The Perfect Storm: Investing In U.S. Real Estate

Monday, 02 May 2011 12:58    Editorial Team, PROPERTY WIRE

They call it the perfect storm. It’s that catchy term used for just about anything these days as long as it defines the union of separate factors or events into a powerful outcome, action or experience.  And that’s how some describe what’s happening in real estate right now given low interest rates, the strength of the Canadian dollar and bottomed-out U.S. real estate prices. Those factors have created the perfect storm by which to motivate Canadians to seek real estate south of the border.

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As tempting as the numbers are, though, think long and hard before signing on the dotted line, says Nick Karadza, who co-owns Rock Star Real Estate investment brokerage firm in Burlington with his brother Tom Karadza.
“We see a lot of people going into it blind,” he says. “There are definitely opportunities there, but you need to know what you’re walking into.” Karadza sees many clients who are hot to trot over U.S. properties, many of which have dipped by ridiculous amounts such as 50 and 75 per cent and even higher. Their drive to buy is fueled by a number of factors such as low interest rates, a strong dollar and recession-weary consumers wanting to spend again. But don’t let your clients get ahead of themselves.
Buyers need to become intimately aware of the markets that they’re considering buying in, says Karadza.
“What people need to do is research into the area they’re buying in,” he says. “There are definitely opportunities for buying. If you’re investing in a small town in Ohio because the house is $20,000 and everyone is moving out of the area, how will you make money on that home?”
If buyers are serious about an area, visit the town or city and find out about business development opportunities. Are major corporations headquartered there or moving up stakes? Is it attracting retirees mostly or young families? Talk to economic development officers, police officers, politicians. They’ll let you know how the area is faring.
Karadza recommends clients invest in cash-flow properties that can be rented out and will generate enough return. Getting renters to pay off your mortgage is a great plan. If its value rises in the meantime, all the better. “You need to know your safety,” he says. “You don’t want to just cover your costs; you want a return on your money.”
Philip McKernan has seen first hand what a perfect storm can do. The international speaker and bestselling author has seen the devastation in his native Ireland, where many purchased deflated real estate in Eastern Europe and are now stuck with properties they can’t sell or rent.
“Real estate has always been marketed by the gurus as something that’s so simple to do,” he says. “It’s for everybody and my fundamental belief is it’s not. It’s hard work. It’s a tough gig. It’s the greatest asset in the world for long term wealth but it’s not a quick fix.”
McKernan has written two books for Canadians interested in buying real estate in the U.S. His first book, South of 49: the Canadian Guide to Buying Residential Real Estate in the United States, was published in 2009 and is more for the beginner investor. McKernan followed that book in 2010 with Fire Sale: How to Buy U.S. Foreclosures Now!, a book geared more to the sophisticated real estate investor.
One big mistake investors should avoid is making a decision to make a purchase because the Canadian dollar is at parity with the greenback. McKernan does not believe that’s a good enough reason to buy. “It’s a bonus,” he says. “But currency should never come into play, unless it’s off the rails in terms of value. When the dollar hits parity, everyone jumps on planes and heads south. People who did that in 2007 are now sitting with real estate that’s dropped 20 or 30 per cent for two cents on the dollar so they’ve ended up paying 20 or 30 cents in terms of the value of the real estate. Now you’ve got people sitting there with negative real estate.”
McKernan says people often have difficulty understanding the difference between lifestyle and investment properties. A lifestyle property may yield a good return, but it’s never a good investment, he says. “People often mix up the two and think their lifestyle real estate is going to recover and that they’ll get a great return. That’s a big price and a big risk to put your toothbrush next to the sink.”
For clients interested in buying a lifestyle property sometime down the road, he recommends instead that they buy a cash-flow property in the interim. In five years, say, when they’re ready to make warmer climates their home for some or all of the year, that’s when they should purchase their lifestyle property.  This way, you’re taking advantage of today’s low prices; you’re paying down the mortgage and will have eventually accumulated some equity in your investment.
When it comes to tax laws concerning U.S. real estate, Dale A. Walters has it covered in his recently published 128-page book, Buying Real Estate in the U.S., the Concise Guide for Canadians.
The question that invariably comes up from Canadians interested in buying south of the border is whether they should put the property in their own name or in a Canadian corporate name. If your client is buying a second home for leisure purposes, then buying in their name is perfectly fine, says Walters, who is CEO of Keith Connelly and Associates, a cross-border wealth management firm with offices in Phoenix and Boynton Beach, Florida.
However, if your client is interested in investing, there are liability issues at play and that’s what your clients need to be aware of. Setting up your investment as an entity such as a corporation, a partnership or a trust helps protect your asset. “The U.S. is a lot more litigious than Canada,” says Walters. “If you’ve got contractors in and out of there all the time, you’ve got liability issues. Same with renters. That shields it so if you were sued, they could only get those assets in that entity.”
Tax laws aside, there are other matters Canadian investors should be aware of such as the fact that title companies instead of lawyers typically carry out real estate transactions. The U.S. also has real estate agents who only work with buyers because of the “inherent conflict” behind the concept of getting the best price for a buyer and a seller at the same time. Commission fees, however, at six or seven per cent are pretty much in line with Canada and they are negotiable.
“Seek out help before investing in U.S. properties,” advises Walters. “It’s a big investment. Don’t be cheap about doing this. It’s better to spend a few hundred bucks now to save you thousands and thousands of dollars in the future.”