With the U.S. house-price crash officially becoming worse than during the Great Depression last month, a growing number of Canadians are sinking their high-priced loonies into American real estate.
Dean Duperron and wife Sherri Duperron are among those Canadian real estate shoppers. They successfully bid $2.7 million to buy a 64-unit apartment building in Washington state’s Tri-Cities region in May – the same month the S&P-Case-Shiller price index estimated that national residential rates were down 33% from their 2006 peak. That compares with a 31% decline during the Great Depression.
Experts predict that the U.S. housing market will drop further before it starts to rise, but as Vancouver-based Colliers International vice-president John Gee joked: “Predictions are difficult, especially about the future.”
What is clear is that now is an abnormally good time to buy U.S. real estate.
Last year, Jim Gillespie, the CEO of Coldwell Banker Real Estate Corp., told Business in Vancouver, “This is the best time I’ve ever seen in my 35 years in this business to buy in [sand] states [such as Florida, Arizona and California].”
Gillespie knows real estate well. He oversees 100,000 sales representatives in more than 3,000 offices in 49 countries around the world.
The Duperrons decided to dip their toe in the U.S. market after buying a 28-unit apartment building in Langley for $2.96 million. They also own four houses, a tri-plex and two individual apartments in Canada.
Sherri sold Sprott Shaw Community College to CIBT Education Group Inc. for $12 million in 2007.
According to Dean, the advantages of buying in the U.S. include:
- capitalization (cap) rates are higher;
- prices are more attractive; and
- there’s more available housing supply in communities that have 200,000 or more residents.
In addition, the U.S. real estate market collapse has prompted many Americans to rent rather than own.
According to California brokerage Marcus & Millchap, the crush of new renters has pushed the value of U.S. apartment buildings up 16% in 2010. In contrast, apartment building prices fell 27% between 2006 and 2009.
Research firm Green Street Advisors now estimates that the prices of U.S. apartment buildings that are owned by real estate investment trusts (REITs) are within 10% of their 2007 peak.
Duperron said the apartment building he’s buying is priced higher than it was a few years ago, but so are the rents.
“The property six years ago rented its units for $300 per unit. Today, they’re renting for $640,” Duperron said. “Apartment buildings have some minimum value for land and buildings, but the key value is the cap rate, which is the return that you’re getting.”
The cap rate is the ratio between an asset’s net operating income and its original price. For example, a $1 million property that generates $100,000 annually after expenses would give the owner a 10% cap rate.
Duperron’s Langley apartment building came with a 6% cap rate; the rate for the Tri-Cities property is 8.4%.
But Gee warned that high cap rates are a sign of risk.
“The reason buildings have a high cap rate is because demand is low, because it’s risky and people would rather buy something else,” Gee said. “I have a building in Burnaby, which is a 4% cap rate, and one in the West End, which is a 4.2% cap rate – that’s a great deal.”
Gee knows of some buildings in Atlanta, Georgia, that come with 20% cap rates. He said a friend of his bought one for what the friend said was about the same price as it would cost to carpet the structure.
Gee added that properties with extremely high cap rates could continue to drop in value.
The crash in the value of single-family homes makes residential real estate even more desirable than buying apartment buildings, said Troy Peterson, who is director of U.S. operations at Aperture Investment Group.
He pointed out that single-family homes have higher cap rates and higher long-term appreciation potential than apartment buildings.
“If you can buy low and sell high, then you make a lot of money over time.”
Aperture, a month-old Vancouver-based company that helps Canadians buy U.S. single-family homes, does not provide tax, accounting or legal advice. It refers clients to consultants as needed.