CEO of Berkovitz Development Group, buying and building homes across the U.S. and the Caribbean. Owner of a minor league pro hockey team!
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It may be hard to imagine any optimism amid the Covid-19 doldrums, but one silver lining is that foreign investors’ appetite for U.S. real estate has hardly subsided. If anything, the appetite of some foreign investors may be more insatiable than ever before.
Yes, the retail and office sectors are in trouble, awash with concessions. Yes, the residential and multifamily markets are hot to the point of being overpriced, despite rent holidays and eviction moratoria. Yes, tenants are in wait-and-see mode, sitting on leases and driving a hard bargain on renewals. However, despite all this, we’re seeing the demand for investment real estate in the U.S. continue to rise for quite some time.
For the last 12 years, I have been working with foreign investors who are looking for advice and help in buying U.S. real estate for income purposes. My clients range from high net worth individuals to large investment funds and syndicates, and my specialty is leading them through transactions on properties with the maximum income potential. Currently, I see four major reasons foreign investors are still bullish on U.S. real estate:
1. Favorable Debt Terms
U.S. investors tend to forget how good they have it in the American real estate debt market. The terms they get on mortgage loans are unheard of almost anywhere else in the world. The long-term, fixed-rate mortgage is far from a global standard. In many countries, even the U.K. and Canada, short-term, adjustable-rate loans are the norm.
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U.S. lenders, on the other hand, offer the opportunity to lock in a low interest rate for anywhere from 10 to 30 years, with amortization schedules from 15 to 40 years. Stabilized-asset loans of $1 million or more from agency lenders like Fannie Mae or Freddie Mac are even more attractive, offering non-recourse guarantorship and interest-only periods.
With U.S. interest rates currently at historic lows, this kind of leverage is more attractive than ever to foreign investors.
2. Low Property Valuations
Americans may face sticker shock when they look at property prices, but that’s nothing compared to their foreign counterparts. A cost of $200 per square foot might seem like a lot to pay for a high-end property, but consider the London investor, facing prices of thousands of pounds per square foot.
Property is abundant in the U.S.; new development is almost constant. Some of the most stable markets, found in the middle of the country, are some of the least expensive with the lowest barrier to entry. European and Asian property investors, by contrast, have to pay through the nose for that kind of stability.
Not including markets like New York, San Francisco and Los Angeles, when foreign investors want a comparative bargain on premium property, they look to the United States.
3. Positive Cash Flow
The first two points are already game-changers on the world property stage. It’s worth keeping in mind that favorable debt and low prices also combine to form a major ancillary benefit: They create the conditions where cash flow is possible. With a low debt-service burden and a low purchase price compared to the market rent, it is relatively easy for owners of U.S. rental property to have a monthly cash surplus.
American investors take for granted the potential for cash flow — even significant cash flow — from even their highly-levered real estate assets. Not so elsewhere. In the hot London real estate market, investors settle for minimal cash flow. In my experience with Australian markets, negative cash flow is not only acceptable but expected. Investors in Sydney property expect to be several hundred dollars in the hole each month.
The potential not only for stability but also for cash flow and even appreciation contributes heavily to foreign demand for U.S. real estate.
4. Relative Stability
As in many other countries, U.S. governmental bodies reserve the right of eminent domain — the right to judicially seize property for any reason, asserting the ancient truism that anywhere you go in the world, land actually belongs to the state; landlords merely exploit that land at the pleasure of the state. However, the U.S. is comparatively sparing in its exercise of eminent domain, reserving it usually for the public good, like a highway or utility development project, and has a history of fair compensation for the property seized. The U.S. also tends to reject attainder, the seizure of the property of accused or convicted criminals.
Private ownership of property sits at the core of the “American Dream” ethos, one that American politicians and courts hesitate to upend. Contrast this with heavy-handed regimes that may seize property without a second thought.
As tough as it may seem out there for U.S. landlords, foreign interest in American real estate means that their prospects are still bright. Because of the many advantages of U.S. property ownership, foreign investors may even be willing to accept far more modest returns than a local investor might settle for. U.S. markets in general may be seen as volatile right now, but foreign interest in American real estate remains strong.
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