Pockets of the US property market currently present some very attractive opportunities, but investors have to tread carefully. Here, Mark Mashiter, director at Qualitas Property, gives his top tips for success.

Editor's note: Pockets of the US property market currently present some very attractive opportunities, but investors have to tread carefully. Here, Mark Mashiter, director at Qualitas Property, gives his top tips for success in US property investment. The views contained here, including the recommendations on specific properties, are not necessarily endorsed by this publication. 

1.    Be clear from the start of your objectives for investing...

There are many different reasons for investing in property and every investor should be clear at the outset about what exactly they are trying to accomplish. Whether you are a savvy investor putting together the perfect portfolio, or whether you are a one-off investor looking for longer-term growth, your ultimate goal needs to be crystal clear, and if you are working with any company to help you achieve your goal, you need to make sure that they also have your best interests at heart.

As with any sector, the property market has some very reputable companies who help would-be investors place their money and start on an exciting and profitable path towards their financial goals. However, beware of the companies who are more interested in getting their commission and lining their own pockets and are quite uninterested in helping you achieve your objectives.

2.    Beware of investing in low-cost, high-yield property in the US...

Increasing numbers of UK and other overseas investors in the US housing market has been a trend for many years, but since 2008 more and more UK-based property agencies have been selling low-cost, high-yield housing, and recently there have been some negative stories in the UK press regarding these investments. 

Investors from the UK find the US market attractive for a number of reasons, the low entry price and the advertised yields being the two main ones. As a resident of the US and active in the market since 2003 by mid-2007 we identified this same opportunity and acquired approximately 20 such properties. Although on the face of it these properties look excellent value and seem capable of producing very high yields, we have found there to be several recurring problems which we now know to be representative of many people's experiences. The main problems we have found are high maintenance costs: most of these properties tend to be several decades old, often from 1980 or earlier. While in the UK this is normal, in the US many new homes have an economic lifespan of just 65 years, so these properties at thirty years and more often require extensive ongoing maintenance.

 3.    Consider your investment strategy carefully...

The reality is that if a property is purchased cheaply enough as a rental, it can produce a high immediate short-term yield. But does this investment strategy pro­duce the greatest return over the life of the investment, and what kind of growth and real investment are you making? This is a high-risk strategy and one that leaves all the risk with the investor.

If you have a high-yield, lower price property the actual yield that is so often quoted of 15 per cent on a $30,000 property is only $4,500, spread over 12 months. So in reality by the time you pay for wear and tear, new boilers and other problems, and perhaps you are left with the property vacant due to eviction and then eviction costs for a few months with no one paying the rent, you would be left with only just a few hundred dollars, if that. We know of many investors who have actually lost money.

There are many companies giving bad advice, leaving naive or less experienced investors with a property that will ultimately bring in very little return over a very long time and the worst thing is that they are often stuck with these investments forever.

The reality is that returns on these properties are capped by rental income, minus property expenses and even with everything going well and with no problems, this strategy will probably generate a pre-tax return of about 6 per cent, at most, not the 12 per cent or 15 per cent that was promised. But here’s the thing - unlike an investment in high cost but lower yield property - the lower cost, supposedly high-yield investment gives you very little capital growth, if any at all, if you choose to sell.

However, it’s not all bad, many people have chosen to invest this way because they are required to invest less initially and although the risk is higher the yield looks better on paper. None of these points are necessarily obstacles for experienced investors who understand the risk and are prepared to deal with all the associated problems. Can you achieve a 15 per cent net return on a $30,000 house? Yes, you can, but it will take a lot of effort on the investor’s part, which many UK investors have neither the time nor inclination to take on. In my view these properties should not be seen as an “armchair investment”, more a relatively small part of a balanced portfolio for the more experienced investor.

4.    So, what exactly should the investor look for..?

So how does an investor know who to trust and what to should look out for? There are a lot of companies out there that will happily take your money, get their commission from the sale and move on – making the problems after the sale not their problem. A good company will look at higher-priced properties with realistic and conventional yields in areas that will guarantee the investor longer-term and much better growth. A reputable advisor should only really look in areas where they would themself want to buy or live.

Every seasoned investor who is active in this marketplace right now understands the crucial importance of balancing yield return and purchase price against quality of product. Get this right and you reduce the risk, you increase the profit potential, you secure the exit strategy and you remove the hassles and headaches of property investment which can plague the investor who gets it wrong.

The key factors to ensure your property is rented to a high-quality tenant is to purchase in the best location possible and to target middle-class professional residents who demand access to the best schools, high-end employers and upscale recreational and shopping areas. Most importantly, these tenants will in the future have access to bank finance to purchase your property from you at a profit when you decide to sell and can in the meantime absorb rental increases much easier than the more transient type of resident you may find in the less desirable areas.

5. Look out for standout investment opportunities…

One of the standout investment opportunities we have identified Visconti development in the Maitland/Winter Park area of Orlando, a very established and exclusive residential location with massive demand from those who want to live in this area.

We see Visconti as the best investment opportunity we have seen in the last nine years, both in terms of value and quality, providing a perfect combination of solid yield and a firm foundation for capital growth. This market is already seeing strong growth, with median prices up more that 15 per cent in the last 12 months and this looks set to continue, so these opportunities are now few and far between - everyone from individual investors, to billion-dollar funds and institutional investors are competing for the best units.

The reasons that areas like Maitland/Winter Park are so desirable are clear: the area has an air of charm and sophistication, with tree lined streets, upmarket shopping and fine dining options, chic boutiques, period architecture and numerous parks and museums right on the doorstep. This is no tacky, “vacation” style area of Orlando, this is a wealthy residential suburb home to some of the best schools in the area, high-paying employers, fabulous parks and amenities. Furthermore, it has a wealthy and safe residential feel to it.

As you would expect from a location as classy as this, the demographic is reflective of a very upper middle class, professional, wealthy resident. The area itself is characterised in the main by exclusive and expensive single family homes; there are very few other condo communities in this location. Average household incomes are well above the Orlando and Florida average, and indeed higher than over 84 per cent of the neighbourhoods in America. Well over 50 per cent of the working population is employed in executive, management, and professional occupations.

In our opinion, this project easily beats anything else available due to its location, demographic, construction quality and the genuine demand to live and rent in this area.

I would conclude that the massive oversupply of property which existed in this area from 2007 to late 2010 has been gradually eroded away, to the point where high-quality investment opportunities in wealthy locations such as Visconti are now all but gone.