Weak Australian Dollar Good for Aussies who invest in US Property!


Weak Australian Dollar Good for Aussies who invest in US Property!

  • Deutsche Bank: Prospect of the Australian dollar trading in the mid-to-low US60¢ come end-2015.

 

  • Morgan Stanley: Australian Dollar Structurally Weak

 

  • Goldman Sachs: Australian Dollar Headed to 80 cents

 

Things are not looking good for the Australian Dollar (AUD) vs the US Dollar (USD) and this is great news for Aussies who invest in US Property. Why? Because owning USD denominated assets is a hedge against a falling AUD. In this newsletter we’re going to explore the relationship between a US investment property (ie. a USD denominated asset) and the growth/income of that investment when converted back into a weaker AUD.

Impact on Growth

Consider the simplified example below explaining how a falling AUD affects the growth of your investment when priced in AUD:

    • The current exchange rate between the AUD and USD is roughly 90cents.

 

    • You buy a property for $100,000USD today which translates to $111,111AUD

 

    • The AUD drops to 80cents

 

    • You sell the property for what you paid, $100,000USD

 

    • You send the money back to Australia at the new exchange rate of 80cents

 

    • When converted back into AUD you receive $125,000AUD

 
This represents a profit of $13,889AUD purely from the drop in value of the AUD vs USD. If the AUD fell to 70cents the profit would be $31,746AUD. If it did indeed drop as low as 60cents the profit would be a staggering $55,556AUD.

Note: this example does not consider growth in value of the property due to appreciation. If you factor in the growth in value of the property due to appreciation the profit made when selling the property will increase accordingly.

Impact on Income

Consider the simplified example below explaining how a falling AUD affects the rental income your investment produces:

    • Once again, the current exchange rate between the AUD and USD is 90 cents

 

    • This same property you bought in the above example rents for $1,000USD/month and for this example, your monthly positive cashflow is $500USD or $555AUD

 

    • The AUD drops to 80cents

 

    • Your monthly cashflow income stays the same $500USD but now when you send the money back to Australia at the new exchange rate of 80 cents you receive $625AUD instead of $555AUD. An extra $70AUD a month which adds up to an extra $840AUD a year.

 

    • At 70 cents you’d receive $714AUD representing an extra $159AUD/month or an extra $1,908AUD/year. At 60 cents you’d receive $833AUD representing an extra $278AUD/month or an extra $3,336AUD/year

 

 

Hopefully these two examples have highlighted the merit in owning a USD denominated asset when faced with a falling AUD. Of course, this phenomenon goes both ways. If you wait until the AUD drops to 80cents to buy a property you will pay MORE in AUD for the same property. A property that costs $100,000USD costs $111,111AUD when the exchange rate is 90 cents. If you wait until the exchange rate drops to 80 cents that same $100,000USD property will cost you $125,000AUD.

You miss 100% of the shots you don’t take – Wayne Gretzky


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