Update on my USA adventure

[Perp]

Thanks to LynnH and TPFKAD for their kind thoughts re my US "heads of agreement". I decided to start a thread on the topic so as not to hijack other threads, but based on my unfortunate experience with the "Why NOT to buy in the USA?" thread, I won't be sharing as much detail as I did in that thread.

I have been researching the US market for over a year, and decided about 9 months or more ago that I'd target multi-family properties (ie blocks of apartments). My motivations for doing this rather than buying houses are:

1) Property management - is generally woeful for houses in the USA. Renters almost exclusively live in apartment complexes there; not so much in houses. The vast majority who own houses as IPs manage the properties themselves. If I have an apartment complex, I'll have on-site management, and that means a staff whose sole focus is looking after my investment, and I just have to manage the on-site management.

2) Finance - without a FICO and SSN and other things that US residents have, it's much easier to borrow commercially than it is for residential property. It's much easier to borrow $1M than $100K. Property being CF+, larger property investments - with larger numbers of tenants - are seen as less risky to lenders than small investments.

I spent April in the USA getting to know my chosen location (a thriving southern city > 500K people). I met some fantastic people, and felt that my choice to invest in this area was a solid one; what I saw confirmed what I'd deduced from reading and looking at statistics before I went.

In this part of the USA, the typical complex size is around 250-300 units. I'm looking at a "small" complex of around 80 units, which I plan to rehab (renovate) and convert to affordable housing for seniors, because I've established that this is an area of huge demand and almost zero supply in that area. The complex consists of several buildings, nearly all of which is single-storey, on 2 acres.

I'll be getting in with no money down (All figures US$.) The purchase price is around $2M, and a $500K rehab is needed. (New roof, some electrical, some smoke alarms and signs, repaint exterior and interior, new carpet, catching up neglected maintenance, and quite a lot of landscaping.)

"Purchase plus rehab" cost is $2.5M, and I can borrow 80% of this on what's essentially a "commercial lo doc". So at settlement, the vendor will receive the entire purchase price of $2M from the lender. The vendor will then lend back to me the $500K needed for the rehab, which is "my" equity contribution to the venture. This loan will be secured by a second lien (second mortgage) over the property, and is being disclosed to the lender.

The forecast after-repair value (ARV) of the property as seniors' accommodation is $3.5M. So in a year, I should be able to refinance to 80% of $3.5M = $2.8M, which would allow me to pay back the vendor the $500K that I owe him. I know everybody's thinking "what if it doesn't value up? There are two ways of securing this, and I'm not sure which way we'll go yet:

1) Preferred option, if lender agreeable - some lenders will appraise the property in its after-repair state now, and approve (in principle) the loan up to 80% of the ARV, with progressive drawdown, ie drawdown would be limited to $2M until rehab is complete.

2) Backup option - vendor is agreeable to a provision in the contract for the $500K loan period to be extended for up to several years if required.

The forecast P&L figures suggest that after rehab, the figures will look something like this:

Gross income: ________________ $800K
Expenses: ___________________ $500K
Net Operating Income: _________ $300K
Mortgage interest (6% of $2.5M): $150K
Positive cashflow: _____________ $150K

I already have most of my team - brokers, on-site management, handyman etc - identified, and feel extremely confident that I've met some top-notch, reliable, trustworthy people.

I have kept a detailed blog elsewhere, including a reproduction of the constructive bits of the deleted "Why NOT to buy in the USA?" thread, and full information on this deal, the location, some other deals I saw, etc. Those who are interested in viewing it can contact me via PM.

 

[Player]

Congrats on the HOA.....may your hard yards and feet on streets unfold in the manner commensurate with your efforts and passion about following your dream

 

[vbplease]

Tracey,
Will you be back home in Aus during the whole refurb? If not, do you have a project manager looking after it?

I get the impression a 75% lend, using vendor finance wasn't very difficult? What's to stop average Joe from doing this, assuming he has no equity, but he knows what he's doing i.e. has a plan, contacts, experience etc

Sounds like a great deal! Thanks for sharing all the details and I wish you all the best with it!!

 

[skater]

Tracey, please keep us updated on this. I hope all goes to plan.

 

[Dazz]

Excellent work ozperp - you are definitely in the thick of it now - the only way is up.

You deserve all of the rewards that are due to arrive, given the massive amount of passion, vim and verve you have poured into the deal.

I think you are indeed brave, posting so much detail on a public board, where certain others take great delight in kicking people in the teeth for doing so.

You're doing it girl !! Best of the British to both you and your hubby.

 

[Perp]

Will you be back home in Aus during the whole refurb? If not, do you have a project manager looking after it?

I don't plan to be resident in the USA, but I imagine I'll rack up a few frequent flyer points. I'd be happy to relocate for 6 months or a year, but I don't think hubby's so keen, so we'll see... Certainly if I'm not there, I plan to visit at least, say, a week every 2 months, or something like that. I do have several people lined up to keep an eye on things for me, who I'm confident have the capacity to keep things on track, and will look after my best interests.

I get the impression a 75% lend, using vendor finance wasn't very difficult? What's to stop average Joe from doing this, assuming he has no equity, but he knows what he's doing i.e. has a plan, contacts, experience etc

In terms of financial capacity alone, you're right - anybody could do this deal (who was brave enough). Getting the deal done relies on persuading the lender to lend, and persuading the vendor that you've persuaded the lender.

The lenders aren't too concerned about the cashflow of these properties; the cashflow is awesome and the deal funds itself. They're more concerned about protecting their equity, and they want to make sure that you're not going to walk away and leave them a half-renovated property, because they have an entirely different attitude to "renovators' delights" than we do in Australia.

Consider a house which in great condition would sell for $200K. Let's say that it needs a new coat of paint, has a few holes in the wall that need to be repaired, and perhaps the timber floors need polishing, all of which would cost $20K for professionals to do. In Australia, properties like this might sell for, say, $175K ($5K discount for work not being done), and then buyers will do the paint, sanding etc themselves for $5K in materials, and gain $20K in equity for doing the work themselves. (Spend $180K plus some sweat to get a $200K house.)

In the USA, buyers really dislike even organising for work to be done, let alone doing it themselves! A house such as the one above would usually sell for about $120K, and a flipper will come in and pay professionals $20K to do all the work in a week, and sell the house the next week for $200K, pocketing $60K in profit. That's why all those shows like "Flip That House" and "Flipping Out" exist; this really is quite doable in the US market, much more so than here.

BUT it means that there's a risk... if you do only part of the renovation, you'll probably lose money, because there doesn't seem to be much discrimination in pricing for how much work needs to be done. Properties either "need work" or are "retail", and if needing work get 60% of ARV (after repair value), or else they have the work done and get 100% of value, but there's little in-between.

So during the renovation, you usually have negative equity - you're putting in money to improve the property, but until you finish the project, you won't reap any reward in terms of value. Thus getting a deal like this financed is all about convincing the financier that you are committed to the deal and will finish it. The easiest way to do this is to put up some of your own cash; to have something to lose if the project doesn't complete. I can't do that; I don't have US$500K sitting around as loose change (yet ). What I did was talk to lenders and the vendor about projects that I'd done here, what kinds of problems I encountered and how I resolved them, why I wanted to buy this property, and how I planned to complete this project. Whilst (almost) anybody could have done it, the difference is that I did do it - by spending time in the USA networking and getting myself known. Don't underestimate the importance of "turning up".

But the short answer is that you're right: there's no reason why anybody else couldn't duplicate what I'm doing.

Excellent work ozperp - you are definitely in the thick of it now - the only way is up.

****, hope so. LOL

Thanks, Dazz, and also to Player and skater for their encouragement.

 

[Horizon]

Go Girl!

I have enjoyed following your blog immensely Tracey, and congrats on pulling together what looks like a great deal! I look forward to reading more on the closing phase of this acquisition, and whether the four legged family member(s) make it to the settlement party or if not, recognise you on your return.

Cheers,
Horizon

 

[SYD]

Congratulations Ozperp - a very inspirational story.

Does this now mean you will be changing your nickname to USperp?

 

[GIDDO]

After reading your posts I can see you are committed to this project. And like a lot of things in life, it seems that commitment is more than 50% of what is required for success.
I believe in you, just like the US financiers do.
Hope it all goes smoothly.

Giddo

 

[Perp]

I have enjoyed following your blog immensely Tracey

Thanks, Horizon. Puppy won't get over to the US - quarantine's a nightmare - and undoubtedly will forget me every time I leave, but thankfully gets to know me again quickly.

Congratulations Ozperp - a very inspirational story.

Thanks, but I feel obliged to point out that it's not money in the bank yet...

Does this now mean you will be changing your nickname to USperp?

Several forumites seem to (mis)read it as "prop" anyway... LOL I might just shorten it to "Perp" actually... suitable for a global offensive.

I believe in you, just like the US financiers do.

Thank you, my dear birthday twin.

 

[NedKelly]

I don't plan to be resident in the USA, but I imagine I'll rack up a few frequent flyer points. I'd be happy to relocate for 6 months or a year, but I don't think hubby's so keen, so we'll see... Certainly if I'm not there, I plan to visit at least, say, a week every 2 months, or something like that. I do have several people lined up to keep an eye on things for me, who I'm confident have the capacity to keep things on track, and will look after my best interests.

Hi ozperp, I know I am always coming up with spanners but be careful about staying too long in the USA or you will be considered resident for tax purposes. That opens up a real can of worms with the IRS. When I fill in my USA tax returns my accountant has to certify the time I have been in the USA. Also do you need a working visa? The visa waiver program does not entitle you to work and I would have thought that as you are setting up an LLC from which you will presumably take some form of wage/salary, this might raise questions about your eligibility to work.

 

[Perp]

be careful about staying too long in the USA or you will be considered resident for tax purposes.

Thanks for the heads up; throw as many spanners as you like.

I won't be drawing a salary, thus won't be "working" and I don't believe there's any issue of becoming resident for tax purposes, but I'll confirm with my accountant.

And no, I don't believe that I need a working visa, because I won't be working. You are allowed to conduct business for up to 90 days under the Visa Waiver Program. Worst case, I could get a B-1 business visa, which shouldn't be a problem.

 

[BayView]

Good on ya Tracey.

I know you'll make this work.

But for god's sake - make sure you get to the GRAND CANYON!!

 

[HiEquity]

Hi Tracey

Just adding my best wishes for it all to come out better than you hope! Thanks for posting the numbers as well - they really do tell a very useful story. You know my problem with the kudos!

If you don't mind me asking, what sort of net yield would a property like this attract without the reno/rehab? Is it the same story as with the value - ie very low rent for a fixer upper and nice juicy rent for the bells and whistles?

I guess it's a roundabout way of asking what's that type of deal like for a more passive B&H investor who may be prepared to put up the $500k you mention for example, if you could still get a decent cashflow?

 

[Perp]

If you don't mind me asking, what sort of net yield would a property like this attract without the reno/rehab? Is it the same story as with the value - ie very low rent for a fixer upper and nice juicy rent for the bells and whistles?

No, "fixer uppers" are virtually untenantable at any price, which I guess is why they sell for such a hefty discount. (I'm not rehabbing because the property's in poor condition; I'm primarily rehabbing to "reposition" it to target seniors, but whilst I'm at it, may as well re-paint etc.)

There is a higher average vacancy rate in the USA (5-10%, still not a concern if you have multiple tenants and take into account the much higher yields), so tenants can afford to be choosy. Even the very poorest people want the property freshly painted, great floors, nice light fittings, etc. The overall standard of repair of properties in the USA is higher. The abundance of cheap labour ("illegal aliens", and uneducated locals competing against illegal aliens ) means that repainting and other non-trades works are relatively cheap over there, and most landlords repaint and replace carpets every year or two, or even every tenant. Guess you at least don't have to worry too much about the condition report... Keeping the bond seems to be pretty standard - some landlords brag that they've never returned the bond - and they think "oh well, I'll use that to rehab for the next tenant". In most states, the landlord controls the bond - it goes in their account and it's up to the tenant to try and justify getting it back. (A bit different, eh?)

If you just want to do a buy and hold and have $500K cash, you could still get positive cashflow. You could probably pick up a property similar to the one that I'm buying and the figures as affordable housing for lower socio-economic bracket would look something like this:

Gross income @ 85% occupancy: $350K
Operating expenses: $175K
Net Operating Income: $175K
Interest @ 6% on $1.5M loan: $90K
Positive cashflow: $85K pa

Which gives you an 17% return, cash-on-cash, on your $500K investment. And there's room to improve those figures significantly by improving occupancy; with new management you should be able to boost the figures at least $40-50K pa.

If I had $500K cash and wanted a passive investment, though, I'd be more inclined to buy a commercial property on a lease where the tenant pays all outgoings (NNN, "triple net" lease). You could get an 80% lend, buy a $2.5M property, and in many areas get a 9% net return for very little effort. (Though, of course, depending on the lease, there is the vacancy risk to consider.)

Net Operating Income @ 9% of $2.5M: $225K
Interest @ 6% on $2M: $120K
Positive cashflow: $105K
Cash-on-cash return: 21%

And obviously, if you were able to get vendor finance for some or all of the 20% deposit, the figures get better still...

There are awesome deals to be done in the USA; the biggest limitation for me was having no cash/equity to put in. This restricted me to deals where I could get vendor finance, and then when I found vendor finance, made getting finance more difficult.

If I'd had $500K cash, I would really have had a good time shopping for deals. (Hmmm.... maybe there's a business opportunity in there, being a buyers' agent specialising in US commercial properties for Aussie investors with cash but little/no local knowledge... )

 

[Aaron Sice]

juicy juicy deals there Tracey - appreciate the update.

I love the idea of buying a 5+ pack and renovating for max yield, only need to spend a few grand USD to get what would cost 3 times that here.

keep it up!

 

[MichaelW]

If I'd had $500K cash, I would really have had a good time shopping for deals. (Hmmm.... maybe there's a business opportunity in there, being a buyers' agent specialising in US commercial properties for Aussie investors with cash but little/no local knowledge... )

Count me in...

Just let me knock over my wee little local development first!

Awesome work OzPerp, love your tenacity, drive and energy. Good things come to those brave enough to reach out for them.

Cheers,
Michael

 

[Rockstar]

(Hmmm.... maybe there's a business opportunity in there, being a buyers' agent specialising in US commercial properties for Aussie investors with cash but little/no local knowledge... )

Think & Grow Rich Tracey

Just thinking about the 80 units/tenants. You'd be holding a fair whack of bond money there eh? Enough to help finance the next purchase? How much bond per unit?

To be serious, it sounds like a lot of trust you will be putting into the hands of your management team - as you say, managing them will be the key to your success. Best wishes toward your future achievements and gratitude for sharing the experience.

 

[babushka]

Thanks, Tracey, for all the updates. Am too, been following your interesting journey! My trip to the US in March was not successful - family is always a big hassle. So, we are now considering buying another IP in Australia instead of buying in the US.

Go all the way and achieve that dream!

 

[angie10]

Hi Ozperp

I am new to this forum so excuse my ignorance but what do you mean by PMing you?

I too am very keen in looking at the US market and have been researching the Multi-family - 5+ blocks, however not quite to the extent you have gone. Congrats on how much you have achieved. I would be very interested in reading your previous posts on "Why NOT invest in the USA" if you could tell me how to get my email address privately to you.

Look forward to hearing from you.

Ange