Active investor from US

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!

Perfect, thank you.

At that price what is in it for you, given that cash flow and such most of the Nice US turn key guys would be selling that for double what your talking about and pocketing 20 to 30k profit. not to mention the layer of marketers that go along with it.

Now do you own this as in did you close on it already with your own funds and are flipping it. Or is your Aussie;s funds closing the deal.

From those numbers I would think  you making a modest fee maybe 5k on this deal…

Most properties that sell this low in the big US cities frankly are not in good neighborhoods as you suggest.

I loaned on a half dozen Chicago properties a few years back and lost my ass. So not sure where these are.

I did do some loans with a very good company that sold to US citizens they were buying these doubles at 40k putting 50k into them and they would rent 800 a side.

So on the surface your numbers seem very low in purchase an rehab I mean 6k rehab on a double is really just barely carpet and paint.

once you close maybe you can share address so we can all do a little quick check up.

thanks for your reply.

At least we are starting to bring reality to the AU investor on what the true running cost are for properties. unfortuantly there are so many spruikers out there that claim little to no running cost and these nice folks buy because of that and then have bad experinces.

I basically get 1 to 5 e mails a week asking for help the investors nice turn key guy just screwed them and they need management or whatever. Since I have loaned over the years in Chicago, St. Luis, memphis, Jackson, Atlanta, Birmingham, Indianapolis, Columbus, Kokomo, Ft. Myers, Vicksburg,  cleveland, Pittsburg,  and last if not least Detroit, Eastpointe etc. I have probably a better working knowledge than most folks when it comes to the US rental market in the low end.

Then of course I live in Oregon have investments in CA. NV and AZ personally, Not to mention my new venture of buying Cash flow rentals in Bham, Jackson, Memphis, Indy and Kokomo, and suburbs of Atlanta.

end of the day I KNOW what the real returns are over time, we have a 5 to 10% net market. and few will do a little better. 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.

JLH

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.

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?

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 your right keeps us hard money lenders in business:)

As you know there are many folks with marketing companies for these properties that do not own them and are not licensed. What has happened is that so many US investors got wiped out from their 05 to 08 purchases, these same folks are going back on the Turn key guys that sold them the properties claiming fraud etc etc.

So if they go to an attorney the attorney goes through the normal process of dissecting the deal and making sure there are no holes in the transaction: and one of the gaping holes have been these marketing companies that do not own the property, and are not licensed.

It has gotten the attention of the AG’s in various states and the Feds as you have business taking place over state lines.

Same thing with folks flipping properties the closing companies no longer allow one buyer to buy\\\\\\\\\ unless they show up with cash to close then process the second transaction when in the good ole days you had pass through escrows with middle man taking their fee out at closing. This has created the transactional lender who charges fee’s for one day loans. Now not saying this practice is all but eliminated as smaller private closing attorneys may participate however any national title and escrow company with not.

I presume the Aussie marketing companies are going to start to get on some regulatory radar if they are not licensed as well in the states they are working in.

A huge benefit for the buyer when using a licensed agent is they have a fiduciary to divulge to their client what properties are listed for. And of course everyone knows what the commission are to the agents no secret….

Time will tell on all this.