Investing in US real estate
 

I've mentioned in a number of threads that I invest in US real estate (both personally and with other investors), and have had a couple of people PM me with qu's, requests, etc.

Well, thought I'd post a thread for people to ask questions, (or you can PM me and I can forward you onto my website where you can learn more info, or if you're really interested, I'd happily meet with ppl to talk in person).

In case you were wondering, some good things to ask about are:
1) returns to expect, different areas, types of properties to invest in
2) risks / rewards to investing in the US
3) liability concerns and how to mitigate these
4) tax (if you don't know anything about tax, you'll lose 30% gross off the top, i pay significantly less than this due to the way I structure my investments (all totally above board and per the letter of the tax law in the US and Canada).

So, if anyone has any qu's, please PM me or post here

How do you choose what to purchase? Do you fly down to the area and look before purchasing? Or do you have someone do that for you?

I fly down every 2 or 3 months, as I have a strong preference to see properties before I buy them, but I have bought multiple properties without seeing them (my real estate team will provide me with video walkthroughs of properties I like). While I can buy them that way, its ALWAYS better to see them in person.

I have a strict set of requirements for properties, so I only analyze those that meet my criteria, and go from there.

I'm currently looking to invest around 15-20k to buy a house in US. From what I've seen, that can get you a fixer upper house in the Miami area. I know that there a lot of scams though so I'm worried about making a purchase without going through a broker especially because this would be my first purchase and it's on the other side of the states. What's your opinion on Miami? Do you know of any good deals in a nice warm climate? I would prefer living in a big city where the economy is more stable. Seems like SoCal is very pricey and not realistic for my price range though. Do you have any insight?

Cheers

I'm not from Wenzhou, nor do I have such a big capital to invest in properties. :okay:

i'll give you a PM, but generally speaking I don't like Miami for the following reasons:

Risk of natural disasters
High unemployment (vs. national average)
You can't easily get to your property, if you wanted to (its an expensive & long flight)

As for $15-20K places, you're probably asking for more of a headache than anything - i come across places for $50K or so, and i wouldn't touch them with a 10 foot pole, older places, who knows what structural problems (maybe none, but risk is definitely there - and i ALWAYS get full inspections and reports done on any house i buy, the best $400 to spend on a house before closing). you will generally get a good yield from a lower end property, but your capital appreciation is limited and you run the risk of big expenditures being required (an AC unit is $5K alone - they WILL go on older places)

While not offered by many, and not easily available, you can always consider getting an investment mortgage on a place, I have been offered 65% LTV mortgages at 7%, 10 yr fixed, 30 yr amort - not 'cheap' money, but this is an investment mortgage for a non resident.

also think about how you will hold this property & the tax consequences - this HAS to be a first thought, not an after thought.

As for those ads you see in the 24HR paper, I won't say they're a scam, but this is what they are - they will sell you a property - whether it is a great investment property or not doesn't really matter, as they make their money when they sell a property - they sell to you, make their $$ then walk away - yes it could work great, but equally it can be a dud... then what, you're left holding a property and don't have any assistance - who manages it (not too hard to find a management company, hard to find a good one), what about tax liabilities, what about actually getting your money, what if something goes wrong and you get sued (Americans LOVE to sue)... this is why I work with money investors and enter into relationships with them long term, I only make money if the investment makes money (thus I have incentive to get the best places, have them managed well, manage risks and taxes)

You see A LOT of junk information out there, and a lot of it angers me, as I am someone with experience and education is investment/corporate tax planning and structuring cross border - so much misinformation out there - so my main advice - BE CAREFUL!

haha, i own 0 properties in Vancouver, not because I can't afford them, but because I can make way more money elsewhere for the same capital and can live cheaper renting here

if you look at certain US market capital appreciation prospects vs Vancouver, its not even a second thought

These 3 points are bang on. Let's start with the last one. There is no direct flight from YVR to Miami. You will have to make it a connecting flight or from a direct flight from Seattle. And once on the plane, it is around a 6 hour flight.

Miami is like LA. Some of the richer parts of town are booming, but then there is a lot of boarded up buildings. Just outside of Downtown Miami, there are some of the sketchier neighborhoods, similar to Compton.
If you go to South Beach and take a stroll down A1A (Beach front ave... Ice Ice baby) you will see a lot and I mean a lot of beach front property that is boarded up Slum Dog Millionaire style.
Mind you, I have a theory that South Beach is actually picking up again since many Americans are scared to travel to Mexico due to all the crime, but this is just my theory.

Now we come to the first point. Miami is in a high hurricane area. For 6 months of the year, there is high risk of hurricane caused damages. IIRC, you cannot buy hurricane/flood insurance. And Property tax is quite high too.

Can you talk a little bit more about getting a mortgage to buy a house in U.S.? Who do you talk to and what do you need? What is the investment mortgage you were talking about?

Investment mortgage, sadly, I can't comment further on - I have a significant amount of connections down there (thanks to a lot of leg work), and as such, certain relationships I have garnered have allowed me to obtain investment financing - for me, and those I work with...

As for other mortgage products, most banks will provide mortgages to Canadians for second homes down in the states, but there are restrictions, such that you cannot rent these properties (not even on a weekly basis).

Basically, I'm a bit of a tease with this one, most ppl cannot get mortgages down there, unless they have connections - I have connections, but it has taken a lot of leg work on my part to get these, which is a great for me and those who invest with me, but generally its not going to happen yet at least - give it time, the banks will start lending again, but not this year, and maybe not next year.

if you wanted a vacation property - many banks will offer at around 4.5% variable, which is pretty good! you'd still get some major capital appreciation from that over the next 5-10 years but as an investment it wouldn't be that great (as you get no cashflow) - but again, watch the tax on that one (if you do nothing, you will lose 10% of proceeds to FIRPTA withholding tax)

Just had someone PM me, and I gave a pretty good US vs. Canada analysis of investment properties - now, tehre are simplications below, so no need to nit pick, I know there will be some +/-'s but generally this is true

I also don't want to turn the last two paragraphs into a debate - these are my opinions on what the local market will do, nothing more, if you don't agree, not a problem, but no need to start something here, my opinions drive my and my investors' decisions, if you don't agree, not a problem:

Vancouver - Downtown apartment (2bed 2bath) rent: $1500 a month, would sell for about $450K


Mortgage interest ONLY payments at 3% (will only go up) = $1125 (i've assumed 100% mortgage for simplicity to ignore opportunity cost of downpayment)
Monthly maintenance fee = $300
Property tax = $250-300 per month
Insurance = $50 per month (assume $600 per year as fair)
Misc = $50 per month (I always have a contingency)
Total monthly cost = $1,775

Oh, that's a $275 cash outflow every month... and honestly, I can't think property (Especially apartments which are overbuilt in vancouver/richmond) will go up much more given that interest rates are at all time lows.

Calgary
70 or 80's 2 bed, 1 bath apartment is about $175K, would rent for $1,100 (this is from actuals a friend owns, and I've looked at Calgary - Edmonton is meant to be a better place to buy, but I just think its overpriced right now, and I just don't like the climate there for an investment)

Mortgage (interest only on full mortgage) = 437
Maintenance fee = $350-450 (snow removal makes this really high)
Property tax = $150 -200? around there
Insurance = $50
Contingency = $50
Total = $1,037 on the low side... so basically break even (loss if you consider vacancy rates, as you will have vacancy once in a while.

Prices in Canada are too high, we are blessed to have a great banking system, BUT, CMHC insuring all these mortgages is scary, our prices are too high, and will inevitably come down, I'm expecting this as soon as we see a 1/4% rise in interest rates, either later 2012 or early 2013, then we will see a long period of slow decreases in values for 5 years or so (slightly down or stable, but no up)

people talk of chinese investors this and that, but really they are buying high end units (people who live here are different, they are locals, so they just have the local effect) - investors can never drive a market, as I am seeing in Phoenix, investors maintain prices at where they are and are decreasing available units, but what will drive the local market will be locals when their credit comes back, along with their desire to own again and banks willingness to lend

I don't know about Vancouver, But I invest in Victoria. And your number look off to me. My one property looks like this:
Paid 200,000 (in pre-build stage) inc.HST
Monthly Starta fee: $130
Property Tax: $100 per month
Insurance(I have full renter insurance with earthquake): $230 a Year

I don't know why your insurance and maintenance are so high...

I have also been looking in the US. But I like to be a hands on Landlord. I like to pick my tenants.

They might be off, but as far as I'm aware family members with properties in the $500-700K range pay $3000+ per year in property tax (so was going on that basis) - i certainly don't disagree that they may be a tad less

Maybe insurance on an apartment is less (makes sense), either way, these differences aren't making me go out and leverage to the tits in vancouver

Strata fees are actuals, and man are they expensive for what you get!!!!! (why i would never own an investment apartment in vancouver)

Ohhh my. Wait till Redline_Daily sees this thread. He thinks investing in real estate is unethical as per wenzhou thread :seriously:

I would like to learn more about taxes and risk of renting out in US. Do Canadians buy houses in Point Roberts to live? Since it's only a couple blocks away fro
Twasassen.

What about Washington state? I just think it's easier if I can drive down there whenever I want, instead of flying.
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I think what 4444 is trying to suggest is that, it's nearly impossible to find a residential property in Vancouver that can generate a positive cash flow as an investment property. On the other hand, it's quite easy in the states.

To elaborate on what you posted earlier concerning renting investment properties, do all mortgage policies in the States restrict borrower's (non-resident) from renting out their properties?

Great post!
I currently some commercial properties (on NNN-base) in the US. Any1 with questions in this area, I'd do my best to answer them as well.

But I am also interested in residential area given the potential of returns. (Commercial properties stay relatively flat as it's rent dependent)

Can you explain a bit on the tax structure? If I were to purchase RE with the idea of selling them later on, what would be the best way? (consider renting out during the period prior of selling)

Taxes - very complex area for those investing in the US, well, it can be easy, but when its easy you lose 30% gross income to withholding, which kills your returns, this is my area of expertise and one major area I provide value to people who invest with me. Unfortunately I can't give out tax advice as I am a professional in this area and can get sued for giving out advice (I'm dead serious) - but just know, the whole tax issue is a major headache for most investors and ends up costing them a lot of money either through 1) paying high taxes or 2) paying someone a lot of money to organize their affairs to be tax efficient

Risk of renting - depends on the area. My area of expertise is certain areas of Phoenix where rental demand is high from locals for certain reasons (you'd have to see my website or talk to me for more info on that) - now you speak of Washington, I know yields will be much lower in Washington as prices weren't hit as hard as in other areas, and to be honest I haven't analyzed WA as a place to invest, but all I know is that there are WAY better places to invest.

As for point roberts, no one buys there for anything other than a summer cottage or w/e, most ppl in point bob are cdns

yes, I have only found 1 (through A LOT of work and meeting with many banks in Phoenix) that will allow me to have a mortgage on a property that I can rent out - but i must spend 1+ day per year in it, thus it has to be a weekly vacation style rental - returns are lower on these properties due to vacancies

other than that, you just won't get mortgages for investment properties - I'm fortunate that I have been offered them for my investments, but they are not at the kind of rates you'd see here - definitely still great investments, but would be amazing if i could get a 5 year at 2.99%!!!

As I say above, I can't give out tax advice as I'd end up liable - but know this, there are right ways of investing, and wrong ways. there are ways US people will tell you (LLC) which just don't work for Canadians (LLC is very tax inefficient for Canadians, I can explain why, but would have to be in person), equally your structure is important too for liability protection if you are going to rent out - so there is a fine line between 1) liability protection 2) tax efficiency and 3) complexity/tax filing complexity - the structure I use (which, i don't want to say is proprietory, but generally I don't go around giving to people as only people with experience in these types of transactions would know about), I feel, has the best combination of all of these three.

Just know, using corporations is bad for tax, using partnerships is bad for liability protection, holding individually is bad for liability protection but best for tax efficiency...

if you are serious about this, PM me - I certainly want to educate people of the opportunity, but just know there are a LOT of risks associated with investing in the US which are easily mitigated if you work with the right people...

I've just run the numbers on my investments for a prospective client and have come up with a pre-tax IRR of about 20% for the investment vehicle using leverage over 5 and 10 year periods, based on my projections.

I think one would be hard pressed to find that kind of return anywhere else, especially with a fully insured (as in the property is insured against damage/destruction), tangible asset backed investment

4444,

What's the typical ROI on an average property for your clients (taking in account that I borrow from a mortgage broker vs. 100% liquid cash)? How much do your clients invest in one property on average?

Do your clients typically purchase their investment property entirely with liquid cash? or do they seek lenders (banks)? Also, at what price point do you see the most returns (ex. 150-200k home)?

That's very impressive.

Is this based on residential RE portfolio?

While I am far from an expert, I took a quick look at some of real estate last year and a chat with someone I know from Vancouver who is working at Microsoft and was in the market for a house last year, in general Washington wasn't hit as hard as some other parts of the US during the 08 recession. But other than wanting to be close to Seattle, I highly doubt there is much action going on around Spokane or the Chelan/Wenatchee area which doesn't make it ideal IMO to seek as investment opportunities.

If the NHL and Gary Bettman has taught us anything, "build it and they will come" isn't true. A simple thing as locating the hockey rink a hour outside of town really hurts their attendance. Phoenix and Ottawa are prime examples of this. Same thing can be said if you are looking for investment real estate.

4444's numbers are not off by much. Average strata fee's are quite high in Vancouver. Anything under $250 for an average sized 600 sq ft apartment is pretty good. Some may be lower, but there are tons that are higher especially if they had water leakage problems in the past.

One reason why your numbers might seem a lot lower is that your building is in pre-built stage. Usually they use a number and after the first AGM the strata realizes they are either way under budget, way over budget, or just right.
Property tax looks about right depending on the area.

Could you provide a conservative cost break down similar to this for a rental property in Phoenix, please.