[baruchmaxParticipant@baruchmaxJoin Date: 2011Post Count: 14]

November 8, 2011 - 2:44 pm

Rich,

I will suggest doing a little more research on the US locations, shortlisting the market to 3-4 locations and then fly down to visit each location personally and invest in one you feel most comfortable with. If you are looking to buy multiple properties, then it would definitely make sense to fly down and pick a location that you have visited. If you are just buying one property, the cost of flying down may not be justified. In which case, you may need to find a company that can sell you turn key properties. Although, be very careful about how some of these companies calculate ROI on turn key properties. They conveniently exclude any maintenance on these properties.

Happy investing!

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November 8, 2011 - 7:03 am

Hi John,

Good post. I have some comments.

1) Property Management – Property Management is a necessary evil for long distance property owners. The simple fact is no one will care about your property as much as you would, but you have to have a property manager involved if you own a property overseas. The best thing to do is find a property manager that is recommended by other investors.

2) Renovations – The best thing to do here is go with a contractor who is licensed, insured and bonded with the local government. Call the local city and confirm that their license and insurance is active. Ask the contractor for 3-5 references and follow up with every single reference.

3) Brokers – Agreed with your comments on brokers.

4) Insurance – I agree with you on this. For all my properties, I have insurance to cover my investment, demolition and about 25% money on top of it to walk away with some cash if the property needs to be demolished.

One thing I don’t completely agree with is about the last paragraph. No matter how well you renovate the house, you can’t always make the house fully “tenant-proof”. There will always be some maintenance calls. There are always be some water leaks, some toilets, bath tubs, kitchen sink, etc that need to be rodded. The best thing to do is keep a separate reserve for these maintenance calls, because it’s not a matter of if, but a matter of when you get these calls.

Another thing that can make or break a deal that not many people think about is real estate taxes. On a good deal, it should not take more than 2 months of rental income to cover annual property taxes.

Also, I agree that in this market where there are TONS of GREAT deals, anything less than 15% net ROI is not worth investing your time and effort

Otherwise, a great post.

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October 17, 2011 - 10:18 pm

janemcewen wrote:

Baruchmax : can you explain your comment 3.

3) If you are purchasing a multi-unit, PLEASE make sure that all the units are legal per the city and any other government authority. You can find this out by calling the city's building department. Just give them the address and ask them "What is the zoning for this property?" and they should be able to confirm that.

What do you mean by "legal" ? I would have thought any property that was built would be legal? (niave aussie investor)

Your points are really helpful, thanks again.

Jane,

Legal would really apply to multi unit properties. Let’s say you are purchasing a duplex (2 unit property), each unit is rented out separately. What you should do is call the city building or zoning department and confirm that both the units in the duplex are legal to be used as rental apartments. A lot of times what happens is that people convert a basement or an attic in a single family house into a rental apartment and then they advertise it as a 2 unit property; however, the 2nd unit (basement or attic unit) is not legal. The property is zoned as a single family house and should be used as such. If the city building authority were to inspect the property, they could possibly shut down the other unit.

I hope my explanation makes sense. If you have any further questions, please let me know.

[baruchmaxParticipant@baruchmaxJoin Date: 2011Post Count: 14]

October 15, 2011 - 11:21 pm

Jay,

Thanks for that information. I am considering getting a real estate license. From your note, it definitely sounds like it will be beneficial. Thanks again for the information

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October 15, 2011 - 4:13 am

Jane,

I am glad you found the information useful. Good luck in your search. Make sure you do all the due diligence. Below are some of the things I consider in my purchase of investment property, I hope you find this helpful:

1) Does the property appear to be in a safe neighborhood? What is the condition of the other houses on the block? If the are yards are well kept, then the owners take pride in their houses. If the houses look run down, grass is not cut, then you may need to investigate more.
2) I talk to people living in the neighborhood to get their opinion. I talk to neighbors if I see them outside. I talk to some of the local business owners (grocery store owner for the area, gas station, etc.)
3) If you are purchasing a multi-unit, PLEASE make sure that all the units are legal per the city and any other government authority. You can find this out by calling the city’s building department. Just give them the address and ask them “What is the zoning for this property?” and they should be able to confirm that.
4) I also call the local police department to get crime report for the area and the particular block.
5) When you are looking at a property, the main things to look for are roof, foundation, water leak in the basement (if there is a basement), heating or cooling system, plumbing system (just check the water pressure in bathroom and kitchen), electrical panel (in my area, the electric panel should be upgraded to 100 amps). Since you are not very experienced, ALWAYS get a property inspection.
6) Find out the taxes on the property. For taxes, make sure the tax amount that you have is for an investor. If you are purchasing a property from an owner occupant, then the chances are taxes will be low due to some exemptions, which you as an investor may not have, so your taxes will be high.

The above are some of the items, there are a LOT of other things that go into due diligence. If you have any other questions, please feel free to ask.

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October 14, 2011 - 11:37 pm

Alex SC wrote:

Strongly disagree some of the strongest teams  in the USA buy fix, and manage there properties in house.We have over 150 in house adding 10 – 15 monthly. Biggest Memphis team has 800  properties and Indianapolis team has over 1000. I not sure  about Jay  please chime in I think you manage over 200 .

Alex,

I agree with the points you added. Really good points.

But with number of units managed, I think it comes to personal preference, I guess. I personally would feel more comfortable with a property manager who manages 50 properties vs someone who manages 200. Not to say that a manager managing 200 units will not do as good a job as someone managing 50.

Again, great additional points.

[baruchmaxParticipant@baruchmaxJoin Date: 2011Post Count: 14]

October 14, 2011 - 2:52 pm

Hi Jane,

It is definitely a very exciting to be buying first investment property, specially as an overseas buyer. Below are some of the questions I would ask:

Realtors

1) How many overseas investors have you worked with?
2) Can you provide me references for these overseas investors?
3) If you like some property, ask the realtor to provide you with comparable sales information for similar properties in last 6 months. Don’t go based on the comparable sales information that is more than 6 months old, as the market may have changed a lot in last 6 months.
4) If the realtor tries to tell you that Cash Flow = Rent – PITI (Principal, Interest, Taxes, and Insurance). Keep in mind, that’s not true. There are a LOT of other expenses that come with owning a rental property like, vacancy, property management, repairs and maintenance, utilities while the property is vacant, letting fee, etc.

Property Managers

1) How many properties do you manage for overseas investors?
2) Can you provide me references for these overseas investors?
3) Will I have online access to property financials including lease, tenant information, etc.?
4) How do you handle repairs? Do you have some handyman or repair person in your own crew that handles small repair jobs?
5) Do I get a discounted price if you manage multiple properties for me?
6) Are you licensed with the city and state?
7) How many total properties do you manage? Do you have other property managers on your team? What is the average number of properties each property manager handles? (You don’t want to see one property manager handle more than 30-50 units)
How do you handle eviction?
9) Is there a fee when the property is vacant?
10) How much do you charge for filling a vacancy? The average is 1/2 month rent all the way up to 1 month of rent.

These are some of the questions I could come up with. I will add more if I think of something else.

2 months is plenty of time to give you a good idea of the market. Are you going to be in Fort Worth only for 2 months?

Just curious, how did you decide on Fort Worth market? Please feel free to contact me if you have any other questions. I will be more than happy to help you

Good luck with your search.

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October 13, 2011 - 10:22 pm

No, I am not a licensed real estate agent. My main source of income is from the rental properties that I own and my long term goal is to keep buying as many properties as I can.

I help some overseas buyers purchase properties that I would purchase myself, if I didn’t have my cash tied up right now. I would never sell someone anything that I wouldn’t feel comfortable buying for myself, it’s as simple as that.

Like the one I closed on today, I would have purchased it myself if I didn’t have my money tied up elsewhere.

Are you a real estate agent?

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October 13, 2011 - 3:47 pm

Really great advice on purchasing properties from someone local who has knowledge of the area AND who owns some properties in the area themselves. If they say they own some properties in the area, ask for proof of ownership AND do an independent check to make sure they are being honest.

DUE DILIGENCE DUE DILIGENCE AND SOME MORE DUE DILIGENCE!

I am helping an Australian client purchase properties in Midwest where I own properties myself. My client flew down and I gave him a tour of my properties. Took him inside of my properties and showed him some great deals on the market. He liked one particular and made an offer and we are closing on it today. The gross return will be 44% and the net return on that deal will be around 18%.

Good luck and happy investing!

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October 13, 2011 - 3:31 pm

My Australian client actually flew down and walked through this property before purchasing it. He couldn’t believe the returns that he could get in this market. I gave him a tour of all my properties and showed him the REAL numbers.

He felt comfortable and made an offer the same day.

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October 13, 2011 - 3:29 pm

I agree with Jay above. I just mentioned in my other post that condos are rarely a good investment deal, because of the reasons Jay mentioned above. Also, because you NEVER own the condo free and clear, you ALWAYS have the monthly HOA bill whether you have a mortgage or not.

If you must buy a condo, like Jay said, purchase in a complex that is mostly owner occupied. If the whole complex is owned by investors, you will have a HOA that doesn’t care much about the complex and condos will not be kept in the best shape.

With condos, you never have the full control of your investment, because of HOA. You are always at HOA’s mercy. You can easily make over 10% NET return in this market, don’t settle for anything less or inflated returns.

Good luck and happy investing!

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October 13, 2011 - 3:24 pm

The Australian client is paying me for my time for this property, around $2k. I helped my Australian client with some properties in Phoenix, but I wanted to help them purchase something that actually makes money and I told them, just pay me for my time and if you like this property, we can set up some compensation structure for any future deals.

I do not own this property myself, the Australian client will be closing on this property with their funds. I am handling everything for them from negotiating a better price to finding tenants. The property was listed for $40,000 and I negotiated a price of $25k for the Australian client.

The property is actually not in Chicago, it’s 30 minutes drive from Chicago and in a very small city of about 30,000 people.

The $6k rehab is for a new furnace, upgrading electric breakers to 100 amps and 2 new garage doors. The inside of the units don’t need any work other than cleaning.

I don’t know if I feel comfortable with sharing address for my client’s property, but I can send you some pictures of inside of the property, so you get an idea on the condition. I don’t know how to post pictures on this website.

“A lot of these investors will get wiped out completly because they go for the highest posted returns and buy in the HOOD and god help them. And the folks selling them to them are really only out for themselves, its america and real estate is cavet emptar to the maximum.”

Excellent point. I couldn’t agree more with your statement above. My Australian client was looking to purchase some properties and sent me information to help him with due diligence and I couldn’t believe how bad the deal was. Just doing a little research, I found out that the asking price was 50% over the true market value of the properties. So, for instance, the asking price was $30k when the actual market value was $20k. JUST PLAIN WRONG! I talked him out of the deal and found him similar deals for half the price he was willing to pay.

One other thing I want to add is that a lot of Australian investors like to purchase condos. I don’t like buying condos, because you are at the mercy of HOA. Also, because you have monthly HOA, you will never own the condo free and clear compared to a single family house or multi unit building. So I tell my Australian clients to be very careful when it comes to purchasing condos. They are rarely a good deal for investment.

Good luck and happy investing!

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October 13, 2011 - 4:34 am

Sorry, one thing I forgot to add was that the property I am helping my Australian client purchase tomorrow is NOT in a bad neighborhood.It’s in a diverse neighborhood made of blue collar working class people. I own multiple properties in this neighborhood myself and I have visited my properties after dark without any fears

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October 13, 2011 - 4:29 am

Jay,

I agree with your approach for the most part. Generally, people selling to overseas investors calculate cash flow using the following formula:

Cash Flow = Rent – PITI (Principal, Interest, Taxes, and Insurance)

There a lot of other expenses that go into owning a rental property. Though this is a GREAT rental market, but there has to be at least a month of vacancy factor included in the cash flow. In my market, the letting fee is 1/2 month of rent. Honestly, one full month rent for letting fee is kind of high, but not unheard of. I agree with your 10% for property management fee. Depending on the size of your rental portfolio, you can negotiate that price down to 8-9%, but I think it’s good conservative approach to go with 10%.

One thing I have noticed in my experience, I don’t do any one year leases with my tenants. I only do month to month lease. The reason for doing that is if a tenant wants to break the one year lease, they will do that no matter what. With month to month lease, I have noticed that tenants tend to stay much longer than a year in my apartments. The reason for that being, the tenants don’t have a decision hanging over their head after a year whether they should sign another one year lease or not. Another great benefit of month to month lease is that if a tenant isn’t working out for me, all I have to do is give them a 30 day notice and they are out of my place and I can get another tenant moved in.

As for maintenance, I agree with your number of $150/month.

Taxes and insurance are on the high end for a property that’s renting for only $700/month.

However, in the example you gave above for a property renting for $700/month at purchase price of $50,000. That’s an AVERAGE deal at best. I would personally never invest my money in that kind of deal UNLESS the market value of that property is $75k and I have $25k equity in it. I personally would not buy anything in this market where my NET rate of return is less than 15%.

For example, I am helping an Australian client with purchasing a property tomorrow (Thursday, US time) for $25,000 and it needs $6,000 worth of work. It’s a duplex (2 units) and each unit will rent at least $650/month. It has basement, attic, and two car garage detached. So the total investment of the Australian investor will be $31,000, let’s add another $4,000 to this deal for other expenses and misc charges, so total purchase price comes to a nice round figure of $35,000.

Gross return = 44.57% (1,300 x 12 = $15,600/$35,000)

Taxes for this property are $2,000. Insurance is $600/year. Utilities – $600. Vacancy – $1,300. Letting fee = $650. Repairs and maintenance = $2,500. Property Management = $1,560. Total expenses = $9,210

In case you are wondering why the taxes are high for a property worth $35k, that’s because the property is actually worth $60,000 in today’s market and that’s what the tax amounts are based off on. So this Australian client will have an equity of $25k once the repair work is completed. A few years ago, the same property sold for over $100k!

Net return = 18.25% ($15,600 – $9,210 = $6,390/$35,000)

These are the kind of deals that I would invest my money in. These deals are rare, but NET return of 12% in this market is easy money and no one should settle for less than that. If someone is making 5-6% in this market, it’s a waste of time and money, to be honest. There are TONS of better deals in this market.

Buyer beware, when someone pitches you a deal with CAP rate of 10+%, please make sure that they are including ALL the expenses that come with owning a rental property. Don’t go based on the best case scenario, all calculate your numbers based on the worst case scenario and purchase property based on that.

Good luck and happy investing!