In 2013, Todd started to build a property portfolio for himself in the United States of America. Now four years later, he can’t get enough!
Your Investment Property asked Todd Hunter how he is still finding great investment opportunities in the US market.
Buying property in the United States as a property investing strategy is beginning to gain popularity again. I’m finding that more and more investors are seeing the returns I am posting on our wHeregroup Facebook page and they are calling me to learn more about why I am investing there – and how they can get involved.
With purchase prices from around the US$75,000 mark, and with rents of US$220 per week – that’s a 15% yield – plus no stamp duty costs, it’s no wonder that Australian investors are very keen to get involved.
Those yields are the bottom end of what we are seeing, too. It’s not uncommon to see 18%+ returns. I personally own a couple of houses that are achieving over 21% yield.
Where can you achieve this in Australia without huge risk?
Some people see investing in the US as a risk, but that is simply because they don’t understand the market. It is a little like those investors who must own a property near where they live, because they believe they know the market there and it makes them feel comfortable being able to drive past daily, and go and see it for themselves if something goes wrong.
This is not the best way to invest in property. It actually comes down to the old adage in property investing: ‘It’s all about the numbers’.
Researching the US landscape
From the outset, I must say that it did take me two years of research and educating myself before I made that first purchase for myself. The reason for doing all of this was that I needed to learn from scratch how investing in the US works and what parameters I needed to research, so I could find awesome locations to invest in.
Add to this the fact that there are 3,144 counties in the US, with a total population of over 330 million people, and this means researching can be a long process.
Then, once you have a location to invest in, you must put together a team that is willing to deal with Australians. It sounds strange, but with each new location I look to invest in, I email approximately 20 real estate agents and receive only three or four replies. Building rapport is not an easy task!
If it were not for the team I have on the ground in the US, I wouldn’t even be investing there myself. You read a lot about the benefits of having the right team by your side when investing in Australia, which is true – but in the US, unless you’re willing to travel over there time and time again, and spend many weeks researching, then using the right buyers agent who has an awesome team around them is absolutely crucial.
Before you decide to invest, you must know what structure to invest in. I must say that every investor should obtain their own independent advice here.
Personally, I purchase through a Limited Liability Company (LLC). That way, should anything go wrong and a tenant potentially tries to sue me for whatever reason (it is the US after all), then all that is at stake is whatever the LLC owns – my US property. Everything that I own in Australia is then protected.
I have never heard of anyone in the US or Australia being sued by a tenant, but asset protection is essential.
Risk mitigation through city inspections
To also negate the risk, most counties do what is called a city inspection during the buying process. This inspection is required to be completed before you can lease the property to a tenant. I negotiate this inspection into my offer, stating that the owner must bring the property up to code at their expense prior to closing (settlement). Most owners accept this.
Now, the city inspection helps protect you, the new owner, from things that may potentially hurt a tenant. As the houses priced at around US$75,000 are older homes, they often need quite a few updates to bring them up to 2017 building standards.
These include things like: safety switches to be installed, concrete slabs rectified where one slab has raised by an inch and could be prone to become a trip hazard, loose handrails, etc.
With this inspection behind you, you can be assured that when you take ownership of the house, it’s up to code and safe for the tenants. The tenants also know this is the case. As a secondary defence, you need to take out insurance on your property, similar to what you would take out in Australia.
Choosing your US investment location
Now, on to what I look for when choosing a location to invest in.
Researching the US is completely different to the research done here.
In Australia, I research things like:
• Market timing/cycle
• Infrastructure projects
• Increase in population along with population size
• Price point/affordability
• Access to public transport.
And so on.
But in the US, the factors that really matter are:
• What large companies are within working distance?
• Price point versus rental return (yield)
• Crime statistics
• Is the location within Tornado Alley?
• Are there cyclones in that region?
• Is there NO public transport nearby? I’ll explain later …
• Quality of nearby schools and colleges
• US state monetary system
As you can see, the only criteria that matches Australia is public transport. But, it’s not for the reason you think!
In the US, you actually don’t want to buy near public transport (with the exception of New York and a couple of other cities), as this is where the highest crime rates are. In nearly every city of the US, the good locations to invest in, and where the wealthy reside, are the outer rings of the city, as there is zero public transport – I guess everyone who lives in these areas can afford to drive where they need to go! In Australia, it is the complete opposite.
This factor alone has caught out hundreds of Australian investors who have lost a lot of money by investing in those areas.
Crime stats are heavily recorded in the US. Simply type in the name of the suburb into Google along with the words ‘crime stats’ and you will be able to get exact figures on how safe your chosen suburb is. The information that is available is unbelievably detailed, and you’ll receive comparisons to state and federal stats, too.
At the cheaper end of investing in the US, schools don’t play as large a part of the location decision process, but for properties over the US$100k mark, this is definitely a factor.
This will make a huge difference on whether your property increases in value over time or not. Parents will pay more for rent and property prices if their children can go to a good school nearby.
Also note that Americans are not afraid to move state for work. Therefore, employment is one of the biggest factors you need to consider when choosing a place to invest. Again, this is very easy to research. Type into Google: ‘large companies in’ or ‘biggest employers in’ with the town or city and state you are looking at. All the big players will be listed.
Look out for Mother Nature
Mother Nature plays a key factor in deciding where to invest, as the middle part of the US falls into what is called Tornado Alley. And with an average of 1,274 tornados each year, it’s definitely something you need to consider.
That said, not all tornados are destructive ones. However, there are some locations, like Kansas, that are more prone to them than others.
On the east coast, cyclones play a factor in Florida, Louisiana, and as far west as Texas. The great part is that there are stats available on every location for both tornados and cyclones, so don’t let this deter you from investing there – it’s simply a factor you have to consider when choosing where in the US to invest.
“This factor alone has caught out hundreds of Australian investors who have lost a lot of money investing in those areas”
Somewhat surprisingly, population matters very little when choosing where to invest in the US, unless you buy in a tiny town with 50,000 people or less. Small towns in the US are over 100,000 and normal towns can be 250,000 up to 1 million people.
To put that into perspective, a good sized town is as big as the Gold Coast – and there are tonnes of them! Remember, there are over 330 million people living in America, so critical mass is on your side. For comparison’s sake, there are more people in the state of Texas than the whole of Australia!
UNDERSTANDING HOW US PROPERTY FINANCE WORKS
Across the country, the median house price in the US is around US$140,000. Yes, it’s only US$140k. I invest at about half that amount, around the US$75,000 mark.
Take note: these are US dollar amounts and the Australian dollar can fluctuate drastically. At present, US$75,000 equates to around AU$100,000.
In the locations I invest in, I receive around US$220–250 per week in rent, amounting to between 15.2% and 17.3% yield. If you can negotiate the purchase price of a property to under US$70k, the yields jump to over 18%.
So, this begs the obvious question: why don’t Americans just buy the houses themselves?
The answer to this is quite simple: most Americans do not qualify to apply for a loan.
Let me explain. In Australia, to get a loan you must have three things:
• A deposit to match the loan size and property you are looking to purchase
• The ability to afford to repay the loan in the eyes of the lender
• And lastly, you must have clean credit.
In the US, their system also requires three things, but one differs immensely:
• A deposit to match the loan size and property you are looking to purchase
• The ability to afford to repay the loan in the eyes of the lender
• And lastly, you must have clean credit with a score of at least 720.
It is for this reason, and this reason alone, that much of the population in the US will be tenants for life.
To achieve a credit score of 720 is quite difficult. And to make it worse, they don’t tell you the algorithm as to how this is made up.
In simple terms, it includes many of the following factors:
• You must hold a good job for a period of time
• Have borrowed a personal loan and repaid on time, every time
• Pay your utilities on time, every time
• Have car loans and repay them on time, every time
• Have a bank account with the lender, usually, for a period of time
• Repay your store cards on time every month.
If you’re picking up on a common theme here – it is that US citizens must NEVER pay any bills late. By doing so, their credit score will drop – and it drops far more than it goes up when you pay on time. Over many years, you may be able to build that score back up to 720, but it will take a significant amount of time.
Let’s imagine you were a tenant and you worked hard for years and finally got your credit score up to 720. You are ready to buy a home for, say US$80,000, but there are now a few more hurdles to overcome.
Most mainstream lenders have a minimum loan size of $100,000 and they also have insane property location restrictions. They base this mainly on Foreclosure sales (mortgagee on possession) stats that they have access to for every neighbourhood in the US.
If the property you want to buy has had many foreclosures nearby, you will find it almost impossible to get a loan for a property there. This is information they won’t tell you until you give them an address.
Also, due to the monetary and tax system of the US being state-based, not all lenders can lend in every state. The state legislation and licensing is different in every state, which is why many lenders are restricted to lending in certain states. It must be a nightmare for low income home buyers to navigate.
This can be very overwhelming for an uneducated investor, too. But once you cover all this off, the benefits become crystal clear. If you’re picking up on a theme here, you really can benefit from a buyer’s agent to help you through all this!
Where to invest in America?
For all of the reasons above and more, I decided to invest in Detroit.
It was one of the hardest hit cities during the GFC. And like all hard cities, they bounce back the best.
A prime example of this in Australia is the Gold Coast, also hit hardest in our small GFC. It is now one of the best performers for houses in the country.
But Detroit has extra benefits, including a businessman by the name of Dan Gilbert. A billionaire from Detroit, Gilbert has made it his life’s mission to rebuild the city to be bigger and better than its former self. Where commercially the occupancy rate in the city was around 20%, it’s now almost 100%, seven years later.
Whenever I invest in the US, I will personally walk through every property for myself and on behalf of my clients. Being so far away, you either need to visit the property yourself or use a buyer’s agent who operates in your city in the US.
On each visit to the US, I typically walk through around 30–40 houses and all of them look great in the advert, but when I actually walk through, many are a complete disaster. Floor plan layout can be poor and many have issues that can be costly to rectify.
When investing at the US$75k mark, you need to be conscious of repair costs. That said, at this price point you can certainly buy some beautiful properties that need less than $1,000 spent on maintenance items.
Once you have settled on a house, you need to understand that property management is primitive in the US. Due to massive bank transfer costs (up to US$60 per transfer), tenants will generally pay cash or cheque to the property manager. And whereas you generally receive your rent in Australia on the 1st of every month, you may not receive payment until the 8th in America. Be patient!
One final reason to invest in the US
Now, there are some extra benefits or risks that are associated with investing in the US. Yes, we have to cover the Trump factor. Like him or hate him, he is doing some fantastic things for jobs and keeping manufacturing in the US. Due to the low incomes paid in the US, the manufacturing industry is still very much alive and well.
And Trump has also done some amazing deals with Ford and GM in Detroit (the car city) to keep them manufacturing in Detroit.
On my last visit to the US in March this year, I travelled to two new potential investing locations – one in Ohio and the other in Texas. Great things are happening in these cities, too!
There’s one last factor that investors need to account for, and that is the currency exchange. We are currently sitting at around 75c in the dollar and the Australian government would like to see this at around 60c.
So, by simply investing now before the dollar drops to this level, you could make 20% capital growth in your investment property, as well as a 20% increase in the rent that you receive each month. Now, if that doesn’t put a smile on your face, I can’t think of anything that will!
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup.
He is an active property investor himself and amassed a portfolio of
50 properties by the age of 31.
For more information on Todd's US property portfolio, visit: www.wheregroup.com.au/usa
While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.