It wasn’t too long ago when 1 Euro would only buy you US$ 0.80. Unfortunately (or should we say fortunately ?) the table has turned and 1 Euro at the time of this writing will buy you US$ 1.57. This has not only made travel to Paris, London, Rome - or whatever European city you might favor - very expensive, but it certainly has made the US a very attractive target for European bargain shoppers of all sorts. Clothing, vacations, cars, it is all discounted right now. The same seems to hold true for real estate. Especially when you combine the favorable exchange rate with the weak housing market and the significant price declines in many US cities.
Let’s use my home town – Miami, FL – as an example. South Florida has seen some of the biggest price increases during the boom years and consequently has faced some of the biggest decreases in the last 2 years. Since Miami is also a city that attracts people from all over the globe, requests from foreign investors are quite frequent these days.
Often these people ask one simple question that – while very common amongst the commercial real estate community is generally not too often discussed amongst residential real estate buyers, sellers & brokers.
What’s the rate of return on my investment ?
Now here is where things get a little tricky. Based on an analysis of many Miami Beach properties (a few of which you can see in below graph), I found that the net rate of return seldom goes above 3% and I have yet to find a building that can achieve a higher than 4% return. This is based on rental income minus expenses / purchase price, so future price increases are not factored into these numbers.
(BLUE: average gross rate of return / RED: average net rate of return)
Granted these are all averages, so if you buy below the average purchase price and rent for more than the average rental income your returns will of course increase.
Keep in mind though, that these returns are based on an all cash investment. If you figure in a mortgage, you will end up with a negative return, e.g. if you achieve a 3% net return and pay 7% mortgage interest you end up with a negative return of 4% assuming you finance 100% of the purchase price. Since that is not realistic these days, your actual loss will be slightly less than 4% per year, but you get the picture.
For Europeans who are often used to high single or even double digit returns in their home countries, these are hardly stellar figures.
Considering that a lot of foreign investors can not even benefit from the tax deductions of owning real estate in the US since they have no US income, one could ask why you would want to buy yourself an “investment” that achieves a negative return every year.
So why should they invest here ?
There is a very valid side to investing here, but it is purely based on the assumptions of future price increases. Cash flow investing, at least for the small residential investor seems to not be possible (if anybody finds this to be incorrect, please educate me !)
Investors will have to calculate a small loss every year and hope that the average price increase is higher than the loss. Some people I am currently working with found that they will have to take a 3-5% hit per year (like shown in the example above).
Assuming they are holding the properties for 10 years, they have to hope for a price increase of more than 30-50% in order to make money.
Is that possible ? It definitely is ! Even though we can not guarantee or even promise future price increases, if the past is a good indicator of the future, real estate prices in the US on average nearly double every 10-12 years.
This is something that has to be explained to the Europeans. My main clientele is from Germany & Austria where property values are only increasing at a very slow pace, therefore a high rate of return based on the annual rental income is what a lot of investors from these countries seem to be looking for. Any information you can give them on historic price increases and average price increases over certain periods of time (not counting the unreasonably high increases during the recent boom years) will greatly improve your chances of striking a deal.
Another factor that I haven’t taken into consideration is the exchange rate. While I’m not knowledgeable enough to make any forecasts on the future of the Euro / US$ exchange rate, I strongly believe that the US will work very hard to control the decline of the Dollar against the Euro. If the exchange rate at some point goes the other way again, Europeans that are buying at current exchange rates, will benefit even more. Assume you spent 100k Euro at the current exchange rate and bought yourself a US$ 150k property. If you hold the property until it is worth US$ 200k and the exchange rate at that point has gone to 1 Euro for 1 US$, you are getting back 200k Euros, therefore doubling your initial investment, the value of which really only increased by approx. 33%.
So what’s the conclusion ? Do the numbers make sense ? In my humble opinion they do make sense, assuming you are buying at the right price and understand that you have to hold your investment for several years (in my opninion at least 5-10 years)
Nobody knows how quickly we will recuperate from the recent downturn, but one thing is sure. If you can buy and wait, you will win.
And therefore the numbers do make sense. At least in my opinion…<!--EndFragment-->