• Category Archives US Real Estate
  • Inflated Property Returns

    I was talking to someone recently about our property in Florida, and was saying how the expenses were higher than we first imagined, and in turn our return is a bit less than what we were hoping for. Initially I was hoping for a net yield of around 8.00%, I thought this might be a bit optimistic but going through the numbers before purchasing a property, it seemed like a realistic value.

    But after obtaining our property in Florida and seeing first hand the expenses, it seems that despite being fairly conservative in our initial assumptions, the return is still less than what we initially hoped for. However, if you rearrange the numbers a little, the investment looks better and perhaps even a bit more realistic as well. See below for the initial and subsequent calculations which show net yield returns.

    Initial Calculations

    The Net Yield of 0.56% is less than desirable, and if we were told we would be getting this return then I don’t know if we would have taken the leap to invest in the US as the hassle would just not be worth it. Although I did not include any capital gains on the property (as our plan is for cash flow) this can be  disregarded as the cash flow target simply has not been met.

    But by making some adjustments to the calculations, like shifting some of the expenses to the capital (moving the cost of the A/C unit and the whitegoods under capital expenditure), the numbers start to look much better. This is realistic as these expenses are not a yearly expense and you would hope that a new A/C unit would last a few years at least, the same with the white goods. Further, you can remove the cost of PI  insurance (as this expense is not dedicated to this single property and will cover all properties under the LLC) and include it as part of the LLC’s general overheads.

    Adjusted Calculations

    As you can see by adjusting the calculations to perhaps more realistic figures, we have now obtained our 8.00% Net Yield that we were hoping. It is important to note that both situations are essentially identical with all expenses included in both examples (with the exception of PI Insurance), yet it is simply a different way of
    calculating that gives you a very different result.

    I think this is a good sign to be careful when seeing advertisements purporting unbelievable returns. You should always look through the numbers yourself and satisfy yourself that what is being advertised is achievable. You should also always check whether the returns are ‘gross’ or ‘net’ yield and what expenses have been considered.


  • How to Find a Buyer’s Agent

    Finding a good buyer’s agent and property manager can be the difference between having a very successful and prosperous investing experience, compared to having a horror one.

     

    A buyer’s agent will be your point of contact when purchasing a property in the US, they will put offers in on your behalf and also keep a lookout for properties that you might be interested in. Because we are purchasing a property on the other side of the world, in an area we have not even visited before, let alone researched significantly, it means we are putting a lot of trust into the buyer’s agent to find us a property that suits us, and give us an honest price guide on the property. Because an agent works on commission, i.e. they make money by selling houses, it can be easy to believe that an agent does not have your best interest at heart and they simply just want to make the sale and collect their cheque.

     

    Of course in my opinion I believe the agent should do everything they can to be honest and trustworthy to the seller, especially in our case. For our first property, we were simply trying it out to see if investing in the US worked well for us, if it did, then there is no reason why we would not be investing significantly more into the US property market. So by being dishonest and collecting a smaller commission, they are potentially missing out on building a solid relationship with us which will benefit both of us financially in the long term. We were lucky that the buyer’s agent we ended up going with was on the same line of thought with regards to this. She is initially from Australia, and now lives in Fort Myers, Florida, so being initially from Australia, she is able to better understand our concerns with regards to investing overseas, and is also able to decipher the jargon that is sometimes used in the US and relate it back to Australian terms that we understand better.

    While we were looking at houses to purchase, we would have contacted probably around a dozen buyer’s agents in the Lee County area, and just about all of them were very responsive and seemed very eager to help us with regards to purchase a property, but I guess we just did not feel as comfortable as we did with the buyer’s agent that we ended up going with. It is important to note that the system in the US is different to Australia with regards to buying a property. A property is not simply listed with a single real estate agency and sold through them; it is listed on a database, and gives all real estate agents the ability to see all the properties on the market, so it is not like you are missing out on a good property by going with one particular agent. That being said, we were talking with one agent, who claimed she had information on properties that were about to go on to the market, and what price they were looking at. This way, you could put an offer on it instantly as it went on, and get it before everyone else saw it. I have a feeling this was not quite ethical and perhaps even illegal; anyway we did not feel comfortable working with this person.

    Building trust with your buyer’s agent is another very important aspect of the process of purchasing a US property. You are not going to feel comfortable sending over $50,000 (or more) of your hard earned money into the US if you are not confident you are getting value for money. You want to make sure you are purchasing a good quality house and not getting something that is just going to continue to drain your money. The main way we were able to build trust with our agent was just by constant communication with her, and by continuously asking her questions just to make sure she knows what she is talking about. Another good idea would be to talk to other people who your agent is currently working with, we did not do this as we believed to be confident enough with her to not need to do this.

    The process we used to find a house for us was fairly simple, our agent set us up to receive notifications of new houses that met a criteria on the database of properties. Basically all the houses for sale are listed on the database, and by entering certain criteria to find a house you are looking for, such as price, size, location etc. You are sent a list of all the current houses that match your criteria. When we got the list, normally there would be about 40 new houses or so a week, we just sent our agent a list, normally of about 10 or so properties that we thought looked good on the photos. Our agent with local information and being able to see the properties for a property inspection would then review the properties and provide her own opinion. One of the reasons we were comfortable with our agent was that she would reject 90% of the properties we suggested, which lead us to believe that she was not simply in it for the commission, and that she was looking out for our best interests. Our agent would also look at houses herself and send us (and her other customers) a list of all the properties with her review of them.

    The last aspect that made us comfortable with investing with this agent, was that she too is a property investor in the area, and quite often with the properties she saw as good value, she would say that we should put an offer on the property, and if we didn’t then she would put an offer on the place herself. So if an experienced investor sees a property as a good investment, then it is a good sign that it would be a good place to put our money.

    So as you can see finding a good buyer’s agent is very important, they are your representative on the ground and you need to work together to make this successful. At the end of the day, you need to find a good, honest, genuine and trustworthy agent that you feel comfortable working with; otherwise the process will just never work out.

    If you would like more information and the contact details of our property manager, or have any other questions you wish to ask us, feel free to contact us.


  • How to Acquire an EIN

    An EIN (Employer Identification Number) is essentially the equivalent of an ABN (Australian Business Number) in Australia. Basically it just allows our LLC to be recognised with the IRS in America. Because we used an LLC to purchase a property, it meant we required an EIN. If we had purchased as an individual, we would either require a SSN (Social Security Number), which is not possible as neither of us are American citizens, so we would have required an ITIN (Individual Tax Identification Number). I remember reading initially that to obtain an EIN; it was required of at least one member of the LLC to obtain an ITIN first. I can tell you now that this is not true, as we were able to acquire an EIN with neither of us having an ITIN.

    To obtain an EIN, we used the same company that we set up our LLC with, INCORP. Dealing with Incorp allows you to be assigned your personal company representative, who we were able to contact to help us get out EIN. When setting up an LLC with Incorp, you can opt for a package deal where you set up the LLC and get an EIN, but we thought we could set up the EIN ourselves and thought we would try and save some money. We were told by our personal representative from Incorp that if we had an SSN or ITIN, then we should be able to get an EIN within 24 hours of applying, but due to not having either of these numbers; the process would take a lot longer. In the end it took about 3 weeks before we were assigned an EIN. The cost to us was $69 (US Dollars) by going through Incorp. As I said before, it is possible to obtain the EIN by doing it yourself and free.

    You are also able to apply for an EIN online, similar to obtaining an ABN, but again, without an SSN or ITIN you are unable to use this service, and have to follow one of the other methods on this website – How to Apply for an EIN. Essentially you are required to fill out Form SS-4 and submit it to the IRS.

    So overall acquiring an EIN for us was not very involved as we simply went through a company, but if you are doing it yourself you may find it slightly more challenging, unless of course you have an ITIN or SSN, then applying online should be relatively easy.


  • Placing an Offer

    When we first started looking at properties in the US, our first reaction was of amazement, simply due to the amount of properties that were for sale. Not only just by the sheer bulk of properties, but the amount of properties available under $50,000. Even though we had narrowed our search down to Lee County area in Florida, which includes Fort Myers, Lehigh Acres and Cape Coral, there were still hundreds of properties listed for sale.Looking at information on Lee County, the population is approximately 620,000. Yet there is more houses for sale in this area than there is in the whole of Sydney, which has a population closer to 4,000,000. I guess when we saw data like this, it just shows the crisis the area was in.

    So our initial thoughts would be that finding a property would not be a problem at all, there almost seems like there is an unlimited supply of houses, so when we are ready we can simply go in, put an offer in, get accepted and be done with the search and start investing. I think I was also falsely optimistic when I purchased my first house in Sydney. I only really looked for a couple weekends, went to approximately 6 open inspections of houses, submitted one offer and it was accepted. So I started to think that there was nothing stressful at all about trying to find a house.

    Once we started to dig a little deeper in the Lee County houses, we soon found why there were so many houses listed for sale, basically 90% of them were just not worth the money, even for $50,000 they were just dead investments, either they had Chinese dry wall issues all throughout, or they were trashed inside by the previous owners leaving the property needing tens of thousands of remedial works. Quite often houses had termite damage, or simply the properties were just too far away for anyone to want to live there. A lot of the properties were also in undesirable areas, such as areas with a strong gang presence, typically Mexican gangs in this area.

    So here we are now, looking at hundreds and hundreds of houses, where only 10% are of any good, still sound like there is not much of a problem. With discussion between the property manager and ourselves, we can find out if a house is worth it or not. Unfortunately, as I have discussed in a different post, there is a difficulty with communicating with our property manager in Florida, with the time zones making it very hard to have an effective and efficient talk. These delays meant that the properties we saw that met our desired criteria had just about always been sold before we had the chance of putting an offer in. The good properties seem to get snapped up very quickly, normally within hours of being put up for listing, seems professional investors keep a very close eye on new listings, and are ready to act fast. It made it very hard to compete with people like this, I imagine it would have been a lot easier if we had been in Florida in person and been able to work physically together with our property manager when trying to find a property.

    As you can see, with things going very fast, it is important that you have everything ready when you start placing offers on houses, this turned out to be quite annoying for us, as we had $40,000 sitting in our Interactive Brokers account, in US Dollars, waiting to be used to buy a house. This would have been fine, except we initially put the money into the account in December 2011, we did not end up purchasing a property late April 2012, so there was effectively 5 months of money doing nothing for us. This money was taken out of my home loan offset account, which meant I was forced to pay extra interest. At a 7% interest rate, this equated to an extra $1,200 or so, a significant amount.

    So although we did not end up getting a property until April 2012, we did start putting offers in on properties from December 2011, at first we were very hesitant and thorough, making sure we read through all the offer documents and making sure we understood everything, over time we were able to trust our property manager more and in the end we almost signed the offer papers without even reading them. There is a cooling out period in the offers, typically 10 days, so we were able to withdraw the offers if they were accepted, and we had a better chance to be able to look through the property.

    At the start, we also only made sure we had one offer in at any one time, if we submitted offers on more than one property, if they were both accepted, we would be responsible to purchase the properties, well actually I guess we could cancel one of them during the cooling off period, but it was still dangerous to offer on more than one property just in case. But soon we found that the waiting time between submitting an offer and being notified if you were successful or not, was weeks, so it was just wasting our time. So we ended up quite often having offers on up to 5 properties concurrently. We also found that short sales tended to be even slower, and would quite often sit with the banks for months before they accepted or rejected the offer.

    In the end the property we purchased ended up being a short sale. I cannot remember the exact timeline of how everything went, but from memory it was something like this –

    January 5th 2012 – Initial offer submitted at $42,900
    January 10th 2012 – Offer accepted by owner of the house
    January 20th 2012 – Bank counteroffers with $44,000
    January 31st 2012 – We re-offer the asking price of $44,000
    March 10th 2012 – Bank reject our offer for the property
    March 25th 2012 – Bank changes decision and says offer is back on the table
    April 3rd 2012 – Bank accepts offer for $44,000
    April 28th 2012 – Money transferred into title account, house is officially ours!

    As you can see from the above, there were a couple of months between initial submission of the offer, and the final purchase of the property. Being a short sale, the bank seems to slow down the process to a snail’s pace. Which to be honest I do not understand, you would think a bank is trying to get as much money as they can, and although they are accepting a loss on the property as the sale price would not match the existing loan, it is still better than holding on to the property.

    Anyway, in summary, I believe we submitted offers on about 20 properties, and approximately 16 of those were rejected by the owner or the bank, 3 or so would have been withdrawn by us due to issues found during a more stringent inspection, and lucky last was accepted and is now officially ours.