Why does Foreign Investment in U.S. Real Estate Continue to Rise in Spite of Inflation?
The market has changed. As inflation is increasing, domestic investors are slowing and pacing to match their spending with rising rates. At the moment, looking to cash flow on rental properties is becoming a more difficult and complex goal, and only experienced and astute investors are able to find these opportunities. First-time homebuyers, and even buyers looking for a new primary or secondary residence, are being priced out. So why do foreign investors keep buying? Statistically, foreign national buyers are actually purchasing more property, at a greater rate, than previous years – even during COVID. To understand why that is, it is important to understand inflation, and how it affects our foreign clients.
What is Causing Rising Interest Rates?
The current market is in a unique position where the threat of a recession is competing with investors’ demand, and property values are erratic across the nation. During the COVID pandemic real estate prices plummeted, the costs of financing hit historic lows, and product availability in the housing market boomed. The climate was incredibly favorable for expanding investors, first-time homebuyers, and foreign national buyers. The middle of 2021 saw a slight slow in the market, caused by a drop in product availability, that ignited a massive surge in property purchases in the States.
While supply was low, demand spiked. Throughout the first quarter of 2022 the demand only continued to rise. This trend was apparent in many aspects of the global market as well, as inflation throughout all sectors of the economy was fueled by the political impacts of the Russian invasion of Ukraine. Increases in spending, coinciding with the rising demand in the market, cause an increase in product and supply prices to match. Prices continue to trend upwards, eventually spiraling out of reach for the average citizen, business owner, and even seasoned investor. Once prices hit highs that are so cost-prohibitive that nobody can afford to buy goods, the economy crashes. A ‘crash’ is the rapid implosion of the economy where spending halts and businesses suddenly aren’t making money because nobody can afford to purchase their products. Once the producers cannot afford to operate, jobs are lost, unemployment skyrockets, and the entire financial system collapses.
The Fed raises interest rates to force banks to operate more cautiously and slow their lending. By raising the cost for banks at the source, the Fed is exerting direct pressure on how much it costs banks to continue fueling spending in the economy. The Fed intends to slow the rate of spending in the United States, increasing the cost for investors and making them less likely to over-spend or seek risk. By reducing the ability of the ‘demand’ arm of the economy to act, the ‘supply’ arm should settle across the different economic sectors, restoring a balance between supply and demand that does not have the immediate and harsh repercussions of a crash.
What Do Rising Interest Rates Mean for Foreign Buyers?
To understand how rising interest rates affect foreign purchasing, first it is important to establish the reasons why a foreign investor would be interested in buying U.S. property. The factors that are historically at the forefront of foreign buyer’s minds are:
- Cash flow potential
- The value of the U.S. dollar
- The value of the currency in their country
- The cost of cash, or how much financing will cost in the U.S.
- The ability to find a viable property
- The ability to acquire financing
If a foreign buyer is looking at the global market for their investment decisions, they are concerned with many more factors than interest rates. Interest rates become a simple metric they weigh against many other metrics when deciding if they will purchase property in the U.S.
The U.S. dollar is currently in a strong position globally, and as an investor it carries weight to place your assets into U.S. equity that guarantees consistent strength. The security in diversifying assets is only amplified by keeping money in real estate outside of the investor’s country, away from any political climate that could affect their liquidity. Aside from the stability of investing in the U.S., a property that cash flows for a foreign buyer creates a very consistent source of income while building equity. Foreign investors also gain value by establishing credit in the United States; creating income and owning property in the States can fast-track citizenship, gives access to an ITIN, and facilitates the Visa process.
The value of purchasing in the U.S. is multi-faceted, and it’s very important to understand the motivation of the investor. Currently, the global political and economic climate favors moving money into the United States. Regardless of your political affiliation, the current government, and even the real estate market, the United States remains the global leader in financial stability and opportunities. Many different markets in the states are ripe for savvy investors to carve out their profits via short-term rentals, developments, long-term investment properties, and even commercial spaces. Interest rates have risen, but rental income has scaled upwards, the U.S. dollar is powerful while other currencies such as the Euro and CAD are trending downwards year-over-year, and properties are importantly still able to cash flow.
How to Know When and Where to Invest?
In the current climate, it’s important to find properties that serve the interests of the investment. Secondary residences should be in markets with favorable access to amenities, airports, and any other necessities that facilitate the business of the investor. The focus with residences is on granting access to the U.S. while also growing equity and facilitating the building of credit. Investment properties should be focused on cash flow and cash-on-cash returns. The current market is less focused on ROI, as interest rates are making it more difficult to pencil out positive calculations, and more focused on how long an investor will take to recoup their initial cash infusion. Short-term rentals markets are blossoming in important areas and overtaking long-term rentals in income figures in States such as Florida, Arizona, and Texas. Most foreign investors have pivoted to utilizing AirBnB and VRBO to list their properties as short-term and vacation rentals, as the returns are much higher than long-term leasing. Short-term rentals pose newer difficulties, such as managing bookings, cleanings, and management, however the income can offset the costs of these negatives. As foreign investors get accustomed to this form of investment, more are capitalizing on the opportunity to leverage these tools. For cash flow focused buyers, short term rentals are becoming more prevalent than long term.
How Can mbanc Invest Help Find the Best Properties?
mbanc Invest is a platform specifically created to locate and quantify the effectiveness of investment purchases, specifically as short-term rental properties. The Invest software generates reports that quantify a property’s projected income and provides comps to support and enforce the data. As an investor, it is difficult to weigh the different aspects of a property, such as location, amenities, market conditions, etc. With the Invest report, the entire market’s information is provided, allowing you to measure a property against all other local rentals, to compare occupancy factors, size, potential income, and any other factor.
Purchasing a rental property is a commitment to future financial security. Still, this is just the beginning. Maximizing rental property income necessitates setting the perfect price for a short-term rental. Setting it too high deters prospective renters and causes current renters to jump ship while setting it too low equates to leaving money on the table.
Fortunately, with mbanc Invest, the preeminent vacation property estimator, you gain essential short-term rental data that enables you to select the optimal price for your rental property. To experience the mbanc advantage, talk with our team today.