Buying in the US

Buying in the US, part 5.

From here, things started to get rocky. It was about Monday, my plane was scheduled to fly out out early Friday, the property I owned still wasn’t insured, and no bank I spoke to would deal with me if I didn’t have a social security number. You need the SS# for just about everything there – I even saw a video game in a pub that required you to enter your SS# and promised dire consequences if you used someone else’s.

Many banks wouldn’t lend against investment properties at all. Others wouldn’t lend to an LLC. Others wouldn’t lend to foreign corporations. I reminded myself of the Jan Somers story of the people who tried bank after bank, to find the right one. I was a bit depressed, however – I certainly hadn’t found anyone on the net who was willing to lend. To complicate matters, I was told that I had a chance on 2-4 unit buildings, but 5 unit buildings were right out, and did I know that they had extra regulatory requirements and extra taxes?

Insurance brokers were just as bad. They would agree, quote a good price and then ring up and say that they didn’t do investment properties/properties owned by corporations/properties owned by foreigners/whatever. In short, if it was mine, they wouldn’t touch it.

I was getting a little desperate, especially regarding the insurance. I mentioned it to my attorney who put me onto her sister, an insurance broker. Bingo! I got my existing property covered and the others won’t be a problem. She couldn’t help with the 5-unit, or at least that was going to prove a problem. The insurance was expensive, but letting $100,000 of house (or $19,000 of income) burn to the ground uninsured would have been more so.

That took pretty much a day and a half and meanwhile I was frantically running around setting up check accounts for the LLC, a bank account in my name, and other matters. I couldn’t actually set up the company account (remember my LLC was not ‘in good standing’?) therefore couldn’t trade in NY therefore couldn’t have a bank account until all the papers (which would arrive after I had left) were approved.

In the end I agreed with the banker that the attorney would contact him with the papers when they arrived, and that the account would then be set up. I signed powers of attorney for my lawyer to close all the contracts for me and to handle just about everything else. I had a long discussion with the accountant about strategy, depreciation, structures and the rest.

I arranged with the attorney that I would send her a big swag of money which she would put into her trust account and cut checks for the properties and the inspector as required. I couldn't find out what the $A/$us rate was at that stage and I was sweating that particular equation.

I finally got onto a broker who would be able to finance me at 4.5% for 65% LVR (although not on the 5 unit and probably not on the 4 unit I already owned.) He would have financed a purchase to 80%, but refinances where you are pulling cash out are treated rather differently – this was consistent with what I’d researched on the net so I was disappointed, but not surprised. And the cash offers had really reduced the prices I was paying. Still the figures were looking pretty good, although the 5 unit was looking dicier all the time.

Friday came, and there I was at the airport. I owned one property in the US, I had agreed to buy 8 more (total commitment US$363,500), I had finance in train, I had insurance settled and I was ready to go home.

I phoned the lawyer, the realtor, the accountant and the PM and left messages for all of them.

End of Part 5

The next parts, which have a lot more of the warts will have to wait for me to regain my notebook, which is being typed up for me (and for the IRS, in case they ever come calling). I'm now open to questions, and don't mind getting ahead of the story. Don't expect a razor sharp recollection of any figures which for the moment are still only in the notebook. I can't emphasise enough how disorienting an experience this was.
Lilith said:
Perhaps you need to update the calendar setting of your DC :) I thought you were talking about some recent transactions, not of transactions 4 years ago.
Yeah, I thought I'd turned that feature off. but hey, I'm an investor, not a photographer. :p
Great story Quiggles. What are the growth prospects like for these properties?
Obviosly you are buying for cashflow with such great yields, but it sounds like a lot of the gross yield gets sucked out pretty quick.
To A86, this was all this year. I haven't yet closed (settled the contract) on most of the houses yet. Settlement date is 30 November (easiest to close then as the new rent is due on 1 December)

To Likewow, I'm not in it for the capital growth. However, there's a fair bit of New York City money flowing in which may force an miniboom in investor properties, in which case I'll refinance and pull all my money out in about 12 months time. That would require a 50% increase in prices, but from the low level I'm describing, it remains possible. My rough calculation is that there's a 10% net yield on well bought properties before tax and depreciation, but after debt servicing.

To all, thanks for your encouragement, only 2-3 more parts to go (when I get my notebook back)
If your a foreign investor and you own property in the US for x years does that help you to get a green card/citizenship since you are self sufficient and proving you wont be a burden on their ss.

And thus make followup purchase easier in some way?
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Thanks for the inventive thought, but the short answer is no. The longer answer is no way, Jose!

You need to be a resident or a citizen to get the SS# - if you are a resident in the US, you can't be resident in Australia as each requires more than 6 months in a year. Then if you apply for US residency, that makes Visas harder, as they are a bit more suspicious of you.

At present, I cn go back and forth without a visa as long as I stay less than 90 days. I'll stay that way, as I'm very happy to be an Aussie.

Great story!!

Quiggles, how high LVR have you managed to go with your new LLC being the borrower and how many properties will the lender(s) let you get?

Have you found any other better lenders since your initial search that offer higher LVRs/lower rates/higher borrowing capacity?

Did you try any US mortgage brokers?
Hi Quiggles

Grear story. Well done. I can feel a book coming at some stage about your expeditions.

Are the prices you quoted in American dollars or Australian dollars?

quiggles said:
Buying in the US, part 5.

Friday came, and there I was at the airport. I owned one property in the US, I had agreed to buy 8 more (total commitment US$363,500), I had finance in train, I had insurance settled and I was ready to go home.


Looks like US dollars to me
Yes, US dollars.

Highest LVR I've been offered was 80% but that was at about 8% interest plus an upfront fee that equated to between 3.5% and over 5% plus other fees and taxes that amount to an upfront impost of over 10% of the purchase price!

Thanks for the encouragement, I think I'm getting my notebook back tomorrow so I'll produce the rest fairly quickly.

Well Done

I agree with loopnet, and thanks for the reference. Castro told me about this post. Haven't read it all but basically I went through the same steps to get my properties. Good in a way (if you are buying) that the AUD is now 75, but bad for me, getting rents in USD. Keep it up.

My newest purchase in Ca
30% down 8 plex $715,000 - commercial property sadly 30% down
8 1br's at 750 per month each

And this is noted by the lenders as being a 'poor' returning property.

Thanks for remembering me....
lawsjs said:
I agree with loopnet, and thanks for the reference. Castro told me about this post. Haven't read it all but basically I went through the same steps to get my properties. Good in a way (if you are buying) that the AUD is now 75, but bad for me, getting rents in USD. Keep it up.

My newest purchase in Ca
30% down 8 plex $715,000 - commercial property sadly 30% down
8 1br's at 750 per month each

And this is noted by the lenders as being a 'poor' returning property.

Thanks for remembering me....
Welcome back, haven't seen you for a while.

I make that about 10% return.

How's taxes and charges on your US properties?

How has CG been?
Lilith said:
Perhaps you need to update the calendar setting of your DC :) I thought you were talking about some recent transactions, not of transactions 4 years ago.

Thanks for the clarification, we just call it realty tax in general, which essentially is money paid to the county for funding local police, public schools, libraries, road and park maintenance, etc. I was under the impression that council rate in Oz covers the similar lines of local expenses, or am I wrong? The "realty tax" should run at around 1% of the asssessed property value (which normally lags the market movement), but in some states there is a cap on how much the assessed value can grow annually.
Lilith, in Aust we pay council rates which covers things such as sewerage, water, environment levies, fire levies, garbage collection and community service charges and other such things provided by council. Schools, police and most other infrastructure things are run by the state. State taxes include stamp duties when buying, land tax if you have so much land etc, car rego for roads (supposedly). Most taxes here are federal and they hand out to states.
bloody brilliant Bob!!!!!!

talk about taking the bull by the horns!

I really hope it all pays off for you and i beleive it will. it's great to see someone giving it a real good go! Very inspirational for me. I have been looking at exactly the same area (buffalo, niagra & detroit) and couldn't beleive the low prices/high returns! Your info has been priceless to me.

have you thought about using any "creative" r/e tecniques in these areas ie lease options, wraps etc?

keep it comin' mate :)
Thanks, Henry.

I very quickly dismissed the thought of wraps etc because they are a business that you have to be on the ground for. You need your systems set up and your structures in place and a very good understanding of what you can and can't do.

Plus a lot of the people can afford these rents by virtue of Government rental assistance. Govt also has home buying assistance but is not nearly so generous. Finally, there's a real attitude problem - the I want it NOW mentality is very prevalent there, much more so than here, which is really saying something.

However, I do have a couple of thoughts in mind ;)
Buying in the US, part 6.

So I got on the plane (or a series of them, interrupted by 3 hour stopovers in airports). By the time I’d gotten onto the San Fran – Sydney flight I was into a full scale panic attack. WHAT HAD I DONE? I’d probably contractually committed $50,000 more than we owned, it was all going to fall to pieces, I was doomed…these emotions were so unfamiliar to me that for a while I was quite lost.

In the end, I wrote down a list of what was worrying me and why:

I was
• overexcited by the properties
• worried by those that I bought unlet
• worried that I’d spent too much and that I should have driven harder bargains
• worried what would happen if it “all went wrong” – property in Buffalo is illiquid even compared to normal real estate.
• Short on sleep
• Worried that I might have messed up
• Worried that we should have concentrated on cap growth for a few more years before moving to focus on cash flow
• Worried about putting so much trust in relative strangers.

Then I wrote down how to deal with it

• We were experienced in remote control property management.
• I trusted my attorney, and the realtor knew that I intended to be ‘repeat business’, and the PM needs my continued patronage to draw a paycheque. The accountant came recommended, so it really wasn’t so much a case of strangers – they had qualities I wanted, and reasons to align themselves to my interests
• As for not driving harder bargains, the realtor had almost been apologising for some of my more derisory offers – I was just getting greedy
• I had spent too much, but there were ways out, the building inspections hadn’t come in yet and may others would be interested in JVing. The correct question was not could I afford it, but how could I afford it?
• I don’t sleep well on planes, and there wasn’t much going to change but I had to recognise the effects of a stressful fortnight and temper my reactions.
• Most of the properties were already let and a lot would have to go wrong before I was forced to liquidate
• Maybe I had messed up in some areas – get over it! I’m not perfect.
• Going for cap growth is gambling in our general philosophy, at least in the short term. Also, our experience is that properties offering huge yields now are later viewed as undervalued, and go through big cap growth spurts – wee may get our cake and eat it too.

Eventually I calmed down. I made it home in one piece and started to organise myself for the long distance closing process.

End of Part 6
Buying in the US, part 7

So there I am at home once more, with deals in the bag but not settled. It had become clear that the 5 unit was going to be a logistical and regulatory nightmare. Although the formal building report was by no means the worst I had seen, it had problems in addition to those I had identified. The contract has a standard ‘out’ for the building inspection clause and I used it, but to be on the safe side, my attorney refused to use her power of attorney to approve the contract.

All of the other properties are two units which will be easier to insure, easier to finance and easier to manage. I came to the conclusion that a cookie cutter approach was going to be best.

The other building reports started coming in, each one identifying problems. For most of the properties I demanded that they take $1000 or $2000 off the price or have a certified repairer fix the issue. Usually they took the former option.

One property (the second best in returns) had a disastrous report. I had offered $25,000, but after reading the report offered either contract cancellation or $15,000. they came back at $20,000 and I countered at $18,000. They stuck to their guns and I took a deep breath. I don’t usually fall in love with deals, but I had with this one, so much so that I was trying to convince myself that it would work. After some cooler thought, I cancelled the contract and thanked my lucky stars that they hadn’t accepted either offer. I could probably have flipped the property, but that would have been a speculative gamble, which is not and have never been part of our plan.

Meanwhile, I was trying to set up my bank accounts (succeeded to date with one, but not the other) and to get finance, to leverage the purchases and do it over. I wanted to see the first cashflows, but finance will take a minimum of 60 days. I only had the name of one broker who was willing to do business, but was still looking for more. After intensive websearching I found another. I also spoke to Dale GG, to thank him for some advice he’d given us which had encouraged my wife in particular to go ahead with our overseas adventure. In passing, he mentioned others who had done or were looking at doing the same and asked if he could my name to them. One of them put me onto another loan broker.

The whole thing was pretty stressful, with phone calls at midnight or (after Ocober 30 when daylight saving changes here and over there changed the time difference from 14 hours to 16 hours) at 6 am, daily reviewing building reports and keeping the realtor and the attorney running to keep up – they were REALLY good.

At the same time, I was having real difficulty contacting the PM and this remains a bit of a problem. I have since discovered that he is more a spoken words person than an email person. That’s a bit of a nuisance considering the time and distance – I’ guess I’ll get myself a phone card if it appears that this is indeed the most effective way of communicating.

I still haven’t gotten around to the final long strategy email to the accountant, nor have I finalised finance, nor have I purchased stoves and refrigerators for those houses that need them. I’m still having occasional misgivings and the profits (of course!) don’t look as good as they used to.

I also looked into getting mortage-backed small business loans to finance this, but of course rental income is not a business, it’s passive income. Yeah, right. And mortage-backed only applied to your personal home or your place of business (the latter not including a rental property).

I even offered to x-coll, to get a better deal. No thanks, I was told, we don’t do that any more! :confused: :confused:

Bottom line – should I be able to refinance at about 4-5% on a 65% LVR, the cash on cash still comes out at a pretty respectable 20% average, before tax, but after debt servicing. If I can secure half a million dollars worth of similar properties, and split the income with my partner, I may decide that the service is a loser’s game and put more effort into investing. Full time.

End of part 7
Buying in the US part 8 (final part).

This was all about education, as I said at the start.

I hope a lot of what I’ve written will be useful, but equally I’d have to write War & Peace to really cover everything that happened. There is so much that is truly alien because it is sooo similar, but different underneath.

This applies to the people, the culture, the tax rules, the property rules and everything else. You can accept Kiyosaki’s statement that when people say “You can’t do that here!”, they usually don’t know what they’re talking about. At the same time, it might be true that you can do it they way you’ve always done it at home.

For those who would invest overseas, advice and home truths:

It really does require getting over there and getting your hands dirty. Had I done so in the first place, I may not have bought the four unit property and might have actually done somewhat better for myself. On the other hand, having the property gave me the confidence to try for more.

Don’t panic, and don’t get greedy. Deals need to be examined for costs – in theUS the property costs are significant, far more so than in many markets in Australia.

Look for opportunities, make your own assessments of areas, but also talk to the locals. Find out the pitfalls and look out for war zones and other areas that have unwelcome characteristics that would be unfamiliar to the bulk of Australian investors. For example, Buffalo has the ‘lake effect’ – an unusual weather pattern that in winter can result in a four foot snow dump from a combination of cold winds and Lake Erie acting as a heat sink. Roofing is important and an ongoing cost.

Ask yourself what makes the area you are considering both better and worse than other areas. The answer will be a combination of your priorities, investment philosophy, market beliefs, market facts and risk tolerance, to name a few factors. I’d anticipate that most people would have different answers even if they chose the same areas in the end.

If you have a partner they need to be totally involved when you try this step. A lack of agreement, support or understanding could be disastrous.

Ask yourself if you really want the extra level of hassle. Can you deal with the foreign currency exposure before refinancing into $US? See Jeremy’s post above, bemoaning the rising $A which is reducing his effective rental income. Have you got the self-confidence to push through the inevitable difficulties and misunderstandings?
Have you tried long distance renting in Australia before? (That gives out a few lessons in handling agents, tenants and trades.)

Use contacts, spread your network and educate yourself. We did this as much as possible beforehand. Try and prequalify the team that you will set up. Search for specialists and accept that you are going to pay for quality. Be aware that paying does not guarantee quality, however – the PM I selected turned out to be the cheapest but that certainly didn’t get him the job. I have since had some indications that he is a genuine go-getter, solving problems before I hear about them.

And ask me. I’m a novice and a newbie and none of my advice is guaranteed. All the usual disclaimers apply. But if you are energetic and enthusiastic, I’d be happy to help however I can.

Here endeth the lesson.

Happy investing, wherever and however you choose to do it.

Hi Bob,

Fantastic story, had me nail biting thru the whole thread to make sure that it turned out ok. You should be very proud, sounds like it has turned out very well in the end.

What actually made you want to invest in the US as opposed to say NZ, UK , etc?

And how did you actually ascertain whether an area was 'good' or not from spending so little time on the ground?

Good luck