Investing in U.S. real estate from Canada can pay off for some, but it’s riskier than many investors think
Investing in U.S. real estate from Canada is not without risks, and a poor place for any significant portion of your retirement savings. Buying a second home in the U.S. may be a good personal lifestyle choice, but it’s not necessarily a great investment choice.
However, if you do want to invest in U.S. real estate, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Investments like these can give you current income, plus long-term development possibilities. That’s a potent combination for patient investors.
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Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.
Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.
Investing in U.S. real estate from Canada: Even the Sunbelt has unique drawbacks
We all know how long winter lasts, and following COVID-19 lockdowns, many Canadians are once again spending part or all of the winter in Florida or other Sunbelt locales.
Despite rising home prices in key U.S. markets, many of us are buying second homes with the belief that even further price increases are inevitable and will make those winter havens good investments.
However, costs may be higher than you think. Beyond the purchase price, you’ll also have to pay real estate taxes and condo fees, if that’s your choice of a dwelling.
On top of that, there’s insurance and maintenance. In addition, due to the heat and humidity, you have to run the air conditioning year-round to avoid mould. New condos will come on the market and compete against decades-old units. As well, when you do decide to sell, you’ll pay a 5% or so real estate commission.
Directly investing in U.S. real estate from Canada entails more work than you might think
You have to recognize that there is no such thing as a simple direct investment in real estate. It’s more likely that you’ll have a part-time job running a house that you own, renting it out and being responsible for calling the plumber and chasing down tenants that don’t pay and so on. There’s a lot more to that than many people realize.
Large property companies own hundreds of properties and the gains and losses on individual properties average out. But if you have a single property and you get into litigation with the tenant or into major repairs and so on, there’s a lot of cash flow that you’re going to miss out on.
We think you need to go into a real estate investment with a lot of knowledge about how wide the variation is—don’t look at the average price increase in your home market in the past 20 years. Look at the worst case scenario: what if you have to hire a lawyer to deal with an unruly tenant?
Having said that, many people do make great fortunes by buying real estate, using a lot of leverage, and sticking with it for 10, 20 or 30 years. But don’t kid yourself into thinking it’s the same as buying a stock like Canadian Pacific, because there’s a lot more to it.
Investing in U.S. real estate from Canada: rising interest rates could ruin your plans
If interest rates move up in the long-term, which appears likely, it may force some would-be buyers out of the market, and lead others to lower the price they are able or willing to pay. Fewer houses will change hands in that case. House prices may hold steady, but they could also move down.
If interest rates were to shoot up in the midst of an economic setback and rising unemployment, it would force a lot more buyers out of the market, while forcing many more others to cut their house-buying budget. In addition, some of the newly unemployed might dump their houses on the market because they won’t be able to keep up their current mortgage payments, let alone refinance when their current low-interest mortgages come due. In that case, there could be a deeper slump in house prices.
Bonus tip: We believe you should have foreign exposure in the U.S., but for most investors, stocks are a better bet than real estate
Our view on foreign investing is that U.S. stocks can provide all the foreign exposure most investors need. We also feel that virtually all Canadian investors should have, say, 20% to 30% of their portfolios in the U.S. stocks we recommend in Wall Street Stock Forecaster.
If you do want to add more foreign content, you could buy individual stocks from other countries. But for most investors, directly investing in foreign stocks can add an extra layer of risk and expense. As well, timely and accurate information about overseas companies is not always available, and securities regulations vary widely between countries. It can also be hard for your broker to buy shares on foreign markets without paying a premium. Tax rules and restrictions on transferring funds between nations add further uncertainty and cost.
What are your thoughts on investing in the U.S. real estate market considering the coronavirus pandemic? Do you think it’s a smart move or do you think there are too many unknowns?