. It’s your investment but you’re somewhat removed from the process, so you need help.
Finding the right people to be involved can be a lengthy process. They will be your eyes and ears and your representative so it pays to get it right. It’s not uncommon for investors to put 80-90% of their effort into researching locations and properties but minimal effort into finding the best property manager.
Never settle on the first property manager you find, interview as wide as you can and subject all to a rigorous selection process. This is the best way to minimise risks.
A – Acquisition
Any investment comes with a certain level of risk (although your strategy will mitigate many) so being able to purchase the right property at the right time in the right location is critical.
While this sounds like a challenge, it’s actually very fun. We call this research, review and redo.
Here’s what you’ve got to do:
Identify locations in the US that you think make a solid investment.
Find supporting evidence that it’s a high growth location.
Trawl real estate websites to assess the current price of properties in this location.
Refine your search for properties that meet the requirements you set out in the strategy.
Make sure you do these steps again until you’re comfortable that the location and properties you’ve selected meet your requirements and suit your strategy.
If it does, great.
If not, keep doing this process until you narrow down a house or apartment that you can confidently start your US property portfolio with or add to it.
R – Renovation
Much like you see in The Block, undertaking renovations can be a hard slog for a first-time investor. There are many things you need to consider and many people or contractors you’ll rely on.
Fortunately, by now you have a trusted support team on the ground who probably have contacts into this area and can help manage the process for you.
Depending on your strategy, you might want to purchase and hold a property for rent or fix and flip. For maximum rental yields and desirable tenants, your property will need to look attractive and be functional and ‘fixing’ a property generally means it’s in need of repair.
Make sure you seek the services of builders and maintenance contractors what are registered and have a proven body of work behind them. This is the US, but that doesn’t mean you should work with cowboys.
R – Realisation
After all your hard work, you deserve to be rewarded and that comes in the form of cash flow or sale. Again, the intended purpose of your investment is up to you but there’s no point doing it if it doesn’t produce the results you wanted.
One of the greatest advantages of investing in the US residential property market is the consistent returns on affordable housing. Properties can easily bring a 10-12% return net after costs.
The realisation of your investment property – whether that be cash flow or sale – can only be achieved if the first four steps are in place first.
Investing in bricks and mortar has long been seen as the best option for Australians to build their wealth and safeguard their financial future, but with the domestic market growing at such speed for so long, it’s priced many out of it.
It’s telling if 70% of Australian investors only do it once. That’s why a detailed and practical investment strategy needs to be in place beforehand.
Generally, US properties are more affordable, have higher cash flows, lower risk and can be purchased debt-free so it’s something any investor should consider.
But you’ll only get it right if you put in place the STARR methodology for property investment.