Going South? Before you buy property south of the border, take this advice

Posted on 27. Jun, 2010 by in General

Rob Gerlsbeck, Moneysense Magazine

Ah, what a great time to buy property south of the border. It’s not just that the Canadian dollar is poised to push the greenback into peso territory. Next year, thousands more subprime mortgages, from Tampa to Tuscon, will be reset with much higher interest rates. Translation: A new wave of foreclosures is about to sweep through the sunbelt.

That means 2010 should be the best year ever to snag that two-bedroom condo in California for next to nothing, right? Perhaps. But before you buy, listen to what Philip McKernan has to say. He’s the author of the recently published book South of 49: The Canadian Guide to Buying Residential Real Estate in the United States (Wiley).

McKernan’s a nice Irish gent who lives in Vancouver, where he runs a real estate investment company called Maple Leaf Property. He worries that many Canadians are going to buy for the wrong reasons in 2010.

Wrong reason No. 1: The dollar. Investing in U.S. real estate because of the fabulous exchange rate is, as McKernan puts it, “insane.” The last time the Canadian and U.S. dollars hit parity a couple of years ago, a stampede of Canadians bought in the U.S. Back then, around 2007, home prices were at record highs. Now these people are sitting on properties with negative equity and “any savings on the dollar was just wiped off the plate,” he says. “It’s a bonus if the dollar is strong, but it shouldn’t be your prime motivator to buy.”

What should be your prime motivator? Lifestyle is a good one. If you simply detest Canadian winters and have the cash to buy a Florida condo, by all means go ahead. Just keep in mind that your reason for purchasing hasn’t anything to do with making money. Your return should be measured in sunny days swatting a nine iron and/or relaxing by the pool.

Which brings us to wrong reason No. 2: Buying as an investment. Fewer people used to do that, McKernan says. The old snowbirds were in it for leisure, not to become landlords. But if your prime motivator is to make money off this house, keep the following in mind:

The best investment properties aren’t all in the sunbelt. You’ll never hear a Canadian at a dinner party brag about the fabulous rental income he’s earning from his landlocked two-storey in Iowa. Too bad. There are real estate opportunities in every state, McKernan says. So don’t limit yourself to the usual hot spots like Florida, Arizona or Nevada.

The trick to investing in U.S. real estate is to find up-and-coming cities. Look for ones with employment rates and incomes that are above the national average. Then drill down to neighbourhoods with the best income potential. Stay away from the cheapest and the most expensive parts of town. Look for neighbourhoods with plenty of young people and public transit, and pay attention to vacancy rates and the going rate for rents.

Be wary of auctions. The hype surrounding an auction can actually drive up the value of the house being sold to more than it’s worth. Worse, houses on the auction block are sold “as is.” Yours could include an undesirable tenant, or have a lien, or have some kind of structural damage. To protect yourself, look for Real Estate Owned, or REO, homes. These are houses that have been foreclosed by a bank or mortgage company, but the bank has repaired the walls and windows, kicked out the motorcycle club member living inside and made sure the repo man isn’t going to come after you. “It means there’s less risk involved for you.” McKernan says.

Visit the property yourself. Seems like an obvious thing to do when plunking down six figures for a house. But McKernan says he’s met plenty of Canadians who purchased American homes without seeing them first.

Your best investment may be in… Edmonton? One thing people fail to do when they buy property in the U.S. is to compare their return on investment to real estate where they live in Canada. “If I have $200,000 to invest, could I get the same kind of returns in Canada without the tax hassles and geographic hassles of the States? If yes, buy an investment property in Canada instead,” he says.

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