Consider all the risks of real estate investing in the U.S. sunbelt

The high Canadian dollar and lower U.S. house values have some investors, including members of our Inner Circle service, seeing opportunity in U.S. real estate investing, particularly in the “sunbelt” states, such as Arizona and Florida.

Before you consider such a move, you should first make sure that buying a vacation property doesn’t leave your investments overweighted in real estate. What’s more, there are a number of other special risks and costs involved with buying and owning vacation property in the U.S.

Real estate investing: Here are 5 risk factors to consider when buying vacation property in the sunbelt

• Beware of unexpected costs. For example, some states (Florida, in particular) can charge out-of-state homeowners higher property-taxes than state residents. As well, homeowners in states that face frequent hurricanes and floods (including California and Florida), often face high insurance costs. That’s why it’s a good idea to contact national and state authorities, insurance firms and other professionals to get a clear picture of all of the costs before you begin your U.S. real estate investing.
• Take a skeptical view of bargains in the U.S. real estate market. Markets like Florida and California still face uncertain outlooks in the wake of the sub-prime mortgage meltdown, and bargains in these states may not be as appealing as they seem.

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• How long do you plan to spend at your new home? You’ll have to budget for your home’s care while you’re not there, because vacant homes invite burglars and vandals. If you plan to spend shorter periods of time at your vacation residence (less than six months, say), and you’re not concerned about making a return on the sale of the property, you may consider renting, instead. This will help you decide whether you want to permanently commit to a community before you buy.
• Any rental income you hope to generate from your property is dependent, in part, on the weather. For example, your property could be more difficult to rent out if your area experiences a prolonged stretch of cold or rainy days.
• If you buy in a new condominium development, say, you could face the risk of your fees increasing without warning, and some new developments can go out of business before your unit is even built. That’s why you’ll want to make sure you focus your property search on established neighbourhoods. Another thing to keep in mind is that land-use controls are often looser in the U.S. than they are in Canada. That means your neighbourhood could change radically in a few years.

We continue to believe that ownership of a primary residence is all the real estate exposure that most investors need. What’s more, unlike your private residence, capital gains on the sale of your vacation property are not tax exempt.

If you have investment-related questions like these, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.