Why NOT to buy in the USA?

[Perp]

It can actually be a full time job for a few people keeping tennats in the place and maybe 2 people full time to maintain it (depending on age of course and quality of tenants)

Hi Uncle Perce, and thanks for your input.

I haven't visited this area yet, though have visited the USA a number of times and have family there, so am somewhat aware of the many "cultural differences" If my offer is accepted, I plan to go over for about a month over Christmas.

1) Start smaller

This was my plan, but due to the inverted risk profile explained earlier in the thread, I simply can't get finance for smaller deals! The lenders view sub-$1M properties as much higher risk than larger deals, so I could only get 60 or 70% LTV for these properties. This is why I started looking at larger deals, where I can get 80% or even higher, and the scope for vendor finance seems greater.

2) Occupancy levels

The property is under-rented, and I'm buying it knowing that there's some work to be done to increase occupancy. Based on vacancy rates of comparable properties, I'm confident it's achievable. For a start - the current owners don't speak good English (or Spanish), don't have an "Apartments for rent" sign on the building, don't spend a cent on advertising, and aren't listed on the internet anywhere that I could find. They also have a number of units occupied by freeloading relatives. So there's some scope for immediate improvement. Current occupancy is 85%, area average is 95%, and I only need about 65% to break even.

3) Management

My figures include payment for 3 full-time on-site management and maintenance staff, plus an external property manager. Finding key staff - particularly the main on-site manager, and a property manager - is top of my "to do" list when I'm over there. I'm aware of the generally lower quality of property managers in the USA.

I will point out that I'm doing all this on my own, not with a guru or a company selling investments. Whilst it means I've spent a lot of hours figuring things out that others have probably already done and could have told me quickly, I do think it reduces the risk of falling victim to dubious marketing. I've selected my target area based purely on my own research, and selected my own buyers' agent and mortgage broker, etc; nobody else has "sold" me on any of the areas or services that I'm planning to use. (Edit: I'm also aware of the negative experiences of many Aussies in Buffalo/NY state; I'm buying in an area that I'm confident has much, much stronger fundamentals.)

Perce, I very much value your "on the ground" experience and thank you for your input. Apart from the tenant quality/stability being much lower than one has been led to believe, what other risks are there that you would consider particular to the USA? (ie not things you would normally have to consider buying a property remotely in Australia)

 

[Aaron Sice]

i love this thread.

 

[Uncle Perce]

usa

Hi Oz perp,
i dont think you are getting it.I know it sounds harsh but im keen to help
protect you from doing something you may regret.
tell me if im out of line and ill accept that,no harm to me ,
just trying to help.

You havent visited this place yet and yr going to buy a 2 million dollar property there 10000+ ks away from yr home and life?
I would seriously advise against this.

You say you have family there?
are they investors or experienced in property?
Are you ensuring a get out clause if yr offer is accepted before you see it all?

Untill you actually go there and see whats around for yourself you have no way of knowing whats what.simple as that.
In the area,the street,the surrounding buildings etc etc.
There are also heaps of little diffferences (alot more than a culture issue)
that you learn as you expericence it.
You said you both have a buyers agent and are doing all the research yr self,
but as mentioned before i dont think you will know what they are telling you untill you fully check it out yrself.

 

[Uncle Perce]

change of plan ?

Hi again ,

You originally planned to buy props around 50K returning 12k per annum?
What happened to this?
Some "People"(brokers) told you they wouldnt lend you the money?
I dont agree with what theyve told you .
I know of heaps of deals that are around (especially now)that owners just want to get out of.You can often get them for "No money in at all"
But alot of these deals dont come though brokers or realtors or buyers agents or websites or any normal avenues.They are found by going there ,living there,building relationships and connecting with people.Word gets around that yr the lady thats looking for houses or units or whatever
and word gets back to you.You also advertise with signage on the "sidewalk"
and in the local papers .

It sounds like yr looking for ongoing ownership rather than just a reno and sell deal first up so ,
I would try a low down ,low input,low cost deal or 2 and learn the whole us system and the way they deal with you from over here in oz.Then if you
can make it work and are happy and have the energy for it ,go gangbusters and buy a bigger deal ,then bigger then bigger and go gangbusters .

The Usa certainly has some amazing opportunities hthere,and many more coming up too !
All the best OzPerp

Perce

 

[Perp]

i dont think you are getting it.

Maybe I just have a different perception of risk than you. Of course my contract is subject to 90 days' due diligence, so I have plenty of time to get on the ground and pull out if things don't pan out as I hope.

My approach to risk is to ask "what if ...?", and develop an answer to every scenario. You simply haven't raised any issues that I haven't yet considered. Your main concern seems to be that the area may be quite different to what I expect. I agree, and that's why I have a clause allowing me to get out for 90 days for any reason.

I'm truly not "blowing off" your advice, it's just that when anybody tells me I should do or not do something, I'm far more concerned with the REASONS why they say that, than their opinion (conclusion). Then I look at their concerns and decide whether I share them, and form my opinion. I'm sure if somebody said to you "I think what you're doing is too risky", you wouldn't immediately abandon what you've found to work for you, just because that person said that. You'd want to know what their concern is - do they think there are legislative changes coming? Do they think that lending will tighten further? Do they think that you'll have difficulty finding tenants? And you may either disagree that those things are risks, or you have a plan to counter the risk, or you don't think it applies in your area, and you form your own opinion.

If you are aware of something specific that I haven't considered, such as "foreign nationals have to pay triple property taxes", "foreign landlords never get supported in tenancy court because the judgement defaults to the tenant unless you turn up in person", or "90% of local landlords do fine, 90% of foreign landlords sell within the first year - see this link" etc, then I'd be perfectly happy to take that into consideration and research that further.

You havent visited this place yet and yr going to buy a 2 million dollar property there 10000+ ks away from yr home and life?
I would seriously advise against this.

There are plenty of people in Australia who would "seriously advise against" investing interstate, too. Yet many investors do this quite successfully. This comment is part of the evidence that you have a different risk profile/tolerance to me.

You originally planned to buy props around 50K returning 12k per annum?

As I did more research, I decided this was a far more risky strategy for me. I do believe - from contacting many brokers, including a number who specialise in lending for foreign nationals - that financing these deals would be very difficult without SSN or FICO. But even if you're right and I could finance them, more significantly, the risk/reward just isn't there. Because I don't want to be tripping back and forth constantly, I'm looking at the income stream primarily, and long-term capital growth. Wrapping and flipping are of no interest to me.

So even if I made 10% positive cashflow on a $50K SFR, that's $5K per year. Not worth the effort (to me).

My research also suggests that being a landlord of SFRs is much more demanding in management per $ of income than large MFRs. If you have a house, your only "go-between" is a property manager, and I'm quite convinced that good property managers for SFRs are rare as hens' teeth in the USA, moreso than here, from my participation in US forums. If I buy a large MFR, I have several full-time staff working on management, as well as a property manager, and much more potential for being as "hands-off" as possible. To own $2M of property in SFRs, at $50K each, I'd have to own 40 of them. Doing due diligence on 40 SFRs, then managing 40 SFRs, would require a LOT more effort than managing 1 MFR. with the MFR, I have one lot of grounds to up-keep, a very limited number of layouts to be familiar with, the economies of scale (both monetary and time) of buying, say, new floor tiles for 100 apartments at a time, my own staff working for me, etc.

I don't invest in SFRs in Australia anymore - my portfolio has grown to the point where I'm only looking at MFRs and commercial properties going forwards. I did plan to try SFRs again for a while to get a feel for the USA, but the more I've researched, for many reasons outlined in this thread, my thinking has changed.

It sounds to me like you have found a winning formula, buying houses that are at risk of foreclosure with no money down, perhaps with assumable mortgages. I'm aware of this strategy and that it can be successful. It just doesn't have the amount of profit per deal that I consider worthwhile. But that doesn't mean that it doesn't work for you.

I really would appreciate any input you have on risks that I haven't considered. But I suspect that most of your input is based on your having a different risk profile. And that's OK; it just means that what you perceive as "too risky" may not be for me, and vice-versa (as demonstrated by your venture into SFRs).

 

[Aaron Sice]

awful awful awful fees and terms/comditions with SSN and FICO too....

 

[Player]

Outstanding thread Tracey.

I can't add anything further to assist your DD or any of the finer details of investing in the US, however on the topic of risk, in support of your (now) stratgey of not investing in SFR type properties into the future going forward, there is some logic to the following quote (unsure of source)........."put all your eggs in one basket, and watch that basket like crazy."

This is a more efficient use of your time even superintending from a distance and certainly a more optimal use of leverage. Sometimes diversification becomes diworsification, especially as you are not at the coal face there. It is easier for you to keep your finger on the pulse of one large patient than many smaller ones.

Good luck with this and keep the posts coming. Personally, I'm learning heaps from this.

 

[Aaron Sice]

yeah me too - dont stop posting! maybe a blog entry...?

 

[Perp]

I'll keep posting. I'm just wondering, though, if your enjoyment is because this is like one of those disaster movies that you can't stop watching, even though you know how it's going to end...

 

[marg4000]

Not from me Tracey.

I am enjoying this thread because you are doing something I have never investigated, am too close to retirement to even consider, and so far outside my comfort zone - plus hubby would have conniptions!!

I appreciate your sharing your journey with us all, and hope everything goes well for you. From your considerable research and "get out of jail" clauses it's hard to see where you could go wrong.

Continue posting.....and once the deal is bedded down then links and photos would be wonderful.
Marg

 

[swebay]

I am just starting to look into the USA seeing all these houses under $50k its just crazy

already have one IP in Mildura, which is just a safe bet , didn't want too much risk on the first IP , but looking at these US prices I am ready to go !!!! Houses for $30k even I know thats US$ but still crazy , I'll grab a whole bunch for under $100k

just need to do some heavy research now !

 

[boomtown]

Swebay:

US minimum wage is $6.55 per hour.

Australian minimum wage is $14.31 per hour.

Keep that in mind.

 

[boomtown]

Tracey: I dont expect you to answer these questions on the forum but these are some of the things I would want to have answers to if it was my investment. And yes - I would be living in the block for my 90 day due diligence period.

Transfer
What are you actually buying? Are you doing an asset purchase or are you buying an LLC that owns the property? If its an LLC how do you know that it doesnt have other liabilities?

Income
What proof of income have you seen?
How do the tenants pay their rent? I would expect by bank cheque.
Do they provide cheques for the term of the lease in advance? What is the rate of dishonoured cheques?
Have you seen the bank account statements to confirm the dishonour rate?
What proportion of tenants are in arrears? What is the average length of arrears?
How long does it take to evict a non-paying tenant?
Is it illegal to evict tenants in winter?
Do deposits into the rental account match the claimed occupancy?
Do tenant name records match the payments made into the rental account?
Do the tenant records contain their income details?
What is the average income of your tenants compared to their rental payments?
Do they rely on overtime or multiple jobs (very common with recent immigrants) to pay their rent?

Condition of apartment block

Are there particular apartments in the complex that have been vacant for a long time? Is there a reason for that?
What condition is the roof? When is the roof due to be replaced? How much will it cost?
Does the block get water penetration in storms? Is there a flood risk?

Social problems
Are there any gangs in the apartment block?
Do any of your tenants deal drugs out of their homes?
Are your tenants prostitutes?
Are there small children as well?
How often are there false fire alarms?
What is the call out fee by the fire department?
Is the HVAC shared between apartments?
Do tenants complain about cigarette / marijuana smoke travelling through common HVAC?

Utilities
What condition is the HVAC plant in?
How are heating costs dealt with?
Can you bill tenants for heat individually?
Are payments for utilities included in the rental account?
Who supplies the heating oil? How much does it cost? Is there a written supply contract?
Is there a shared laundry? Are the machines coin operated? Who owns the machines? Who gets the coin revenue?

Employees
What employee benefits (in excess of wages) do you have to pay your employees? Health care, pension, dental?
Have you seen your employee contracts? What entity employs them?
Have you seen the pay stubs? Do they match the contracts?
Do your employees shovel the sidewalks of snow in the winter? Do they shovel the entire sidewalk in front of the apartment building?

Parking
Is the parking lot open air?
Is the parking compliant with municipal standards (minimum lot spaces?)
The owners have not rented the parking lot to someone else?
Is there a bobcat to move the snow? Does the bobcat work? Does it have a snowblade? Or is there a snow clearing contract? How much does it cost? Does it cover "normal" snowfall? How much does it snow in a bad year?

Environment
Is there any contamination of the soil on site? Are there any sheds with strange drums in them? Does the oil bunker (for heating oil) have bunding in case of a spill?

I wont bother asking about tax structure, repatriation of income, insurance, fire code compliance, structural soundness etc as I know you will be across those issues.

 

[Perp]

boomtown, thanks for assisting me with my due diligence checklist. Once I go to contract - which I expect will be this week - I'll have 90 days to do due diligence and we plan to go over for a month from early Dec to early Jan to look into all these issues and more.

It's timely to say that I have a buyers' agent who's impressed the heck out of me thus far, and looked into many of these things himself, unprompted! As we don't use buyers' agents to anywhere near the same extent here, I might comment on this a bit, as others might be interested. My agent is much more than somebody searching for listings; they assist with due diligence. He's not wedded to this particular property, in fact I actually found this one. But he has:

* visited the site - several times - and sent me about two hundred photos;
* checked out the age of all the (individual) HVAC units, and taken photos of many of them to give me an idea of likely replacement costs over the first few years;
* obtained quotes for works that are obviously necessary or that he believes would enhance tenantability;
* asked friends/colleagues to act as a "phantom tenant" and check out this complex for price, incentives offered to move in, how he's treated at the leasing office, etc;
* gone to competing complexes and checked out how many staff they have, their occupancy rates, quoted rentals and incentives, and taking photos;
* provided lots of data on the region and the zip code in terms of demographics, economic indicators, development activity, forecast supply/demand for apartments;
* and much more.

I'll also highlight that I'm less concerned with the particulars of current tenants (provided I can evict those that I want to, which I can - the laws are unbelievably more landlord-friendly than ours!) than I am with the area's fundamentals. I'm buying it under-occupied and poorly managed with a view to increasing the number and quality of tenants anyway. Employment in the area is much higher than the national average, and wages are strong and growing faster than the national average. The local employment base is diverse and the economic indicators for the area are much better than for the nation as a whole.

Many of your questions relate to complexities of being a landlord in snow-prone/cold climates. That's one of the things I've made a conscious decision to avoid; I'm investing in the south.

 

[boomtown]

Great stuff Tracey. I figured snow issues would be something that Aussie landlords would not be particularly strong on! And it is particularly important for places like Canada - without heating people die.

 

[Perp]

The vendors came back about a week ago and said they would accept my offer and give me 90 days to do due diligence PROVIDED I obtained a letter demonstrating my ability to obtain finance, which was a fair enough request.

My mortgage broker hasn't yet processed a full application, but based on the figures and documentation I gave him, he is able to write a letter indicating "in principle" approval for 80% LTV. I haven't answered boomtown's earlier question about whether we have to give a personal guarantee because I haven't gotten around to confirming yet, but I'm fairly confident (on the basis of the info that they asked etc) that it would be non-recourse. [Non-recourse means that in the event of the default, the liquidated value of the asset is accepted as full settlement of the debt; they can't continue to come after you if there's any shortfall.]

I anticipate the vendors will receive the finance letter in the next few hours, so hopefully we should be able to proceed to contract over the coming week. We plan to go to the USA mid-Dec for about a month, with a week out in the middle to spend Christmas with hubby's brother and his family in Baltimore.

 

[aaarghhh]

My mortgage broker hasn't yet processed a full application, but based on the figures and documentation I gave him, he is able to write a letter indicating "in principle" approval for 80% LTV.

Hi Tracey. Are valuations done in the US similar to over here? Did you get many recent comparable sales and use this as evidence. It will be interesting to see how your valuation goes especially with the recent residential bubble.

I haven't answered boomtown's earlier question about whether we have to give a personal guarantee because I haven't gotten around to confirming yet, but I'm fairly confident (on the basis of the info that they asked etc) that it would be non-recourse.

I'm confused with the non-recourse loan and if the vendor wants a personal guarantee. Doesn't a personal guarantee then mean you have to cover the difference of the (fire-sale)liquidated asset and the non-recourse loan. Can the deal still be completed if you have to give a personal guarantee. BTW where is the other 20% - Equity that is Stateside?

 

[boomtown]

Did you make your offer subject to finance or subject to provision of finance?

If the former, by providing the above letter have you indicated to the vendor that your contract is no longer subject to finance?

 

[Perp]

Hi Tracey. Are valuations done in the US similar to over here? Did you get many recent comparable sales and use this as evidence.

Yes, they use pretty similar methodology. Part of what the buyers' agent did to assist me was come up with $ per sq m costs of about a dozen other apartment complexes that sold in the past few months in the area, and compare them with regards to quality. By that analysis this purchase stacks up well.

I'm confused with the non-recourse loan and if the vendor wants a personal guarantee. Doesn't a personal guarantee then mean you have to cover the difference of the (fire-sale)liquidated asset and the non-recourse loan. Can the deal still be completed if you have to give a personal guarantee. BTW where is the other 20% - Equity that is Stateside?

Sorry; misunderstanding. Boomtown asked whether lenders wanted personal guarantee or not. I was answering that I don't think they do. The 20% is vendor finance (actually about 23%); I imagine we'd have to provide a personal guarantee for that - that seems perfectly reasonable! So even in the event of a total disaster, our potential losses are limited to US$400K.

Did you make your offer subject to finance or subject to provision of finance?

If the former, by providing the above letter have you indicated to the vendor that your contract is no longer subject to finance?

The contract hasn't been drawn yet, but basically what I've negotiated (via letters of intent etc) is a 90-day period during which I will have the right but not the obligation to enter into an unconditional contract to purchase. So any time up to day 90, I can simply elect to walk away. I would plan to have finance approved and have decided whether or not to proceed within that timeframe.

 

[boomtown]

Given the current state of play in global financial markets you may wish to ask your solicitor to include a "material adverse affect" clause which gives you an out in the time between the contract going unconditional and settlement.

You probably do not wish to put yourself in a position where the deal has gone unconditional and you have finance approval but your lender suddenly refuses to provide funds or goes bankrupt on the day of settlement. Or the apartment burns down. Or the US changes tax laws so that all foreign investors have to pay 300 percent tax.