Someone asked me the other day "Why would you buy properties all the way across the world in the USA, when you can invest safely in Australia?"
As a professional buyers agent working for investors buying property in Australia, I have had more than a little experience in "safe" investments in Australia. Most Australian investors think a safe investment looks like buying a residential property in a capital city where we get a 5% rental return and the possibility of long term capital growth. Now the property costs add up to 9-10% of the property value each year when you take into account, interest on loans, rates, insurance, maintenance and of course, rental management. So this "safe" investment loses 5% of its value each year if there is no growth. On a $450,000 property that is $22,500 in cash that you will have to find each year so your tenant can have a nice time living there.Many commentators see danger signs in the inflated value of Australian property similar to the bubbles that burst in the USA and other developed countries during the global financial crisis. Can Australian property continue to grow in value each year by more than 5%? Can you afford to pay $22,500 every year out of pocket, hoping that your property will go up in value by more than 5%? Are we more likely to see a drop in property values due to lack of affordability as interest rates rise in Australia? Does that "safe" investment look so safe anymore?In the USA we can now buy properties that were once bought for $350,000 as "safe" investments for $45,000. Even better still, they are still getting the same rents they were getting before they crashed. The example I am using is a property in Atlanta, Georgia, one of the South Eastern States of the USA. It rents today for $15,600 and after all the expenses mentioned, if you buy it with cash, it nets 21.5% profit. That's a cash profit of $11,000 each year. We don't know when it will go up in value, but we know that the house alone will cost $175,000 to build again today and it was only built four years ago. We also know that Atlanta has one of the fastest growing populations in the USA and they will need to build more homes sooner than later. So, is it conceivable that the property may go up in value once the Americans sort out their economic problems a bit?Some people would call this a risky investment, but provided you can buy it through reputable sources and get a good rental manager, is it not a little bit safer making $11,000 a year cash rather than losing $22,500 each year hoping that the property will go up in value in an expensive market like Australia?If you have $450,000 cash, you can buy 10 of these cash cows for 1 of the "safe" Australian properties. That's suddenly $110,000 a year in cash income, compared to losing $22,500 per year in Australia. Even if you are borrowing money to buy the American properties at 7.5% interest, your 10 US properties will bring in $77,000 per year cash!When I explained this to the person who asked the question, they suddenly grew more interested and, after looking carefully over the detail of our service, signed up as a buyer for US properties.People have fear of the unknown and want to sense they have control over their money. They would rather lose $22,500 a year than gain $77,000 a year because they will feel safer and more in control doing it.What are your concerns about the safety of US property investment?
What problems have you experienced and how can we solve them?
What are your greatest fears about sending your money to a far away land?
I look forward to your comments.
Many thanks
Vincent Selleck
Licensed Buyers Agent
Mortgage Broker
888 Wealth Creation Pty Ltd
http://www.888wealthcreation.com
[email protected]Hi Vincent,
While interested in US property I think, obviously my thoughts only, that you tend to simplify it a bit. Could be wrong but having looked for a while the below sounds a bit to good ….. A lot of the sales data is questionable anyway.
Anyway, are you able to provide the address on below and confirm that this is actually renting out at this point in time. I believe Atlanta has a 16% vacancy rate which would be a huge problem? If its truly true then I will “eat my words”
“In the USA we can now buy properties that were once bought for $350,000 as “safe” investments for $45,000. Even better still, they are still getting the same rents they were getting before they crashed. The example I am using is a property in Atlanta, Georgia, one of the South Eastern States of the USA. It rents today for $15,600 and after all the expenses mentioned, if you buy it with cash, it nets 21.5% profit.”
Hi Vincent,
Thanks for bringing this topic up – I've been thinking about investing in US properties for some time now, but most people I have talked to (including friends/family) think it is a stupid thing to do, and that I would be better off investing here in Australia even if it means paying 10x the amount of US properties. Although I try not to let other people influence me too much, it's hard to go against the advice of close friends/family who care about you deeply, and who have been there for you in the past.
Right now I am planning to invest in US properties starting from the end of 2011 onwards when foreclosure rates are set to peak/double, but being relatively new to property investing, I thought it might be a wiser idea to start investing in a few properties here to gain experience, before investing overseas. Obviously there is a lot of research I need to conduct before heading off to the US – what is your advice with regards to the following:
– What entity should properties in the US be bought under?
– How do you finance properties in the US? Do you have to apply for an IRS number? How can you improve your US credit rating?
– Do the laws differ much from Australia? Can you explain 1031 tax–deferred exchange?
– Where do you get your raw data for analysis? In Australia, we have brilliant resources such as RP data and Residex – are there similar organisations in America? How do I find out about which properties are undergoing foreclosure?Your words of wisdom would be appreciated,
Regards,
Kong
kong71286 wrote:– What entity should properties in the US be bought under?
– How do you finance properties in the US? Do you have to apply for an IRS number? How can you improve your US credit rating?
– Do the laws differ much from Australia? Can you explain 1031 tax–deferred exchange?
– Where do you get your raw data for analysis? In Australia, we have brilliant resources such as RP data and Residex – are there similar organisations in America? How do I find out about which properties are undergoing foreclosure?Kong,
Vince probably knows alot more about this topic than I do, but i can answer what i know fyi on the above.Structure – most foreignors setup using a two member LLC or hold directly (as an individual – ensure sufficient liability and property insurance if taking this route)
Finance- tough one. I financed my places in NY using seller financing. US Banks dont really want to lend to foreigners though. HSBC and Wells Fargo have non resident alien programs, but they dont make it easy. Just alot of forms to fill out. You dont need an IRS number, social security number, US credit history (but will need to verify your oz employment history, financial records, payslips, Tax return etc). Chat to them. Also, often the rates are 2-3% higher than locals pay. Can also look at hard money loans but this is a temporary measure as rates are significantly higher. Suggest not borrowing using oz funds. You then have too much forex exposure, and are at the mercy of the oz rates (when they inevitably go up here).
1031 exchanges. Too hard to smmarise. Have a look for your answer: http://www.realtor.org/library/library/fg408 Great site for us rentals with other useful educational data.
Research:- I found most of my info on yahoo real estate, aol real estate and homepath and bestplaces.net for vacancy rates, biggerpockets as a US investment property forum, city-data for unbiased, locals kowledge on areas realtor as metioned above and of course my favourite for stats: trulia.com. http://www.redcapitalgroup.com/ has some good local info but i think its mostly focused on the multi family sector. fyi, if purchasing purchasing homes privately check out craigslist in the city your looking at. homes.com and investorloft.com are also useful.
homepath.com shows foreclosures. Stay away from realtytrac etc. Huge fees for minimal service.
Hope all this helps.
Josh
Thanks for your input Josh – Appreciate it
I think the Atlanta example above is a bit exagerated, however you can get 9-14% net returns or higher in Indianapolis, with most houses being less than 10 years old and range from $50-$90k. Most of these are bank-owned properties and I have contractors that carry out the work to get them rent-ready.
If you want a really safe investment then Dallas, Austin and Houston are very strong areas and should appreciate well over the next few years.
The exchange rate is very favourable for you Aussies at the moment to invest in the USA and at lot of the US is at (or at least near) the bottom in terms of values. Financing is a problem but the situation will get better soon. I was lucky enough to get an ITIN mortgage a couple of years ago.
If you can use an Australian line of credit now to secure some great properties, within a few years you will be able to refinance using US borrowing and pull all your money back out again, while still hanging on to your properties.
Hi
Apologies for the delay in reply, we are very busy buying foreclosed properties in Phoenix and Atlanta at the moment. If you want a report on our results my Blog on http://888wealthcreation.blogspot.com. It gives a detailed report on conditions experienced in Atlanta and strategies to help investors understand the challenges of the market.
We are getting 15-25% net returns factoring in the expenses of rental management, taxes or rates, insurance and provisions for maintenance. The biggest hurdle in getting tenants in Atlanta is getting the property approved for Section 8, Government sponsored tenancy, and the process takes time booking inspections and providing the paperwork. There is an 18 month waiting list for tenants to get on the program and it is helping people back into vacant houses and rebuilding community and neighbourhoods.
Most of the tenants applying to rent our homes are sponsored under Section 8. The Government pays the rent direct to our rental manager and inspects the property regularly to ensure the tenant is maintaining it well. If they are not, then they are at risk to lose their sponsorship, so the majority of these tenants stay put and do the right thing. Our rental managers also inspect and do the regular police, employment and credit checks, get references and reject unsuitable applicants. It generally takes about six weeks to place tenants this way and there are plenty of tenants wanting to move into near new, fully renovated properties.
The vacancy figures in Atlanta are skewed by the number of foreclosed properties that are boarded up empty. The Americans can't get loans to buy and their credit is compromised from walking out of houses that were "under water", that owe more than their current market value. Atlanta was particularly hard hit by the sub-prime crisis and as a result suffered more dramatic falls than places like Texas and Indianapolis, but this is good for investors because we can buy near new homes and get the high returns.
Property prices are trending upwards, but there will still be a window of opportunity to buy homes with 15% plus rental returns for some time to come. The foreclosures that are forecast for the future are generally for higher value properties than the ones we are buying. This will impact middle and upper value properties much more than the lower percentiles. Much work is also underway to refinance the loan resets to extend the viability of current ownership and I would be cautious about waiting too long to enter the market.
I like buying value, and when we buy a house that is built in 2006, 4 bed, 2.5 bath, close to central Atlanta which sold for $350,000 and would cost $150,000 to construct or more today, at a price of $40-50,000, it is like buying BHP shares for $5 with a dividend of $1 per year. We know the assets and earnings are worth 10 x what we are buying them for and the market will eventually correct and represent their true value. While we are getting a 20% return on our investment, there is little risk in holding and waiting for the correction, even if we are borrowing funds.
Lending is difficult in the US now. After talking to countless brokers and lenders we have decided not to pursue lending on low priced property in the US. Investors are raising cash, using super or lines of credit on Australian property to buy. In the future when equity increases and the lending market improves we will take out loans in the US so we can make further investments. This would be a good strategy to avoid capital gains tax while still being able to raise cash from the property growth.
We are borrowing funds for short term fix and flips in Phoenix. We are getting 75% LVR on purchase and the lender will also value the property for us, confirming the comparable sales target for the project, adding another level of safety. This allows our investors an alternative method of profiting from property and increasing their total investment pool for buying more high yield properties. We recommend both buy and hold with high return and fix and flip as a combined strategy to maximise the equity momentum and cash flow of US holdings.
One of the best safeguards we have for investment are some of the best people on the ground in the US to help us. I really enjoy working with Karen and Jesse in Phoenix and appreciate their total commitment to making our deals work, following through on every detail and taking total responsibility for delivering service to our clients. Likewise, our three Atlanta teams are doing a great job and as we bring more clients on board, the resources we can attract in the US make everything smoother and more satisfying. I think one of the greatest risks in investing in the US is going it alone, because it takes some pull to get good agents to give you total attention. We have agents who are only working for us and adding extra team members to meet the needs of our many new investors.
Structuring deals and setting up LLC's is fairly simple, though different for each case and we refer all our clients to a great joint US and Australian tax agent for a free consultation. There are different approaches for super funds and individuals and, not being a tax professional, I do not give specific advice. The processes are straight forward and we direct people on the preferred path to ensure everything is set up satisfactorily.
I have now included some sample property deals on our website and would encourage anyone interested to have a browse at http://www.888wealthcreation.com .
I will be back soon to answer questions and give you some more guidance from our growing experience in the US markets.
Aloha for now
Vincent Selleck
US buyers agent
888 Wealth Creation p/l
Byron Bay NSW
[email protected]Hello,
Yes, I believe investing in the US is a great opportunity. I have a company – USA Dream House – that is focussed on helping people buy in Florida, one of the premier states in the US. Prices are excellent – we recently bought a 3-bedroom townhouse, 4 years old, for $65K – includes access to a swimming pool, gym and home theatre.
We have a team on the ground to find the right properties based on your requirements. We have acccountants in Australia that can help with US tax, insurance brokers, property managers and other professionals to help through the process.
For those interested in places like Orlando and Tampa, some of the best places to live in the US – contact us now!
Regards,
Steve
USA dream House
Website: http://www.usadreamhouse.com.au
Email; [email protected]
Tel: 0433393688Hi Everyone
Our joint US and Australian tax agent has given us some FAQ on tax and investment structures for Australians investing in the USA.
We have also secured the services of a super fund consultant who is an expert in creative structuring for US property investment for self managed super funds.
I also have an Australian Lawyer who sets up LLC and EIN in America for my clients at a very reasonable rate.
Here is the FAQ:
Q. Can Foreign Individuals purchase US property?
A. Yes individuals can.
Q. Do foreign investors pay tax in the US?
A. Yes. Basically any income sourced in the US is taxed in the US.
Q. Can I set up a bank account in the US?
A. Yes. But you will need to check with the particular bank to see what info is needed. As a foreign investor you will need a reason for setting up a bank account (ie investing purposes)
Q. What is an ITIN number and why do I need one?
A. Individual tax identification number which is used for federal tax reporting purposes. (Similar to the AUS tax file number)
Q. Do Australians pay tax in Australia for their US properties?
A. Australian permanent residents pay tax on world-wide income. They are allowed a foreign tax credit for tax paid on foreign sourced income.
Q. Can income be quarantined in the US for tax purposes?
A. US sourced income will be subject to AUS tax by any Australian permanent resident.
Q. Do Australian investors pay capital gains tax on the sale of the property in the US?
A. Yes.
Q. Do Australian investors pay CGT in Australia on the sale of their US property?
A. Yes.
Q. Can the property be purchased in the US using a LLC company?
A. Yes. However, I strongly recommend that this is discussed with a local solicitor to determine any state requirements.
Q. What are the income tax rates in the US for LLC’s?
A. Depends on who the income is passed out to – they can be taxed at personal rates or company rates – in most cases for small investors it would be advantageous to be taxed at personal rates. Personal tax brackets can be found at http://www.moneychimp.com/features/tax_brackets.htm
Q. What are the CGT rates in the US for LLC’s?
A. Depends on who the income is passed out to – assuming it is passed out to an individual CGT rates can be as low as zero and they go up to 35%. The CGT rate depends on the length of time the investment was held and the individuals ordinary income tax rate for the year.
Q. What is an EIN number and how do I get one?
A. An employer identification number is used to process most business activities (similar to an ABN). It can be applied for online, by phone, by fax, or by email. I suggest this is discussed with your solicitor and is done when the LLC is set up.
Q. Can I quarantine capital gains from sale of US property in the US and roll them into another property without paying CGT?
A. Yes. Under a 1031 exchange this may be possible.
Q. If an Australian investor sets up an LLC in a tax free state like Delaware and uses a pass through LLC in the state which the property is owned do they have to pay state income tax?
A. All LLC’s are pass through entities. Wherever the net income is sourced is where the state tax will be paid (if any).
Q. Can an investor buy US property using a Self Managed Super Fund?
A. This may be deemed as running a business. Each situation would need to be discussed.
Q. Can a SMSF use an LLC in the US to own property?
A. This depends on who is the LLC member. This would need to be discussed with the local solicitor as some states may not allow this.
Q. What property expense deductions are allowable in the US to offset income?
A. Normal operating expenses.
Q. Can you depreciate US property for US tax?
A. Yes.
Q. Can you depreciate US property for Australian tax?
A. The depreciation would offset the US income which would then roll up into the net foreign income to be reported on the AUS tax return.I hope this is useful for property investors looking to invest in the US. I am happy to take calls and share our experiences in the US to date.
Vincent Selleck
Mortgage Broker
Buyers Agent
Wealth Creation Strategist
888 Wealth Creation Pty Ltd ABN – 37068435665
[email protected]
Ph – Fax 02 66 858 388 – Mbl 0403 255510
Shop 6/14 Middleton St. Byron Bay NSW 2481
http://www.888wealthcreation.comP.S. Just do it! People of accomplishment rarely sit back and let things happen to them. They go out and happen to things.
I am trying to open a business bank account for my Delaware LLC. I have all the doc’s required but cant find a bank that will open it over the phone. I have been close a few times but when they see my Australian Passport they want me to go into a branch. Does anyone know of a bank that will open an account over the phone that dose not charge $20 per month in account fees??
HSBC want $200 to set one up and Citibank cant open an LLC account unless i have it owned by an Australian Company. Thanks to 911 its hard but not impossible can someone help me??
Kind Regards
Lee.
[email protected]The opportunities are certainly there in the USA. The example given by Vincent is not unusual, and certainly possible *IF* you do sufficient research.
I am using an US Business Law Attorney, and they have been extremely helpful.
Also, Delaware is a good state to set up in, but my attorney is suggesting Wyoming (cheapest and still strong protection) and Nevada (little bit more, other advantages).
Also, regarding quarantining money in the states … If you first set up a 'C' Corporation, THEN set up an LLC from there, money will pass through the LLC to the Corporation, and remain in the USA. Total cost for establishing C Corp. around $700, likewise for LLC. Also, with a C Corp, you can establish credit, and overcome banking problems. Good attorneys will help with all this plus making sure the charters are done, and bookwork is kept appropriately.
Martha
Oh, and in simple terms… a 1031 exchange is when the capital gains profits from one property are used to purchase another property. There are restrictions… you have to nominate the properties you will purchase by certain days, and then settle purchases by certain days, and if you stuff up you lose the tax exemption, but it isn't too difficult.
I have found the Rich Dad's advisor books extremely helpful on all these issues … he has four property books worth buying, you can get from his site.
ABCs of Real Estate Investing
Advanced Guide to Real Estate Investing
ABCs of Property ManagingAll written by Ken McElroy, Property Developer and Management
The Real Book of Real Estate – ed Robert Kiyosaki
A book with several chapers from a variety of people that Kiyosaki works with.Whatever you think about him, these books are well worth the investment.
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