Hi All,
I just thought I'd give a quick update on what I've been up to. I arrived back from Florida just over 3 months ago and have been trying to find the time to write this update, but haven't managed to find time until now!
I spent about 4 weeks in Florida, most of the time in Jacksonville. A little time in Gaynesville, Miami, Captiva Island and of course Orlando (to keep the kids happy). Unfortunately i didn't get to spend time in Cape Coral / Fort Myers where I was hoping to have a look around and meet Cheeves. Maybe next time?
Anyway, after almost going crazy trying to work out what was the best thing for me to do – what type of property to buy, where to buy, even – should I buy? I decided that I had to take the plunge, otherwise I'd be back in Melbourne and the whole project would just end up in the "too hard" basket, like it did 6 years ago after my trip to Texas.
We eventually bought a property in a lower priced area of Jacksonville – not a war zone, but certainly not the best part of town. It seems to be a lower working class type area. It's on the north western part of town. We came across a bloke who was looking to sell one of his properties, so decided to buy it from him. It's a 2 bedroom weatherboard, built about 1950 I think, that was recently re-habbed. We paid $34,900 for it and has a tenant in there paying $650 per month, so just over 22% gross return. We had a plumbers bill in the first month for $60 for a blocked drain, which seems to be a common problem in the US for older houses – apparently the old drains are smaller than they need to be and are built from some cement fibre type material that is prone to tree roots growing into them. We've been told to update the drain would be about $500, so that's an option if it keeps causing problems. So, at the moment everything seems to be going along okay.
We tried to open a bank account over there and were unable to do it. I'm not sure how other people have done it because we were told by two banks that we needed social security numbers, or evidence of a permanent address in the US, or a work visa, or something similar. So we are now having our property manager pay the rent into our Paypal account, then transferring that to our bank account. It seems to work well. I don't know if there is a better way of doing it, but that's what we've got at the moment.
We bought the property in a Land Trust, which seemed like a much easier and cheaper option than an LLC and seems to offer some asset protection as well. But I think an LLC would be good, then it could be linked to our Australian Family Trust and then the income (and future capital gain, if any) could be offset against other properties in the Trust. Anyway, that all needs looking into a bit more in the future. I'm still not sure how to go about doing all that or what costs are involved.
So, that's about it for the moment. Any comments, help, criticisms are most welcome. A sincere thanks to you all for your earlier replies to my posts and for showing an interest in what I was doing and for the advice that was given.
Phil
Congrats, the pay pal idea is the best i have heard yet
How would he do that? Did he have a PayPal account, was readily willing to get one, or do you charge their credit card? Very interesting concept!
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
Any vintage home that I buy the first thing I do is put a new sewer line in to the street. I doubt you will be able to replace the entire sewer line for 500.00 1.500 to 2,000 is more the going rate. Most these lines were made with Terra Cotta piping just like the Romans
and roots get into the bell housing.better to get that done than to have constant maintenance calls and tenants that are not happy because their sewer plugs up its a very stinky mess for them. If there was one major fix I would do on any rental its that new PVC sewer line.
Here's to continued success with this one.. Keep us posted after you have a few years of running costs to see where your nets fall out… US investors really do not look at Gross yields… We look at Gross rent multipliers to get a base line but its really all about net.
Thanks Kyler, I'll tell my partner that – it was her idea.
No Ziv, he didn't have a paypal account, but opened one just so that he could send us the money that way. It's a pretty easy process and seems to be working well, with minimal fees from paypal, from what I can make out.
Jay, thanks for your comments. I have read a lot of your posts and you are obviously a US investing guru. I know you seem to advise against investing in "war zones" which is very understandable, as the properties get wrecked, then sold to a wholesaler, then re-habbed, then on sold to another unsuspecting investor and the cycle begins again. I wouldn't consider where we bought a war zone, but is obviously a very low income area. The property manager seems to be very good so far, so hopefully all will be well and the rent will keep coming in – we'll pay down the Line of credit we used to purchase the property and at some stage we'll own the house outright and it will be pure cash income. (That's the plan anyway). And hoping to buy some more if all goes well, but can't use up all of our line of credit as it then leaves no money to play with property over in Australia. So finding a source of loans for US investment would be great.
Prices seem to be on the increase in Jacksonville as well, as they appear to be in many parts of the US, from what I've read, so hopefully we'll get some capital growth as well. The only real problem I can see at the moment is when the property does require repairs, because the rent is only $650 per month, even a small repair can eat into that amount quite significantly. Whereas if it was a higher priced property with higher rent, the repairs would not be as noticeable in the net return. But, then the gross return on a higher priced property may only be 10-12 %, so, maybe it's "six of one and half a dozen of the other?"
Can you explain what you mean by "gross rent multipliers" Jay?
" Gross Rent Multipliers"
This is an appraisal term.
YOu can appraise a home in 3 basic ways.
1. comps ( what are neighboring houses selling for)
2. replacement cost ( what would it take to replace it)
3. Gross rent Multipliers ( value based on gross rent that is common in the area)
So right now were values are all over the board. the US values are moving towards the GRM methods.
Its not fair to value a home that rents for 800 at the same value a home just sold for 3 doors down at foreclosure sale and is trashed and maybe sold for 25k to a wholesaler when your nice house that rents for 800 maybe worth 65k based on GRM…. This is what happens when you rely on online services for values its just a computer algorithm.
And right now you can't use replacement cost's.. ( See WI 's post on her reasoning of values) Because 95% of all these homes are selling far below replacement value… And homes in the low end and high crime areas will really never ever be worth what it would cost to replace them… Just look at Rochester or Detroit.. those nice 2500 sq ft brick homes.. Shoot for us to build one new here in Oregon would cost 80 to 100 a foot brand new… And your buying them for 5 to 15k in those areas.
So you use basically a gross rent income approach that is accepted in the area and that appraisers can rely on to set value. It will be a truer value than a wholesale value which is under market and far less than replacement value.
This is why many of you probably look at your insurance ( and some Spruiekers use this for marketing) and you see your insurance company wants to insure your home for some figure that is 3 to 5 times what you paid for it… And theoretically this is what it would cost to rebuild… HOwever in most these areas its not very wise to rebuild brand new… If you have a total loss take your money and go buy something else.. And donate the lot to charity.. ( I am talking about these very low end areas like you describe.. No sense having a beautiful brand new construction in the middle of a bunch of semi run down areas.
Capital growth in the areas you describe will be either non existent or very small as these are purely rental areas and unless you have unsuspecting buyers the locals will only pay a certain amount for a rental in those areas period.
Your challenge will be collecting rent over time and maintenance.. Keep a good eye on it and hopefully it all works out as you desire.
I would plan like this on the property you describe. Now I don't know if you pay a leasing fee or re up fee.
Pm 65
tax's 50 not sure what your real tax's are just guessing at your low dollar purchase price.
insurance 75 Most of Florida is much higher than the rest of the states. we pay on average 30 a month for example.
Maint. 100 In these hot humid climates there is always things that are needed.
vac. 60 this figures over five years you are not vacant more than 5 months.
misc 50 Your US tax return if you need one.. communications and any other contingencies. However does not include any trips to the states to check on your investments.. one trip alone is probably half a years income.
So roughly 400 a month for a 5 year average on the expense side baring any bummer tenants over 5 years of ownership ( which you will spend that amount if not more) if you spend less thats great but it won't be a lot less Unless you have brand new heating and airconditioning systems when you purchase all new plumbing and electrical and roof has 10 plus years. And no one steals your Air conditioning condenser unit every 12 to 18 months which is common.
Vacancy and or bad debt. in any low end area will be an issue and if you pay a leasing fee then you can figure another 30 a month if you turn tenant ever 24 months.. which would be below industry norm in this class property.
If you do better then thats fantastic.. So roughly 250 a month net cash flow or 3k a year net in your pocket.. Lets say you do better and you get 3500.00k in your pocket… Your net return is right at 8% or so.. and if your really doing good and hit the 3.5k your at 10%… Now you said you used your credit line to buy this.. So assume you are paying what 6 to 7% for the cost of funds. Your net is going to be 2 to 3% per annum or roughtly 750 to 1000 a year after paying your debt service so it would take you 35 years to pay this off at those numbers… Lets say my numbers are high by half it will still take you 15 to 17 years to pay this off. . if your only using your cash flow from this property… And at some point if you own that property 10 to 15 years your are going to have at least a 5 to 10k rehab job on top of the regular service calls and maintenance or what we call tenant turn over… to keep it up right.
Personally I think these lower end units should only be purchased with cash so you can get your 8% net return and you do not tie up credit lines that could probably make you far more in other venues or investments.
I am seeing that with those that are buying with vendor financing putting 50% down the numbers just do not work and they get in some pretty serious negative gearing because of vacancy and maintenance issues.
24 months of ownership will give you a good base line of what you can expect.
Best
JLH
Hello,
Yes, I have done property deals in Jacksonville. Usually do foreclosures around 80K as want to get something not too old.
Nice place isn't it?
Steve
Steve,
I'm not sure I would call Jacksonville a "nice" place. I would say it's probably functional, with good roads and freeways, but no public transport. From what I could see there is not really anything of interest in the city – it's just a place where some people live! (A lot of them very poorly and some of them very wealthily). There's no culture, no history and no soul. I actually found it to be quite a depressing place, except for the nice spring weather. The beach area is okay, but nothing special at all. Downtown seemed to be permanently empty except for a lot of down and out types hanging around in a park, being closely watched by heaps of cops – such a difference to the vibrancy of Melbourne (Aus) city centre, or Miami Beach. Compared to somewhere like Miami where there is so much life, energy and culture, Jacksonville really feels, like I said, quite depressing. But, people live there and people need houses!
Phil
Buzzer wrote:Hi All,I just thought I'd give a quick update on what I've been up to. I arrived back from Florida just over 3 months ago and have been trying to find the time to write this update, but haven't managed to find time until now!
I spent about 4 weeks in Florida, most of the time in Jacksonville. A little time in Gaynesville, Miami, Captiva Island and of course Orlando (to keep the kids happy). Unfortunately i didn't get to spend time in Cape Coral / Fort Myers where I was hoping to have a look around and meet Cheeves. Maybe next time?
Anyway, after almost going crazy trying to work out what was the best thing for me to do – what type of property to buy, where to buy, even – should I buy? I decided that I had to take the plunge, otherwise I'd be back in Melbourne and the whole project would just end up in the "too hard" basket, like it did 6 years ago after my trip to Texas.
We eventually bought a property in a lower priced area of Jacksonville – not a war zone, but certainly not the best part of town. It seems to be a lower working class type area. It's on the north western part of town. We came across a bloke who was looking to sell one of his properties, so decided to buy it from him. It's a 2 bedroom weatherboard, built about 1950 I think, that was recently re-habbed. We paid $34,900 for it and has a tenant in there paying $650 per month, so just over 22% gross return. We had a plumbers bill in the first month for $60 for a blocked drain, which seems to be a common problem in the US for older houses – apparently the old drains are smaller than they need to be and are built from some cement fibre type material that is prone to tree roots growing into them. We've been told to update the drain would be about $500, so that's an option if it keeps causing problems. So, at the moment everything seems to be going along okay.
We tried to open a bank account over there and were unable to do it. I'm not sure how other people have done it because we were told by two banks that we needed social security numbers, or evidence of a permanent address in the US, or a work visa, or something similar. So we are now having our property manager pay the rent into our Paypal account, then transferring that to our bank account. It seems to work well. I don't know if there is a better way of doing it, but that's what we've got at the moment.
We bought the property in a Land Trust, which seemed like a much easier and cheaper option than an LLC and seems to offer some asset protection as well. But I think an LLC would be good, then it could be linked to our Australian Family Trust and then the income (and future capital gain, if any) could be offset against other properties in the Trust. Anyway, that all needs looking into a bit more in the future. I'm still not sure how to go about doing all that or what costs are involved.
So, that's about it for the moment. Any comments, help, criticisms are most welcome. A sincere thanks to you all for your earlier replies to my posts and for showing an interest in what I was doing and for the advice that was given.
Phil
Thanks for the update Phil. Could you please explain a bit more about the 'land trust''? Do they work like Australian trusts? Discretionary? Who is trustee etc
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Jay,
Thanks for your comments. I'm sure you are very close to the mark with your figures – you know much more about it than me. I'm well aware that the rent can quickly get eaten up in fees, taxes, repairs etc. This house purchase was something of a calculated gamble at a low entry price, just to get a feel for the whole US investing experience. Plus, we have a family connection in Jacksonville which may see us travelling there a few times over the next 3 years or so.
As I've said, I have been interested in the US for about 6 years now and with the Aussie dollar now being so high, US house prices being so low, the low purchase price of the house, our Jacksonville connection and of course the medium term outlook for Aus house price increases being very poor it seemed like the perfect thing to do.
We bought the house for $34,900 in May this year. According to Zillow it was sold in Jan 2004 for $24,000, then Sept 2005 for $85,000. It's value peaked in Sept 2006 at $97,000. It was then sold again in October 2010 for $22,000 to the guy we bought it from. When we bought it from him he told us he wanted to make $7,000 on the house. So, he must have spent about $5,000 on the re-hab, which seems fair enough. It's in pretty good condition – polished boards, newish roof, bathroom and kitchen are pretty good and the air conditioner is covered with locked steel bars to prevent theft. We felt pretty comfortable with the purchase and felt that the property manager we are using is someone who wants to do a good job.
I understand what you are saying about all the risks involved and the fact that it will take a while to pay down the loan on it, but as the loan gets gradually paid down it will compound to hopefully be paid off reasonably quickly. Also, of course, as I mentioned, when (if) the Aus dollar returns to a more normal level of around 75 cents to the US there will have been a 25% gain on our money. So, if we have bought a property that is slowly paying itself off and we've bought it at a price that appears to be 58% below the price it was sold for in 2005 and have bought it with a potential 25% gain in currency, surely we can't go too far wrong, can we?
I would love to have bought the property with cash, but, if you don't have the cash, you don't have the cash! At the moment, to me it looked like the best investment I could make with $35,000 from our line of credit. We have a few investment properties in Aus and one in the UK. The prospects for capital growth on those is very limited for the foreseeable future and it doesn't seem like a good time to be buying any more (especially when most Aus properties actually take money out of your pocket each week, not put money in your pocket). I have done a few renovations in the past and recently a dual occupancy subdivision. I'm looking to do something similar again, to make a cash lump sum, but at the moment I can't find anything with enough money in it to make it a worthwhile venture. So, Jay, if you (or anyone else) have a better idea for what I should be using my line of credit to invest in……please, please tell me. I want to know. I'm all ears!
Phil
Buzzer wrote:if you (or anyone else) have a better idea for what I should be using my line of credit to invest in……please, please tell me. I want to know. I'm all ears!I've got more than a few ideas, that'll definitely put money in your pocket monthly, AND allow you to capitalize on foreign currency trends. Can't promise CG though. But I don't really think anyone can, and definitely not when it'll happen, how much growth or over how long a period – no matter what they promise you. Stick to the cashflow and the easy management, is my personal philosophy.
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
and roots get into the bell housing.
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