Why NOT to buy in the USA?

[Perp]

OK, I'm actually quite seriously considering following in the footsteps of quiggles et al and embarking on a USA adventure. The title of my thread is because I want to ensure I've considered all the major risks. I have read all the USA info on this forum, as well as quite a lot elsewhere.

Without wanting to go into too much detail about my specific plans, I'd just highlight that I'm aware of the following, and have taken these into account:

* sub-prime has resulted in some markets having lost significant value, and quite a lot think further falls are likely
* perils of long-distance management, difficulty in finding good PMs
* generally more tenant problems, higher vacancy rates, higher rent default rates etc
* difficulty of obtaining finance as a "foreign alien"
* high property taxes
* LLCs and tax considerations
* currency fluctuation risk

I think that the strong $A, the recent "shaking out" of the housing market with sub-prime (even if it's not totally over yet), and the strengths of the particular area that I'm considering targeting, make now an ideal time to venture into this market. (And no, I'm definitely not talking NY state!) The area that I'm looking at (a particular area within a major and growing city; not in the sticks or a single-industry town) has gross yields 20-30%, so even if values in this area, which are predicted to rise modestly in the next year, instead dropped by 10%, I'm still better off buying today and getting that rent for the next 12 months. As well as the monetary considerations, in a year's time, I suspect there'll be more investors back in the market and thus more competition for buying. So I'd rather get in now, when I believe that mortgage brokers, realtors, and vendors will be very keen for the business.

Any other big issues that I haven't considered yet?

 

[oc1]

Have you spoken to several people that have invested in the US before? That would be a priority in my opinion. Also Tracey, i'd say revealing "your plans" would benefit you here. It's not like we're about to all take a trip to where you are looking. I know i won't

I know of one guy that, looking back at investing overseas (US in this case), wouldn't do it again when you can simply invest in your own backyard. Food for thought

 

[Perp]

Have you spoken to several people that have invested in the US before?

Yes, sure have - both locals (ie US investors) and a few Aussies that have done it. Plenty of them have had bad experiences, like your friend, but I've analysed the failures of the people that I know of, and I believe that I know why they failed, and that I can avoid their mistakes/circumstances. Can you tell me specifically why your friend wouldn't do it again?

Also Tracey, i'd say revealing "your plans" would benefit you here. It's not like we're about to all take a trip to where you are looking. I know i won't

True, one posting on SS is unlikely to result in a rush of investing competition - but I'm wary of what happened with Buffalo!!!! (ie Aussies flooding in.) I don't really see the benefit because I'm confident in my choice of area, and anybody else can do their own due diligence. There are plenty of potentially good investing areas over there. I've spent nearly the past month solid on researching various areas; I don't want to hand my conclusions over on a platter.... Either nobody would consider my research valuable anyway - which is fine, and probably wise - or they do value my research, in which case they may become competition and/or blame me when their investment doesn't work out!

I've just realised my plans consist of more than just location, so I'll reveal some other aspects of the plan. Hubby can get sponsored to work in the USA, and we would then be able to obtain an E-3 visa (awesome visa especially for Australian skilled workers). With an E-3 visa and a job, we could apply for SSNs, then get FICO scores etc and get all the necessary documentation to qualify for standard mortgages in about a year. For our first lot of properties, we are going over with about $100K cash, which we can use to get up to 70% LTV "foreign national mortgages", so perhaps $300K-ish of property. The properties I'm looking at are about $30K a piece single-family homes yielding 25%-ish, so $300K would generate $75K in gross income, which should translate to at least $30K pa in net income. If I can find some "owner will carry" (vendor finance) deals, I may be able to secure more than $300K-worth for now. Then the goal is to wait a year, refinance the properties with standard mortgages at higher LTVs, and keep buying - buying should still be OK in a year. That's another reason for getting in now - we need a year to get "established" over there, and I want it to still be good buying when we're done with that process.

I know that lots of Aussies have gone for multi-family and condos, where the yields can be even more spectacular, but I think that these yields for standard houses are great, the tenant problems are likely to be fewer (your tenants are a better demographic), and appreciation is likely to be better.

 

[Sunfish]

You are already aware of the adage "All property is local" and that it is even more relevant there than here. Maybe more than most realise.

I pick up a little about real estate in my American based reading and you must pick a low tax state (people are moving out of California, tax exiles) and avoid the rust belt, Chicago is a disaster zone apparently. Avoid also the ice belt.

I would begin searching Dallas, Texas. There never was a property bubble there, it is warm and I think the taxes are OK.

 

[oc1]

I've just realised my plans consist of more than just location, so I'll reveal some other aspects of the plan. Hubby can get sponsored to work in the USA, and we would then be able to obtain an E-3 visa (awesome visa especially for Australian skilled workers). With an E-3 visa and a job, we could apply for SSNs, then get FICO scores etc and get all the necessary documentation to qualify for standard mortgages in about a year. For our first lot of properties, we are going over with about $100K cash, which we can use to get up to 70% LTV "foreign national mortgages", so perhaps $300K-ish of property. The properties I'm looking at are about $30K a piece single-family homes yielding 25%-ish, so $300K would generate $75K in gross income, which should translate to at least $30K pa in net income. If I can find some "owner will carry" (vendor finance) deals, I may be able to secure more than $300K-worth for now. Then the goal is to wait a year, refinance the properties with standard mortgages at higher LTVs, and keep buying - buying should still be OK in a year. That's another reason for getting in now - we need a year to get "established" over there, and I want it to still be good buying when we're done with that process.

I know that lots of Aussies have gone for multi-family and condos, where the yields can be even more spectacular, but I think that these yields for standard houses are great, the tenant problems are likely to be fewer (your tenants are a better demographic), and appreciation is likely to be better.

You just beat me to it Tracey. I was going to suggest that location isn't the only aspect to a plan

 

[Perp]

You are already aware of the adage "All property is local" and that it is even more relevant there than here. Maybe more than most realise.

I should say that I'm reasonably familiar with the USA as we have family over there who we visit every couple of years, and I have local contacts. I haven't been to the particular area I'm targeting, but I have visited the state before, and we plan to spend at least a month in location getting to know the area.

 

[Sunfish]

I should say that I'm reasonably familiar with the USA as we have family over there who we visit every couple of years, and I have local contacts. I haven't been to the particular area I'm targeting, but I have visited the state before, and we plan to spend at least a month in location getting to know the area.

You are well prepared, so good luck.

 

[WinstonWolfe]

You are a good researcher regarding fine detail Tracey.

And I'd encourage you to apply your logical mind to researching the US macroeconomic future. I read prolifically about what is happening there and most are saying the bottom is a ways off yet. It isn't just a matter of sub prime unwinding and the banks reining in losses via the fed helping margins for another year. There's several decades of consumer debt that can no longer be funded out of household equity. Just as the banks have to wind back debt, consumers also need to do the same.

rates can't come down any further realistically. But house prices can, as well as the broader economy. Falling knives is the name of the game IMHO, for at least another 3 years in the USA. be patient. keep researching other options.

and in alignment with what someone alluded above,

NOTHING IS REAL THAT ISN'T LOCAL.

 

[Perp]

Thanks, Sunfish and Bruce (WW).

oc1, are you able to tell me why your friend's USA investments weren't successful?

I appreciate all input - including comments about the state of the market - but the properties I'm looking at are in area that hasn't boomed, are way, way below the US median house price (so can't see they could really fall a lot further, if at all), and in an area with many positive indicators. Even if I'm wrong, market risk is one that I'm comfortable with accepting.

I'm more concerned as to whether anybody can identify fundamental flaws with the mechanics of my proposed plan for investing in the USA. Of course, handy home leaver hints from those who've been there would be particularly appreciated.

 

[PrimeCommercial]

I'm not sure If you've considered it or not, but you haven't mentioned anything about bringing the profits back into Australia. I have no idea what the consequences would be, if any, but it should be something to consider.
You dont want to find out that you get taxed twice when bringing all the profits back to oz.

The exchange rate alone makes foreign investing quite attractive at the moment, so good luck.

 

[keithj]

......But house prices can, as well as the broader economy. Falling knives is the name of the game IMHO, for at least another 3 years in the USA. be patient.

I'd agree that there's no rush to buy in either US or Oz for at least a couple of years. Now is a good time to be watching closely for trends & identifying specific areas. Survival and/or patience is the name of the game ATM

 

[ozi]

I should say that I'm reasonably familiar with the USA as we have family over there who we visit every couple of years, and I have local contacts. I haven't been to the particular area I'm targeting, but I have visited the state before, and we plan to spend at least a month in location getting to know the area.

I would say this is a must do! I got caught up in the USA hype a couple of years ago when all the Aussies were heading over in flocks and buying up all the scum properties in NY State which local investors wouldn't be seen dead near. With 25-35% gross yields promised it seemed too good to be true, and that turned out to be the case. These gross yields were more likely to be much much lower in net value and is many cases also negative. I spent 6 months researching NY before heading over where I spent 2 weeks on the ground meeting all the contacts I had made prior to arriving, viewing properties, etc... It didn't take me long to realise the risks involved were quite BIG. I looked at Bufallo, Rochestor and Syracuse and I'm glad I didn't buy in any of these cities. You really need to go see the place for yourself to make judgement. You can do all the research you want but its not until you visit that you get to see it all first hand.

I would say the biggest issues with investing in these locations are:

1) Finance - it was almost impossible getting finance for any of these properties. This was the case 2 years ago and I doubt things have changed.

2) Property management - when investing offshore, property management is the key! You really need a manager who will do their job and look after your property. What I found was most PMs were hopeless and far from reliable. Getting in contact with PMs to resolve issues wasn't the easiest of tasks. You would also get ripped off when it came to any maintenance issues.

3) Tenant issues seemed endless. These $30k houses are all in lower socio-economic areas with endless troubles. Tenants have no respect for the properties and are often behind in payments (thats if they pay!).

4) Maintenance - these homes are quite old and in need of constant maintenance. This can be a costly exercise if you are planning to buy and hold.

There all also other issues such as tax, legal, etc which I'm sure you've already looked at. I know of quite a few Aussie investor who have been burnt in NY. Even the guys who were advocating buying in NY have since gotten out of that market.

If you are looking for a set-and-forget type of investment, I would advise you to give NY a miss. The only way I could see buy-and-hold working in these areas is if you were local and lived there, making management easier. The other option which I considered was trading properties, i.e. buying foreclosed properties cheap in good areas, giving them a quick reno, then selling them. Once again you need to be there on the ground for this to work. The good thing about this strategy is that you eliminate 2 of the risks - tenants and property management.

Good luck with it all.

Cheers,
Ozi

 

[topcropper]

G'day Ozperp.

What about a rural area for a property investment in the US? Obviously wait for a bottom though.

The US farming scene is in the midst of a massive boom. Agricultural land values have more than doubled in 2 years [in US dollars though] due to huge grain prices. The US is still the food bowl of the world. US states such as Iowa and Illinois produce much more grain than the whole of Australia!


Now what about Moline, Illinois?
I just mention this place as it is the head quarters of John Deere. The worlds leading agricultural machinery manufacturer, who's shares are doing well. Order a John Deere tractor or harvester today in Australia and you wont get one for 10 months! They can't keep up with demand.

A 5 minute google found this,....

http://realestate.yahoo.com/Illinoi...us=&bedrooms=&bathrooms=&type=classified&b=21

Dunno why house prices in the US are so cheap, Surely this house is half the construction and material cost. Maybe it's next to the local drug dealers..??


The US dollar is falling ,but eventually, it will stop. The US economy is crook, but eventually it will improve. Eventually the lower US dollar will decrease imports due to higher prices, and increase the value of US exports. Eventually the US economy will be competitive again.

The US is still a manufacturing powerhouse, despite what the critics say. Brands such as Boeing, Caterpillar, General electric, John Deere, Kenworth, Cummins, Hewlett-Packard, Intel, Microsoft, pfizer, etc.


This is not advice. I have no idea really. Moline, Illinois is probably a dump.

See ya's.

 

[Andrew_A]

I fancy a little off the grid farm in the S Isle of NZ to sit back and watch the book of revelation play out, might need to hurry up a bit if Israel keep up the sort of talk that pushed oil up on Friday..

Oh yeh.. farmland in the US.. why not buy here instead? Seems to be adding a layer of complexity to the resi investor eyeing potential opportunity in the US.

Seems to be doing well at the moment though.

 

[grossreal]

hi ozperp
I have not look at the us for buying houses for a couple of reasons.
sub prime is not over the first wave is yes but the arms have not opened as yet.
and that wave is to be bigger then the first and there is not alot that can be done to stop it.
I have a couple of us investors in a couple of projects and if there was money to be made in investing in resi in the states there money would not be comming over here and these boys are from new york and finance guys from there. they are keeping an eye on the market but investing off shore.
could be to hedge but more to stay clear of what tey see as going to happen.
I would not be investing in iran,congo, serra leone, or the states as they are all possible war zones.
the last one looking like a war zone just no fighting.
I would and am keeping a very close eye on the market as those arms open to see what effect they will have.
yes there some places that will be fine and no problem.
but there is also a couple of funding looking for investor into the congo.
If I were you I would tread very slowly before jumping into that soup.
I am not saying the its the end of the world for there economy as no one knows.
but the signals are saying that they are infor a big shift so for me I would notgo to clos to that movement.
unless you have a higher risk profil then me.
and that great go for it

 

[marg4000]

If the prices are so low, and the yields so high, then why aren't the locals snapping them all up?
Marg

 

[Perp]

You dont want to find out that you get taxed twice when bringing all the profits back to oz.

Thanks, shady, yes, I'm aware of the repatriation and taxation issues. I haven't decided on my final structure, but I have investigated this a little and I do believe it's possible to avoid double taxation. I'm leaning towards an LLC owned by my Australian DT, but I'll certainly be seeking expert advice on this matter.

I'd agree that there's no rush to buy in either US or Oz for at least a couple of years. Now is a good time to be watching closely for trends & identifying specific areas.

Thanks, keithj. As stated, I really want to get a "foot in the door" and establish my credit, ready for the really top buying conditions in a year or two. I do plan to buy some property soon; the area I'm looking at didn't significantly appreciate during the "bubble", so I don't think it'll be as susceptible to the burst, either. Could be wrong, of course, but that's my opinon.

I got caught up in the USA hype a couple of years ago when all the Aussies were heading over in flocks and buying up all the scum properties in NY State which local investors wouldn't be seen dead near.

ozi, thanks for your detailed response. I've considered all the factors you raised, which are entirely consistent with the experiences of other NY state investors I've talked to, and I'm happy with my plan for addressing these issues. Thanks so much for taking the time to share your experience. I also considered investing in NY state about 3 years ago and am glad I didn't. I believe the market I'm now considering has many significant differences to that situation.

What about a rural area for a property investment in the US? Obviously wait for a bottom though.

Thanks, TC. I'm looking at a city, but in a state that has a significant agricultural economy. I'll check out the rural markets whilst I'm there - I already have a few rural towns in mind to watch, actually. Though I'm generally looking at the warmer southern states - snow/ice creates all sorts of additional maintenance issues and expenses. And besides, if I'm going to visit occasionally, I'd rather go somewhere warm!

why not buy here instead? Seems to be adding a layer of complexity to the resi investor eyeing potential opportunity in the US.

Price, price, price... our real estate is orders of magnitude more expensive at the lower end of the market. Let's consider two comparable suburbs of big cities, ie socio-economically comparable, same size city etc. A middle-class family home would be $400K in both instances. A 25th percentile house (ie working class, but not a slum) in that Australian suburb might be $300K. A similar quality home in a similar suburb in some cities of the USA is only $50K. And the rents are about $250-300pw in both cases. Yes, the USA property has some property taxes etc, but it's costing you ONE SIXTH as much to get in.

sub prime is not over the first wave is yes but the arms have not opened as yet.

I may well be wrong, but in the area I'm looking at, they haven't had the "bubble", prices haven't gone up a lot, they don't have big mortgages, so I don't think they'll be affected anywhere near as much as, say, Florida, Nevada, and California. I could be wrong, but that's my assessment.

I have a couple of us investors in a couple of projects and if there was money to be made in investing in resi in the states there money would not be comming over here and these boys are from new york and finance guys from there. they are keeping an eye on the market but investing off shore.

Again, I may be wrong, but I get the impression that in the USA, being "higher up the food chain" in property investing means investing in prestige property, much more so than with Aussie investors. ie they have a perception that only beginners invest in lower-end properties - not because those markets aren't profitable, but because US investors are much more inclined to want to show others that they own "nice" properties. The prestige suburbs of Australia may well represent better buying than the prestige suburbs of the USA (which I wouldn't touch at the moment, either), but I think that their lower end of the market (not slums, but below median) represents much better value than here, as outlined above. I don't know whether big shots from NY venture into the working class suburbs of the southern states.... That's my take, anyway. If you can amplify on why they think houses in major, thriving cities costing $50K and returning $250 pw aren't good investments, I'd love to hear their reasons. But just because they're not investing in that market is not enough to convince me - there are a million reasons why they may be investing here instead.

You are well prepared, so good luck.

Thanks, Sunfish.

NOTHING IS REAL THAT ISN'T LOCAL.

Thanks, WW, for your comment on macroeconomic factors. I actually agree. And all those middle-class citizens who can no longer afford their middle-class houses have to live somewhere - in the well-located 25th percentile houses that I'm targeting.

Could you please explain this "nothing is real that isn't local" saying. I don't know it, and I don't get it.

If the prices are so low, and the yields so high, then why aren't the locals snapping them all up?

Marg, with respect, that's such a herd mentality! There were shares in Fortescue available on the ASX every day in 2003 - why were people selling instead of buying??? Because everybody sees the market differently, and has a different risk profile. And in this particular instance, I'd also point out that the USA has nowhere near the property investing culture that we do in Australia. Yes, there are still lots of investors, but many fewer as a percentage of the population than in Australia.

 

[marg4000]

Not necessarily a "herd mentality" - think of it more as life experience. We were investing in IPs in the early 1980s when it was definitely NOT the done thing.

I am thinking of the well-known Queensland two-tier marketing of the 1990s when overpriced units in southern Brisbane and on the Gold Coast were sold to unsuspecting interstate buyers at prices that locals knew were exhorbitant.

One has to have a certain knowledge to know the questions to ask. If there are factors you don't know about, then you can't research them.

As always, buyer beware. But with family "on the ground" in the US you are way ahead of the average Aussie US investor - I wish you well.
Marg

 

[grossreal]

hi ozperp
as any where in the world not all markets go down and you have to find the ones that go up so you maybe right you have to do your own due diligents.
I have very little information on the tiering and the pricing of there markets I am looking at it from a very different view.
not houses but arms.
so my focus is in a very different angle.
but hope you well

 

[Perp]

Thanks, Marg and Lawrence, for your good wishes.

I swear this is a true story. A few weeks ago I met a lovely man in the park near our house, whose son is the same age as my sons, and they were playing together. I discovered he was on sabbatical from his university in Canada, and they were just living here for a few more weeks. Wanting to show them some good Aussie hospitality, I invited the family to our home for dinner, and they came last night. We had a wonderful time.

Amongst the wide-ranging topics of conversation, I mentioned that I was thinking of investing in the USA - not really expecting much interest from them, being Canadian and all. They asked where I was thinking of investing, so I mentioned the state. Helene said "Oh, Adam's brother lives there, in xxx", xxx being a town of about 50-75K people - of which there are many hundreds in the USA.

This is precisely the town on which I'm focusing my search for USA properties ; I was even familiar with the street his brother lives in, from all the time I've spent looking at maps. And Adam had heard from his brother that the place was thriving and was ripe for investment, and was considering investing there himself!

In isolation, of course, this means little; but I choose to take this as a sign that I should continue exploring this idea.

I truly thank each of you for your input thus far, and those who've PM'd; many have raised valid concerns, but nothing that I would consider show-stopping yet. And of course many of you have given me great advice; thanks.

I'm all ears if anybody has any further suggestions, warnings, advice, or abuse. (OK, maybe not abuse. )