A year or so ago, a couple of friends announced that they had bought a house in Florida. My husband and I were surprised – they had never expressed any desire to own a vacation home down south. But our friends explained that they weren't interested in living in the house. They were going to rent it out and use it as an income property.
It's a concept that's being entertained more and more by Canadians, intrigued by the bargain-basement prices of U.S. homes. Some see it as a long-term investment opportunity, some are looking for a revenue stream and others are looking to snap up a retirement home at a low price.
According to a Bank of Montreal release earlier this month, house prices in the United States have fallen 34 per cent from their peak levels in 2006. And prices in regions that are traditionally destinations for Canadian snowbirds have dropped even further: Tampa, Fla., is down 48 per cent, Miami is down 51 per cent and Phoenix has dropped 56 per cent.
“We're very, very close to bottoming out right now in the U.S., which means it's extremely affordable to buy real estate,” said Canadian/U.S. real estate expert Steve Martel. “And America is becoming a nation of renters, so rents are through the roof. If you're looking to build a portfolio of income-generating real estate, now is the best time to do it.”
Mr. Martel runs seminars and courses for people interested in investing in U.S. real estate, and says that it's essential to become educated on the process of buying in the U.S. well before considering a property, as it can be very different from buying in Canada. He shared some of his tips for Canadians looking to get into the U.S. real estate game:
Know where to buy
Mr. Martel says that most new investors think of buying in the “sexy” markets, like Florida or Arizona, because many hope to someday move to those properties in their retirement. Because baby boomers will be moving to the "sunbelt" areas in droves in the coming decades, says Mr. Martel, buying there can be a good investment. However, if you're looking for short-term income generation, you should be looking at cities where there is job growth, Mr. Martel says. Some of those markets on his radar include Charlotte, San Antonio, Tex., and Oklahoma City, he said.
“When you go into an area where there is job growth, it brings in populations from across the nation, and it will bring rental prices and real estate prices up in the next five to 10 years,” he said.
Know where to look for properties
If you're a beginner, says Mr. Martel, there are only two resources you should be perusing when looking for properties: Homepath.com (the website of Fannie Mae, a.k.a. the Federal National Mortgage Association), and Homesteps.com (the website of Freddie Mac, a.k.a. the Federal Home Loan Mortgage Corporation).
“The reason I say those are the resources people should start with is because - I don't want to say they guarantee - but they assure the public that there are no hidden liens on these properties,” Mr. Martel says. “So for someone that's starting off, I always say, start off with a Fannie Mae or Freddie Mac property. The biggest mistake I see people make is going on Realtor.com or any other source, because those may not be reputable lenders or sellers."
Check for liens
One of the key differences between buying a property in Canada versus the U.S. is that here you have a lawyer closing your deal, who is representing your best interests. In the U.S., homebuyers use title companies, who aren't concerned about whether you're getting a solid deal. In fact, title companies aren't required by law to inform you whether the property has a lien on it or not.
“If you don't ask, they don't tell,” Mr. Martel says. “When you're talking to the title company, you have to ask, 'By the way, are there any liens on this place?' And by law, if you ask, they have to give you the answer.”
You can also find liens or back taxes owing on the property by checking online with the local tax assessor's office or the county courthouse, Mr. Martel says. And if you decide to buy a condo, check the health of the condo's home owners assocation (HOA), he advises. Many HOAs are “underwater,” he says, because of people not paying their condo fees.
Shop around for financing
Once you've found a solid property to buy, you need to decide how you are going to finance it. For example, Mr. Martel says an average “sunbelt” property might be priced at $70,000, and most lenders would require about a 30-per-cent down payment to purchase it.
Though you can go to a Canadian bank to get your loan, Mr. Martel says you might be better off choosing a different option.
“If a Canadian walks into a Bank of Montreal, they have a program, so the Canadian bank will lend in America,” he says. “But then the little loophole is that if you were call Harris Bank, which is BMO in the States, they have even better programs for Canadians. American banks will [also]lend to Canadians ... there is a lot of lending out there, you just have to find the sources.”
Get yourself a power team
Unless you plan on answering calls about stopped-up toilets yourself, you will need to hire a property manager to maintain your home. Be sure to find a good, reputable property manager, Mr. Martel says, and check references.
“The average [cost]is about 10 per cent of collected income, so if it's $1,000 a month, it's $100 for maintenance,” he said. “And let me tell you, it's the best money anyone will spend."
Most importantly, says Mr. Martel, if you have ambitions of making money from U.S. real estate, you need a willingness to get educated and do your due diligence.
“You've got to be passionate about it,” he says.