15 Tips for Property Investing in the USA
Guest post by Mark Morris
You may have heard of people from the UK buying housing in the sunshine state of Florida for long holidays in the sunshine and may be earning some additional income through holidays lets, to cover expenses.
Have you ever thought of investing in America for long term rentals which can create great cash flow or net yield as we like to say in the UK. America’s Mid West can offer some great double digit rental yields, if you follow these tried and tested guidelines/tips.
How do you choose what part of the USA to invest – after all there are 50 states, over 300 million people and is one of the largest countries in the world
Picking the right area is key. Several areas offer relatively low purchases prices (compared to the UK) and good solid rental returns. I have bought properties in the Midwest ranging from $12k to $50k with monthly rents currently ranging from $600 - $1100. Do your own research. The area you choose should have many if not all of the following :-
- strong economy
- growing population
- Increased employment ( look for the big fortune 500 companies e.g IBM, Walmart, General Motors to name a few.
- Is local/national governments investing in the area. Does it have that feel - things are on the up i.e. the indicators of long term growth.
The following Midwest areas are popular with cash flow investors: Memphis, St Louis, Cleveland, Columbus, Indianapolis & Kansas City (to name a few )
What’s your maximum purchase price entry point? E.g $40k max property price may rule a number of areas out.
Once you have decided on the area – Choosing the right property provider is absolutely key
Please take your time to choose the right company to deal with (both sourcing companies and property manager companies). You may have also heard the term ‘Turn Key Provider’ – loosely speaking a company which will buy a property, fully refurbish the property and then sell that property to an investor fully managed. As it says on the tin – all you need to do is turn the key (well not quite). However, it can be one of the best ways to get on the US property ladder if you are an overseas investor. Unfortunately, as is always the case ‘there are some good ones and there are some bad ones’.
I want to share my top tips of how to deal with the right company’s over in the US who will have your best interest at heart. Some of these I got wrong in my US journey. Please learn from my mistakes and if your gut feeling says no – don’t do it.
- Research online forums e.g. Bigger Pockets. There are several threads on the forum around turn-key providers in different areas. Don’t be afraid to ask for recommendations, however always do you due diligence regardless.
- Checkout turn-key reviews from clients – a really good turnkey review site is https://www.turnkey-reviews.com/
- Listen to real estate podcasts on iTunes - these can offer great insights to particular areas and operators. I personally listen to all Matt Andrews property shows i.e. Epic Real Estate Investing, Turn-key Real Estate Investing and Hold That House with Matt Andrew. Also tunkey-reviews has its own turnkey-investing-podcast. If you would like to go to my interview please click the link: http://turnkey-reviews.com/turnkey-investing-podcast-show-13/
- E-mail a minimum of 3 property companies / providers. Explain what you are looking for. Do they respond efficiently, do they try and push you deals straight away. There should initially be mutual trust created before there is any discussion of deals. I had approx 5 lengthy telephone conversations along with extensive due diligence before I went with one of my turn-key providers in Ohio. Don’t be afraid to ask questions and follow this up with phone calls or Skype.
- Ask the provider for references and have they previously dealt with foreign investors. Ask what sort of guarantees they provide i.e. maintenance, rental or tenant placement guarantees.
- Read all documentation and management agreements. Ask for clarification on anything you do not understand.
- The big one for me. Do they invest in Real Estate themselves? I feel so much more comfortable when providers have their own rental properties. It usually means they would hopefully not buy something for an investor which they wouldn't hold in their own portfolio. Also if they have big exposure to the social media, podcasts, etc. they will have big reputations they need to uphold.
OK, so you have found a reputable Provider – what about a deal?
- Know your investment criteria and minimum deal requirement, for example, it might be 10% per annum after deducting all fees and expenses. It may be minimum $300 per month net yield/cash flow. Knowing you minimum deal standard allows you to discount and filter out a lot of deals.
- Make sure all your costs are factored in, such as management charges, insurance, property taxes, certifications or licenses and voids and tenant finder’s fees (usually one month’s rent). Please note, generally property taxes are the property owners’ responsibility and are usually paid twice year, regardless of whether the property was occupied or not.
- Stress test the numbers with maintenance fees and capital expenditure of big ticket items such as a furnace or roof. These should be in the future if the property has been refurbished/rehabbed.
- Is the monthly rental achievable? if there is a rental guarantee – check the rental price is not inflated as when the guarantee is over your cash flow will reduce due to a reduction in rental amount.
- What is the property history? Was it rented previously and is the property close to local amenities, schools, hospitals, public transport etc.?
- What checks have been carried out on the tenant (if it’s a turn-key provider). What are their current circumstances, how long have they rented the property and are rental amounts up to date?
- Analyse via the web, current listings in that area and the recent sales figures (pay greater attention to properties sold in the last 3 months). Sites like Zillow also give you property tax information as well as a broad current valuation. Rentometer.com gives average market rents for properties. craigslist is a popular classified ads website with lots of properties for sale form both agents and home owners.
- Consider a independent property inspection/valuation. This should ensure you are paying market value and highlight any potential issues. Don't be afraid to go back to the seller to request further repairs or an adjustment to the purchase price.
Other things to be aware of before you take the plunge
There are a number other factors / considerations you should be aware of, including finance – obviously finance is a massive part and probably another blog within itself. However what I would say is finance can be difficult to obtain for overseas investors of US property. There are institutions who will lend, however the minimum loan amount are usually $100k 70% LTV. Cash and private finance are obviously the easiest ways to fund real estate investing in the US.
You will also need to set up a foreign exchange account to transfer funds e.g. clearfx or HIFX. Keep an eye of exchange rates. They can fluctuate daily and have an impact on your cost price. Once transferred, ensure this will reside in escrow until completion of the property (money is ring fenced) . You will need to open a US bank account (which can be difficult from overseas since September 2011 and the Patriot Act) – a US Dollar account in the UK is an alternative. However, the transfer fees can be high.
You will need to employ an accountant or CPA. A tax return must be filled to the IRS yearly and you will need a unique ITIN number. Most US property Investors incorporate in the US with the use of LLC’s, mainly due to increased protection. It protects your personal assets. There can be tax benefits and allows for better organisation. However, consult with a attorney for advice first.
Finally post purchase - Keep in contact with your property manager. Always check property management reports and keep a tab of what’s going on with the property. I recently noticed a double posting of a capital expenditure charge which was $1500.
In conclusion the US can over a great, hands-off, additional stream of income. Cash flow can be greater than UK returns and property prices can be much lower. Why not visit the US and research the areas and property providers first hand or combine a visit with a US vacation destination. I would recommend investors buy one property initially just to test the water and see if it’s a good fit. If you’re happy, re-invest your cash-flow and go again and reap the rewards of the compound effect.
Best of Luck for 2016 in whichever area/strategy you decide to invest in.
Contacts: Mark Morris & Email
Richard Brown's, The Property Voice, Insight
I have been rubbing shoulders with Mark in property circles for a little while now - he is an active and enthusiastic investor, very ready to share with others. What I was not fully aware of was his experience of investing into the US property market, until he shared a podcast interview in which he was the featured guest. I was impressed with his knowledge on the subject and immediately invited him to share his thoughts with us at The Property Voice.
The result is his maiden Blog post above!
I think that I Mark has done an excellent job. Not only in discussing how to go about investing into the US, but many aspects apply to a foreign market investment in general terms. Clearly, some of the actual resources used (e.g. Zillow) will vary, however there are some common principles that we can apply...
- Check the fundamentals, just as you would in any market - what are the supply and demand factors, how about schools, transport, amenities, employment and economic activity, crime rates, etc.?
- Get local, on the ground help - but do your due diligence on the people and organisations you plan to use obviously
- Be legal, compliant & understand the local rules - using lawyers, accountants and other advisers to help
- Get your finances in order - for the purchase and any works, but also for the ongoing costs like mortgage payments and maintenance - remembering that exchange rates can fluctuate over time too!
- Have an initial and then regular property inspections
- Research, research and more research
- Know what you want in terms of property and returns, so that you can screen opportunities more easily
My Golden Rule would be to try and understand the micro market where you are investing. For example, if you take Orlando in Florida as an example - which part of town do you want to invest in...the entertainment hub or the non-entertainment hub? Not every property in Orlando will be suitable for Disneyland visits for sure, and many that are face very tough competition, so check it out carefully. There are lots of tools available to assist in this regard, but as far as possible, do try and get to understand what you are buying and where it is. To take New York as another example, there is a big difference between Manhattan and the Bronx...know which one is your target market and likely to be a sound investment from across the pond.
Thank you Mark for your valuable contribution...do any of our readers have particular experience with other parts of the US, or indeed other property investment markets? Do let us know...