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.

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

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.

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?

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.

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!

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!