Property

At a time when many investors are wary about sharemarket-listed investments other than exchange traded funds, do-it-yourself super promoter Dixon Advisory is capitalising on what it considers to be the most lucrative opportunity in the investment world at the present time: American residential rental property.

While promoting cheap US residential property to Australian investors as a strategy has been around for a while at the individual investment level, Dixon is the first to capitalise on this on a larger scale.

“Because we offer our Australian DIY funds a direct property advisory and buying service on an individual property basis that was the first thing we looked at,” says Alex MacLachlan of Dixon Advisory.

Although the fundamental factors that make US property attractive are the same for a direct investor as a managed fund investor – a stronger Australian dollar with its extra buying power and a 60 per cent slump in American property prices over the past five years (as at October 2011) – a close examination found various reasons that made direct US property investing a lot harder.

Hard to grapple with

It’s a harder market to advise on because it is so big, and genuine property experts are harder to find. Like all property, the tax rules involved in owning property and the structures through which rental property can be owned can be complicated and vary in different places.

Roughly 60 per cent of individual property expenses are tax related, says MacLachlan, and the taxes there are much higher.

While direct ownership can work, it is important to get things right, he says, otherwise you could find yourself paying a lot more American tax than you expect, as well as having to pay such imposts as death duties where a property is sold because a member has died. While US property may look to be a good investment based on sale prices, the after-tax outcome must be weighed up carefully – in addition to the extra complexities of being a long-distance landlord.

Big numbers

As well as the taxes, says MacLachlan, many investors do not appreciate what it really takes to buy and run an investment property. It starts with the sheer volume of choice that is available. Then there is making sure you buy property in areas where you have a high chance of finding tenants. In many areas of California and Florida, for example, while you may buy a cheap property with a tenant, if that tenant leaves, finding a replacement can be very difficult. In many areas, there are huge numbers of vacant properties.

For its investments, says MacLachlan, the Dixon fund is concentrating its efforts in Hudson County, in New Jersey, which is right next to Manhattan.

While in the interests of diversification, it would have 20 properties in any one of a number of different cities, this makes the fund’s investments hard to manage.

The fund’s investment criteria include buying two-storey individual houses, with two or three rental apartments, in densely populated areas with low vacancy rates and excellent public transport.

Strict criteria

“We are very geographically focused,” he says. The properties must be in a good state of repair and where they need some work, this should be $15,000 or less.

MacLachlan estimates that it can cost up to 5 per cent of a property’s annual rental income to manage a property and that’s if the job is done by a management team. Dixon has a team of 15 to 20 people to look after its properties. The properties themselves are all within 20 minutes of the office.

He reckons the fund will end up buying between 350 to 500 houses in Hudson County.

Buying a property takes a lot of homework that can save an investor getting stung down the track.

Where a seller claims the property is leased to a tenant paying a particular rent, the fund manager insists on seeing the contract.

“We don’t take their word that a tenant is paying $1000 a month, for example,” he says.

Lengthy process

Buying property in the US is a very different process to Australia and can take up to four months to close a deal. Properties must be given a clean bill of health on various environmental, pest and structural grounds.

When it comes to tenants, not only is the selection process very strict, so is the continuing management. A tenant who falls behind in their rent is given a week to pay or they are evicted.

As far as the prospects for the fund are concerned, MacLachlan says Dixon estimates it has about two or three years of good buying opportunities ahead to develop its fund. The US residential property market is still struggling and could still have further price falls. It could be argued the market is still bottoming. It is still a market where banks are generally not extending credit to many home buyers let alone small investors wishing to buy property.