Why NOT to buy in the USA?

[josko]

Hi Tracey,

It sounds like you have done your research thoroughly. What an interesting thread.

I had a similar venture chasing high rental yields to NZ with houses for 35k.

When I got to Nz and actually visited the main town I had pin pointed, I was sadly disappointed.

The houses were run down and tired, and the general "feel" of the town was not good. I knew the demographics but it was worse than I could possibly imagine. It was disappointing, but I was extremely glad I'd gone there to see it before buying. Please note that the attitude to investing in these areas by NZ'rs at the time sounds pretty similar to what you are expecting in the US.

I ended up buying a couple of houses in two other, small country towns I had researched. However, the reality of long distance managing, even though I had a local PM, was costly and time consuming.

My experience with the PM's in these towns was what I could only call "backward" and really quite frustrating. I ended up selling them all for nearly twice as much as what I bought them for, but they were very high maintenance.

I wonder in your position, if the low cost of these dwellings, versus the possible high maintenance, versus the position of the US economy/property cylcle, versus what you will eventually make in Capital Growth. . . . . .
will be worth it.

In hindsight, I wonder why I thought these low cost houses with their minimal positive income (REAL income), would beat a single well situated house in AUS.

You do seem to have covered all bases though, and what a great position for you to be in, to actually live there.

Goodluck on your venture!

regards Jo

 

[Perp]

Primary motivation for investing in the USA: I need to find cash flow neutral to positive, no-money-down deals, because:

1) Whilst we do have some spare cash flow, I don't wish to compromise our lifestyle, so I don't want to buy negatively geared;

2) With conservative valuations and tighter lending practices, I currently have very limited accessible equity in my portfolio for deposits on further purchases; and

3) Buying CF+ with no money down allows me to buy a virtually unlimited number of properties, which is important as I'm in the aggressive accumulation stage.

I may be looking in the wrong place, but I'm not finding CF=+, no-money-down deals lying around here in Australia, and certainly not in major cities with great fundamentals. But if somebody can tell me where they are, I'm all ears...

I'm also not confident of any significant capital growth in the Aussie market for the next 5 to 8 years, whereas I am feeling confident about growth in my chosen market in the USA. I don't want to wait 5 years or more for growth; I'm planning to be financially free by then.

With regards to management, I've found that installing an on-site manager at my 16-tenant student accommodation (here in Brisbane) substantially reduced the management overhead. I'm hopeful that targeting a multi-tenancy with on-site management in the USA would achieve a similar reduction. (I know it won't eliminate management overhead, but I believe it will help.)

I was just re-reading the thread and noticed some of my earlier posts in the thread talked about a 30% deposit. My current thinking is to use a strategy that goes something like this: buy 20 units for, say, $500K. Rehab $100K (ie $4K per unit for paint, carpets, kitchen cupboard doors, new stove, plus $20K for landscaping and common areas), end value $900K. Present the deal to a hard money lender (HML), and if HML is confident in my figures, they'll lend up to 70% (sometimes 80%) of the end value of $900K. That allows me to borrow 100% of purchase plus rehab costs (total $600K). At the end of the 3-month rehab, I refinance into a 70% LTV asset-based conventional commercial mortgage (ie non-recourse no doc), which doesn't rely on a credit rating, $600K at 8% (say). (Their standard interest rates are still in the 6s.)

Estimated rental on completion $550 per month each unit, or $132K pa. Costs estimate $66K, net operating income $66K, interest 8% on $600K = $48K, net positive cash flow $18K pa.

Now I agree it's not really worth doing for the $18K - that's not the goal. But I've created $300K equity in the first 3 months, and if my $900K goes up by 5% pa, that's $45K in equity per year on top of that. And I anticipate much better than 5% growth the next few years in this area.

I've been busily asking lots of questions on US property investing forums, too, so have been tapping into local expertise. It's funny that many of the debates mirror those we have on Somersoft, though nearly all the techniques and strategies, and certainly terminology, are different.

I'm writing all these long replies not to be defensive, but because:

1) I wish to solicit as much criticism as possible; it helps me refine my cunning plans.

2) In Somersoft spirit, I have a genuine desire to share what I'm learning with others who may be considering doing something similar.

Thanks to those who are bothering to read and contribute to this discussion; I'm really enjoying learning, sharing, discussing, problem-solving, refining...

 

[DavidMc]

Hi Tracey,

Fantastic posts. Thanks for sharing.

1. Would a middle class area mean less hassles with the tenants?

2. Do you know what tenants rights are like over there? Is their 'RTA' in favour of the tenant or landlord?

3. Also, what is the deal with having an on-site manager? Will this be like having an employee (with the associated hassle)?

4. What are the average PM rates there?

5. Whilst no money down positive cashflow sounds great, it sounds like a large amount of effort will be required. Do you think this is the case or that it shouldn't be much different from investing in Australia?


Regards,

David.

 

[handyandy]

Been enjoying this thread.

The biggest problem that I see with your outline is how to cover the $500k for 3 months.(give it 6 ) whilst Rehabing.

There was a show on cable which showed an US team whole bought low and managed to sell very well in line with what you are proposing. Can't remember the name of the show but they certainly picked up the properties for the right price.

Cheers

 

[alba]

Tracey, you seem to be very keen and I'm sure that you're going ahead with your next venture, no matter what anyone here says. I also wish you good luck and I'm sure because you won't have all your eggs in the one basket, you'll be fine.

However I do agree with those who think that the troubles in the US only just started and they include the top US investors themselves. It seems like it will be a long, drawn out crisis despite of the best efforts of Bernanke and Co. who have already done everything they could to fend off a looming depression.

It's been very interesting to read the replies to this thread and playing out some scenarios in my head. For example, I could buy my residence in Atlanta for 19K, (I guess being a single parent I would fit into the neighbourhood LOL) and collect rental income of some 55K net, after costs, and be totally debt free....not too bad....or leave the money in an Australian bank to earn great interest in hard, appreciating currency...I could probably survive on that too...however....this all reveals a shocking truth about the state of the two countries at grassroots levels....OMG! I think I'll be definitely staying.

 

[Perp]

1. Would a middle class area mean less hassles with the tenants?

I am looking at a middle-class area; maybe on the lower side of middle but certainly not slums. Mostly students and office workers as tenants; 98% employment.

2. Do you know what tenants rights are like over there? Is their 'RTA' in favour of the tenant or landlord?

Varies state to state, but generally more balanced than ours. (ie not as hostile to landlords)

3. Also, what is the deal with having an on-site manager? Will this be like having an employee (with the associated hassle)?

They usually just act as the middle-person between the PM and the other tenants. So there's one person on site who's coordinating repairs, letting in tradesmen, keeping an eye on the tenants, etc. PM still collects rent, administers leases, etc. On-site gets reduced or free rent, depending on how much work is involved. For 20 units, probably get a 30% rent discount or something like that.

4. What are the average PM rates there?

10%

5. Whilst no money down positive cashflow sounds great, it sounds like a large amount of effort will be required. Do you think this is the case or that it shouldn't be much different from investing in Australia?

Yes, there's effort required, but I see the risk/reward ratio as being significantly more favourable than anything I can find here. Do you mean the effort of finding/securing, and financing the deal, or managing it afterwards? The former will be pretty much the same as here (easier with a HML), the latter will be more difficult, but I plan to have an on-site manager, a PM, and then a "trusted local friend" to keep an eye on the other two. I plan to pay my local friend to do things like ring the PM and pretend to be a prospective tenant, do inspections, etc.

The biggest problem that I see with your outline is how to cover the $500k for 3 months.(give it 6 ) whilst Rehabing.

Sorry, should have been clearer: once the HML approves your plan, they put up the funds; it's effectively short-term finance. The interest rates are high, but it's only for a short-term and you usually don't make any payments; just a single balloon payment when you refinance into a conventional mortgage.

There was a show on cable which showed an US team whole bought low and managed to sell very well in line with what you are proposing. Can't remember the name of the show but they certainly picked up the properties for the right price.

"Flip That House", based out of South Carolina. Yes, it was an interesting show... On Bio channel for some reason.

Tracey, you seem to be very keen and I'm sure that you're going ahead with your next venture, no matter what anyone here says.

You're more confident than me, then! I think I'm full of **** and all talk...

Seriously, I do agree that the US economy is headed down the toilet, but I guess what I don't see is what the implication is for me that I should be concerned about... I may be incredibly naive - I confess economics bores me - but let's say the economy does go down the toilet. How and why would that affect the demand for a $125pw apartment?

 

[WinstonWolfe]

but let's say the economy does go down the toilet. How and why would that affect the demand for a $125pw apartment?

Tracey, were you holding property in the 90s?
Some parts of Brisbane saw rents flat from 89 to 94. CPI eroded the $ ~19%

Many smart people are saying the US will experience high inflation, deteriorating employment, and stagnant wages for some time.

If you are vague on what drives property and rental growth now, then you most certainly will know within 5 years.

The problem is, my opinion and that of every somersofter won't carry enough weight to sway you either way with this stuff. maybe Dymphna couldn't even swing you on this one.

Maybe it is time to go deep within and ask what is motivating you to buy in the US. Is it partially because you cannot see opportunity in Australia?

 

[chief wigam]

you guys are better off buying in outside the US. I understand Panama is cheap and they are expanding the canal. Many US retirees end up there. Also big for medical tourism - US tourists go there to get cheap medical. I am looking into Panama at the moment. If anyone has any info or good web sites to direct me to, or opinions on Panama, do let me know.

 

[Perp]

Panama sure gets a good write-up from my favourite global investing information source, Global Property Guide, so I just may investigate further....

 

[grossreal]

hi ozperp
thanks for that link it looks like a great website got alot of info on it
well done.
interesting that sydney is just below bulgaria on rental returns no wonder we see so many people posting here invest in bulgaria.
its about the same returns.
I hope you do well in the states I am keeping an eye on it at this stage
and for what its worth tey have closed off 5 vulture funds for the banking industry there
they were over subscribed.
and have met there target funding requirements
so the battleships are ready.
I understand that this market is interesting and to say not to invest there is not exactly correct its more is this the time to invest there.
for me no not yet.
you need to go in under the radar when the big guns and blasting away and then in that market low ball.
but if you think that time is now well thats fine by me.
no one can pick a market.

 

[grossreal]

hi ozperp
thanks for that link it looks like a great website got alot of info on it
well done.
interesting that sydney is just below bulgaria on rental returns no wonder we see so many people posting here invest in bulgaria.
its about the same returns.
I hope you do well in the states I am keeping an eye on it at this stage
and for what its worth tey have closed off 5 vulture funds for the banking industry there
they were over subscribed.
and have met there target funding requirements
so the battleships are ready.
I understand that this market is interesting and to say not to invest there is not exactly correct its more is this the time to invest there.
for me no not yet.
you need to go in under the radar when the big guns and blasting away and then in that market low ball.
but if you think that time is now well thats fine by me.
no one can pick a market.
also there is no african countries on the % rental returns which is very interesting. but again another side line

 

[Perp]

thanks for that link it looks like a great website got alot of info on it
well done.

I agree; it's an awesome website. Unfortunately the guy that runs it, Matt, is having trouble getting it to pay for itself and it may not survive. I think he gives too much away - he should put a summary of information on each country on the site as a teaser, then charge, say, $10 a pop for a detailed report for each country.... Whatever he does, I do hope it survives, it's an incredible resource and I don't think there's another that's anywhere near as comprehensive.

I hope you do well in the states I am keeping an eye on it at this stage
and for what its worth tey have closed off 5 vulture funds for the banking industry there
they were over subscribed.
and have met there target funding requirements
so the battleships are ready.
I understand that this market is interesting and to say not to invest there is not exactly correct its more is this the time to invest there.
for me no not yet.
you need to go in under the radar when the big guns and blasting away and then in that market low ball.
but if you think that time is now well thats fine by me.
no one can pick a market.

It's such a different market to ours, it may take me a year or two to learn enough to feel confident to buy! I'm putting in a lot of time and energy getting up to speed on their terminology and techniques, and I'm refining my ideas about exactly what kind of properties I'd like to target. The business plan is filling out!

I'm seeing some very sweet deals; now I've just got to continue working the finance angle. I'm getting the right indications from mortgage brokers and other investors that what I'm planning to do is possible; now I just have to find somebody who'll actually do it. It's hard to get a firm answer as to what's possible without presenting them with a specific deal, understandably.

I'm also starting to network with realtors, mortgage brokers, property managers, solicitors, and other investors in my chosen area. As here on Somersoft, other investors have been very helpful and generous.

 

[Perp]

Update

I have an attorney, possibly a realtor (buyer's agent; he's preparing a pitch for my business), and am talking to a few mortgage brokers. I've also established email contact with about 10-15 property investors, both in my target area and elsewhere, and just like Somersoft, they're proving to be very helpful.

My target gets larger all the time; I'm now looking at multi-family properties with 50 to 100 doors. The main reason is that I've decided to go for commercial financing, where the deal and the property are much more important than my personal creditworthiness, so the lack of SSN, FICO etc are not an issue. And here's an interesting perspective: because properties are usually cash flow positive, the risk profile for lenders is somewhat turned upside down (from our perspective) - larger deals are seen as less risky by lenders.

Think of it this way: in Australia, if you buy a $3M property, you would usually have a significant negative cash flow. So the lender needs to know that you can continue to cover that negative cash flow, and your personal creditworthiness is critical. In most parts of the USA, property is an income-generating asset, so the more you have, the lower risk you are. For a single house, or only a couple of units, your personal finances are still important, because that's what the lender is relying on in the not-too-unlikely event that you have a vacancy, or the place gets trashed, etc.

But if you own 100 units in a complex, the chances are that your performance will be close to the market averages, and thus your cash flow positive position is much more reliable; one unit trashed, or a few vacancies, or a HWS blowing up, aren't going to leave you unable to cover the mortgage. The rental income is more significant to the lender than your income/assets.

So a couple of weeks ago I was looking at complexes 15-40 doors, $500K-$1.5M. But my mortgage broker has advised me that if I step up over the $2M mark, finance becomes a lot easier to obtain, I can get a higher LTV (LVR; 80% instead of 70%), and the interest rates are lower. I'm now looking at properties 50-100 doors, $2-3M. What I also like about these larger complexes is that you get full-time on-site management staff coming into the picture, which provided you have good staff (of course), should substantially reduce management overhead. I could possibly even reduce management overhead further by turning it into a "management rights"-type situation (more later).

One particular property that I have my eye on looks something like this:

* 100 x 1 bedroom units - awesome location between a large university and two other major employers
* only two storeys, so quite spread out and comes with lots of land content
* Purchase price est $2M (yes, $20K per apartment, generating $120pw rent )
* Plan to get in no money down, ie borrow 100% (using vendor finance, hard money, or putting up security in Australian property)

Here is how the figures look, as they are now (on left), and if I implemented my idea of creating management rights for, say, $170K pa fee:

Having a management rights agreement would reduce my positive cash flow to $60K, but hopefully it would allow me to be as hands-off as if it were one of Dazz's sheds. And I'm investing primarily for growth, anyway; the cash flow is just a bonus. Now even if the actual figures don't work out quite so well, I think you can see that there's quite a lot of fat in those figures.

The hardest part is trying to get in with no money down. I think it's achievable, but if I had a deposit, I'd have more options.

I'll keep you informed as this journey evolves...

 

[alba]

Tracey, impressive numbers indeed. One more thing I would factor in is currency exchange rates. Friday night the AUD broke through an important resistance level and is heading for parity and possibly beyond, while the USD is again hanging on by the skin of its teeth. I think you'll do fine if you go ahead with your purchase but next year you might have to work with an exchange rate of 1.25. How do these management rights work by the way?

Best regards,

alba

 

[silversands]

Wow Tracey,

I get tired just thinking about all the hours you must be putting in to this! Finding your research faccinating. Thanks for taking the time to share. (judging by the length of your posts, LOTS of time!)

I will continue to follow your journey of discovery on this thread.

Regards Jodie

 

[josko]

Hi Tracey,

Think of it this way: in Australia, if you buy a $3M property, you would usually have a significant negative cash flow. So the lender needs to know that you can continue to cover that negative cash flow, and your personal creditworthiness is critical. In most parts of the USA, property is an income-generating asset, so the more you have, the lower risk you are. For a single house, or only a couple of units, your personal finances are still important, because that's what the lender is relying on in the not-too-unlikely event that you have a vacancy, or the place gets trashed, etc.

That is so very very interesting. I can see why it is such a big drawcard for you. I would say everyone has pretty much come up with all the negatives they can throw at you and it looks like you have covered all bases. We will be looking forward to your success stories!

keep us tuned. You go girl!

Regards Jo

 

[steveadl]

Very interesting Tracey! I've always loved the idea of owning one of those big apartment buildings I read about in the US.

The figures do look good. As a matter of interest - is the 10% vacancy you calculated realistic, or are you being pesimistic/optimistic?

I also take it if I've read your figures correctly, if you were to use equity from the Aust. properties to fund the 20% shortfall from the 80% loan (assuming straight forward contract without vendor finance), then your $60/100k positive cashflow at the end is before you take into account the say 9% rate you'll pay in Aus. on the $400k equity?

Really interesting stuff, keep us posted! Also, can't remember if you've mentioned this before - but what are the best websites for US realestate? When I've looked in the past, I've never been overly impressed with stuff I've found.

 

[Perp]

Very interesting Tracey! I've always loved the idea of owning one of those big apartment buildings I read about in the US.

Come with me - we'll buy one each!

The figures do look good. As a matter of interest - is the 10% vacancy you calculated realistic, or are you being pesimistic/optimistic?

I think I'm being pretty realistic. Current vacancy rate is 15%, and that's with "almost brain dead" on-site management, which of course I'd replace. The vacancy rate across the city for units in my target area is 4-5%, and I'd think that the complex I'm looking at is "better located than average". So if I have more than 5% vacancies, I'd be asking the on-site management what's going on.

I also take it if I've read your figures correctly, if you were to use equity from the Aust. properties to fund the 20% shortfall from the 80% loan (assuming straight forward contract without vendor finance), then your $60/100k positive cashflow at the end is before you take into account the say 9% rate you'll pay in Aus. on the $400k equity?

Good point, but I don't think so, if I'm using the international portfolio loan. My understanding is that I borrow in the US, in US dollars and on US repayment terms, so perhaps 5.8% interest. I think I may even be able to get some equity out of my Aussie portfolio in the USA, that I can't here. In Australia, I can only borrow 60-70% against my student accommodation, but I think the US lenders will let me go to 80%.

Even if I'm mistaken, paying an extra 3% on the $400K - if I did have to pay interest here - would cost me $12K pa, which doesn't substantially alter the viability of the investment.

what are the best websites for US realestate?

Depends exactly what you're looking for... If you want to learn, the best Somersoft-like resource (though still not as good as Somersoft) is Bigger Pockets. Other useful resources:

For commercial property listings: Loopnet
For realestate.com.au-like site: Realtor.com
For research on past sales, aerial shots, title info etc: Zillow
For due diligence on anticipated rental income: Zilpy
For researching different areas: Neighborhood Scout
Landlord and tenant issues: rentlaw.com and bigger pockets again
For articles: There are some good articles on - you guessed it! - Bigger Pockets, investing FAQ and articles

That lot should keep you out of trouble for a while!

 

[babushka]

Depends exactly what you're looking for... If you want to learn, the best Somersoft-like resource (though still not as good as Somersoft) is Bigger Pockets. Other useful resources:

For commercial property listings: Loopnet
For realestate.com.au-like site: Realtor.com
For research on past sales, aerial shots, title info etc: Zillow
For due diligence on anticipated rental income: Zilpy
For researching different areas: Neighborhood Scout
Landlord and tenant issues: rentlaw.com and bigger pockets again
For articles: There are some good articles on - you guessed it! - Bigger Pockets, investing FAQ and articles

That lot should keep you out of trouble for a while!

Thank you!!! Tracey. Much appreciated for your posts.

My situation is different from yours. I have a very poor relative living in Orange County, CA. She has been kicked out of the room she has been rented - as the property will be inspected by the govt for unauthorised additions to the house (apparently the landlady just put up rooms for rent without permission!).

My relative is very upset as she cannot afford much. So, I am thinking of buying a small mobile (or manufactured) home and let her live in it for free. I cannot afford to buy a foreclosed house, but my budget is about $50K for a small mobile home. I don't want to buy it as an IP, complicated borrowing and tax issues. I have been surfing the net to search for properties and buying advice but could not find much useful info (maybe I am not a good surfer). Then I found your thread which you have provided some excellent sites. Please keep them coming.

Now I am going to spend some time on these sites, and will come back with more questions.

 

[babushka]

Questions for Tracey

Alright, I have been trawling the websites Tracey posted, and found good and useful information.

After reading about the costs of owing a mobile home in CA, I think maybe it is not a good idea - particularly having to pay the park owner(s) a monthly fee for renting the space (which can be as much as just renting a smaller condo each month!) And, a mobile home depreciates like a car. The land is owned by the park owner(s) and not the home owner(s).

Now, my thinking is shifting to buying a small house or a condo (despite what I said in my previous post!) - and rent it to my relative and/or tenants. I will do more background research (I have looked at some foreclosure sales as well), then contact a few RE brokers (or agents) in the Orange County and establish working relationships with one or two. The thing is that while house prices in a lot of states in the US appear to be really cheap - but not in California cities!

Don't know if it was luck or not, but on the weekend I received an email from friends who went to the same Church we attended in West LA more than 30 years ago. They have been living in Orange County - owned a house there. I looked up their house on zillow! They are currently back east (NY way) for a holiday for a month. I hope they will be able to guide me when they are back about the housing market in Orange County.

To cut a long story short, I have some questions for Tracey:

1. I think you have set up a LLC for your RE investment in the US. Could I please know how much it would cost to set up an LLC (approximately)? and, are there traps I should look out for?

2. We lived in LA for 5 years - more than 30 years ago. We have got SSNs. Do you know if we can still open a bank account in the US - using these SSNs?

3. You talked about borrowings in the US for your RE investment. I wonder how difficult would this be for us? I guess, the banks will only lend us max 70% of the purchase price for a single family dwelling?

4. We can draw down max $50K from a LoC to cover deposit and purchase costs. Do you reckon that we can claim tax deduction for the interest incurred?

5. Do you know if we have to file a US income tax return if we own an IP in the US? I know we have to declare income & expenses for it on our Australian income tax return.

6. Do you know if a smsf can own a property in the US? I know that in Australia it can. Now, it can even borrow to buy a property in Australia.

Sorry for asking too many questions. Thank you in advance.