Aussie looking to invest in the US

[Michael Pang]

Hi - Thanks in advanced for reading this post and for any advice you can provide me.

I'm an Aussie looking to invest in the US real estate market. My fiancee is actually from the US (dallas) so I figured that it should assist me in overcoming any foreign ownership issues.

I'm just starting out and have been fortunate enough to come across this site. There're so much information and so many real estate strategies out there it's mind boggling!

I feel that the GFC (and subsequent decline of property values) provides a once in a lifetime opportunity to acquire good quality assets.

I'm not looking for a quick profit (although if the opportunity presents itself, i wouldn't turn it down :p). Rather, I'm in this for the long haul.

My intention is to steadily build a portfolio of quality properties with the objective of achieving the following:
1. good ongoing yield/cashflow - my initial goal is to be able to generate $20k a month in rental income. So I'm looking to buy
in areas where there is strong rental demand.
2. capital gains in the next 3-5 years when the property market recovers and values increase to pre-GFC values. So I'm really looking for undervalued properties here.

My issues are that i'm not too sure where to start and where to look as the US is so BIG! At a high level, all I know that is
that the areas that are most affected by the GFC is california, arizona, nevada and florida. Should i focus my attention on
these areas?

In addition, I'm not familiar with the US tax system, ideal property structures/vehicles or acquisition cost/ongoing maintenance cost in the US. Basically, I have a whole host of questions circling in my head!

If you have any advice on providing me with some direction on where to start, it would be greatly appreciated!

Apologies for the general nature of this message and thanks once again for reading.

Mike

[Jon Holdman]

If your finance is from Dallas, you should invest there. No question. Its a decent market from what people here say, and you already have a reason to be there.

Gross rents don't really matter for the $100. What! you way. How can that be? In most markets, there is only a narrow range where properties work. Keep in mind the implications of the "50% rule". Since you're going to be long distance and paying a property manager, and paying a handyman $50-100 to make a repair that would take an hour of your time and cost $5 in parts, you'll certainly hit this 50% rule. That rule tells you:

cash flow = (rent / 2) - P&I payment.

I'm assuming you will be financing the property. Not quite sure how you'll pull that off, and I'll come back to the all cash alternative in a minute.

Also, for the moment, lets assume you can get 100% financing. The $100 number really makes that assumption, too. Its possible to achieve that with various creative strategies, but I suspect you're not going to be using those since you're not on the ground here. Nevertheless, lets start with that and see what it takes to get $100 in cash flow from the property. Then we will add in a 30% down payment and a 100% down payment (all cash) and see how that improves the cash flow. Realize thought that the improvement is from the cash you've sunk into the deal. The first number, assuming 100% financing, give you a better handle on the property itself.

Now, rents are the factor you have the least control over. Those are set by the market. Not sure of rents in Dallas, but I suspect they're not too different from here. Lets pick three rents and go with those. $500 for a cheap 1BR apartment. $1000 for a 3/2. $1500 for an upscale house.

Lets take the formula from above and do a little algebra:

cash flow = (rent / 2) - P&I payment

cash flow = (rent / 2) - PMT (rate, term, loan)

Remember loan is 100% of the purchase price for this case. Lets assume we want $100 in cash flow, and solve for the loan (price). PMT is the payment calculation function from a financial calculator or Excel. PV is present value, which computes the loan amount from a payment.

max payment = (rent/2) - desired cash flow

max price = PV (rate, term, max payment)
max price = PV (rate, term, (rent/2)-desired cash flow)

I'll assume 6% and 30 years for the loan, since that's the current rates for NOO loans. Again, no idea how you're even going to get a loan, let alone the terms. I'll also use $100 for desired cash flow and the three rents from above.

Rent $500 -> max price of $25,019
Rent $1000 -> max price of $66,717
Rent $1500 -> max price of $108,415

Now, in some places you can buy a small house or an apartment for about $25K. That would include any fixup the place needs to make it rent ready. It should also include your closing costs. Here in Denver, essentially impossible. In Dallas or surrounding areas? Perhaps.

Its difficult, but more feasible to be into a 3/2 for $67K. Not everywhere, but there are areas where, with a lot of work, you could come very close. I'm confident you can do this in Dallas, though it will still take work.

To get $1500 in rent, you have to have a really nice place. I have a friend at my day job who moved here from MN a couple of years ago. His wife only wants to live in one specific neighborhood. He wants a good deal. So they've still not bought. Houses in that neighborhood are about $400K. He rents one of them for $1400. That's a LOOONG way from the $108K you can afford to pay for a place that will rent for $1500. Now there are other areas here where you can get a lot closer. But its actually more challenging to find that than to find the house that rents for $1000. And you're still getting only the $100 in cash flow.

If you're buying $200K houses in "nice neighborhoods", its really tough to even get the $100. You need about $2600 in rent to coax $100 out of a $200K house, and that's impossible in most areas. Certainly impossible here in Denver.

This set of calculations tells you what you need to be looking for.

Now, what happens if you kick in 30% down, or pay cash for those same deals? Your P&I payment goes down and cash flow goes up. Now you have cash into the deal, so a "cash on cash" return becomes meaningful. To make the calculations simpler, I'll assume the values computed above include rehab and acquisition closing costs.

Rent $500 -> max price of $25,019
30% down payment -> cash flow = $145, cash on cash return = 23%
all cash -> cash flow = $250, cash on cash return = 12%
Rent $1000 -> max price of $66,717
30% down payment -> cash flow = $220, cash on cash return = 13%
all cash -> cash flow = $500, cash on cash return = 9%
Rent $1500 -> max price of $108,415
30% down payment -> cash flow = $295, cash on cash return = 11%
all cash -> cash flow = $750, cash on cash return = 8%

With that 100% loan, your cash on cash return is infinite, since you have no cash in the deal. When you pump a lot of cash into the deal, your cash on cash goes down. Then, you have to consider other investments. You can certainly do much better than 8% return by making hard money loans.

Lets use these numbers to get you to your $20K goal:

Rent $500 -> max price of $25,019
30% down, cash flow $145, doors needed 138, cash needed, $1.03 million
all cash, cash flow $250, doors needed 80, cash needed, $2.00 million
Rent $1000 -> max price of $66,717
30% down, cash flow $220, doors needed 91, cash needed, $1.82 million
all cash, cash flow $500, doors needed 80, cash needed, $2.67 million
Rent $1500 -> max price of $108,415
30% down, cash flow $295, doors needed 68, cash needed, $2.21 million
all cash, cash flow $750, doors needed 27, cash needed, $2.93 million

Pick your poison.