Australian investors are looking to America where property is at rock-bottom prices after the sub-prime mortgage meltdown. However, financing is definitely an issue in the US where lending conditions are clearly more difficult than a few years ago. Unfortunately, most major US banks are not receptive to investing foreigners at the moment.
I have spoken to people who have assured me that I can get financing but then are unable to come with the goods. Or when they have, they’re talking about high interest rates from 9 to 18 percent. Then I spoke with Salena Kulkarni, owner of Splash Property Group and a leading authority on US property investing with 15 years of experience as a chartered accountant. She caught my attention when she mentioned the possibility of getting financing for US property at a remarkable interest rate of 2 to 2.50 percent.
First, Salena talked about a number of strategies people can choose to adopt if they’re looking at US real estate. Obviously, the easiest option is to use available cash. Superannuation or investing through a self-managed super fund is another increasingly popular alternative because of its tax advantages. Australian banks often allow customers to access equity in the form of an offset account or line of credit to buy US real estate. Joint ventures or syndicates, when a number of people pool their money and assets together to invest as a group, are other options. Some people choose to assume an existing mortgage or borrow money from “high-money lenders.”
However, if none of those ideas appeal to you, Salena came up with what she calls “the hybrid solution.” Essentially you are borrowing money from here in Australia with the safety and knowledge that they are working legitimately within our legal system. An international bank is offering interest rates, as I mentioned before, varying between 2 to 2.5 percent. Although this may sound unbelievable, keep in mind that cash in America is only earning less than a half percent – close to zero in fact – so they are still making a 2 percent margin on the money.
To illustrate how these loans work, imagine you have an Australian property worth $800,000 with a loan of $400,000 and you’re paying 6% interest here in Australia. You go to this particular lender and refinance the whole debt and borrow an additional $80,000 to buy a property in the US… using US dollars at 2.15% . The theory is that if your US property earns $10,000 per annum, it would cover the interest payments on both properties. There are three different options you could consider which Salena explained in some detail during the interview.
Of course, at the end of the day, you have to sit down with an accountant and assess the risks associated with these options. For example, it would be foolish to get excited about the phenomenal opportunity to save a massive amount of interest using one of the options without understanding that there is an associated risk with the exchange rate. With proper advice you would weigh up the potential risks and rewards of the options to decide which of the 3 was most suited to you.
If you’d like to find out more about financing US property, listen in to my conversation with Salena by clicking this link.