"The key drivers were: unemployment rates, vacancy rates, quality of education and instances of violent crime."
A 12-month journey to US residential property investment: Cameron McEvoy
After over 12 months of research, due diligence and running around in circles, I am ready to start writing about the actions I’m to undertake soon as I take the plunge into the US residential property investment market. I envisage this journey to take several months, so I will be sure to document my trials, tribulations, successes, and indeed, challenges, as I go along.
The toughest part is to know where to begin!
The most important thing to stress to readers upfront is that (and I cannot stress this enough) I am not an experienced US property investor. I am not even a novice; I am just a would-be beginner. This means that the views I express are purely my own and they may not be correct. In fact, I encourage feedback and comments from those who have invested in the US; all feedback is welcome. All I have is my 12 months of research/due diligence to guide me as I move forward with my first property.
I guess the best start to make is to bring you up to speed on my journey thus far, so here is a list of actions I’ve completed in the last 12 months.
January to February 2012
I visited numerous cities in the US, each in very different market climates and conditions. Although the short trip did not afford me time to thoroughly investigate any specific markets in terms of actual properties, I did feel I had “schooled” myself on understanding the drivers for would-be US property renters (my future tenants) and the dynamic conditions that US habitants are exposed to in their daily lives.
I got to be exposed to a variety of markets, including Dallas, Texas, Los Angeles/San Diego/Santa Barbara, California, Denver, Colorado, and New Orleans, Louisiana, which allowed me to experience numerous neighbourhoods, ranging from the highly desirable places to live to the downright dodgy.
In my personal opinion, based on qualitative and quantitive research I conducted on the ground, the key drivers were: unemployment rates, vacancy rates, quality of education and instances of violent crime.
May to April 2013
While you can easily Google for yourself things like ‘major drivers for property markets in the US’ and get lists similar to the one I am about to mention, I felt I needed to see these drivers in action.
During these months I then began to investigate the past 10 years of property growth, paying particular attention to pre- and post-2008 bubble burst median dwelling prices. This helped me get an understanding of markets likely to recover more quickly.
May to June 2012
This time was all about due diligence in two areas:
1. Getting an understanding of the process. I learnt about how/why an LLC is set up, the best states to do that in as a foreigner, and also about finance. I investigated what types of lenders (national banks, local banks, or non-bank lenders) would consider lending to non-US citizens.
2. Learning about the offer-to-purchase process, or understanding how long a typical settlement is. Also, I learnt the rights of tenants in the US (typically speaking, most state laws benefit tenants more than they do landlords). Also, I discovered that good property managers in the US are few and far between.
July to August 2012
Having now understood more about the finance capabilities, more challenges were presented to me. Like any investment property acquisition, finance is always the first (and best) place to start. What is the point of canvassing/considering cities and neighbourhoods where median house prices may be, say, USD $140,000,when the maximum borrowing capacity you can achieve in that place may only bring you up to a buy-rate of USD $80,0000?This helped bring me down to earth and to identify the ballpark I’d be playing in for my first purchase.
I also investigated and began to develop a list of likely purchase costs. Although the US does not have stamp duty, there are several costs involved in purchasing property, especially for first-time buyers due to some additional legal and accountancy costs involved with establishing an ownership structure. At this point I started developing some spreadsheets so I could forecast the first-year positive cashflow earnings. All costs though were still approximate at this stage; I had not yet gotten any hard numbers.
September to October 2012
This was an eye-opener for me as I started to attend some property events in my home town of Sydney. These events were related to investment property in Australia and New Zealand, mostly, and while that was interesting to learn more about my local property market, I also discovered several US property investment stalls/stands at these events, which was the biggest eye-opener.
I started to engage with several of these service providers, initially just over email/phone, but I sat in on several seminars as well, just to understand the services they provided and the costs involved.
By this point, I had already established a savings target for the year back in February. I knew I would give myself a target of 12 months to save enough for a deposit on my first US property, as I did not want to draw down on equity from my Australian portfolio. Rather, I wanted the US property portfolio funded by its own initial savings plan.
November to December 2012
I actually came full-circle on the research front, going back to broader media research (such as American news and finance news sites, and trawling lists of ‘best US cities to invest in residential property’, etc.). During this time I made a discovery that markets were very rapidly showing signs of recovery, and that prices were rising.
I shortlisted more of the service providers. By this point, I knew that I could not purchase my first property on my own. I am not averse to travelling and physically seeing places/neighbourhoods, however I knew I would need lots of handholding the first time around.
I also realised that at lower end of the market that I’d be starting out in, I’d need to create a plan beyond the first property purchase. I forecasted that I’d need to be holding around half a dozen of similar property types to be relying on this cashflow as a stable income stream.
I also realised that as the market was quickly recovering, high rental returns would be taking a back seat to high-capital-growth-potential properties.
Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Spectator.