Removing the Fear of Buying in the U.S.
When the average person is asked to think of a simple investor motto, they always say; “buy low, sell high.” I don’t think anyone would disagree that this simple truth should be at the core of any investor’s strategic philosophy. It is with ceaseless pursuit that the valiant investor scrutinizes deal after deal in search of those worthy to provide immediate, ongoing and future returns. Why is it then that so many Canadian investors today seem to accept high prices, painfully high down payments, low rates of return and are then prepared to put up with low or even negative cash flow and then wait up to 25 years to see any profit? And that profit is mostly based on the belief in the appreciation.
To be clear, I’m not saying there are no good deals in Canada, or that people have not made money in this manner, but as risk averse Canadians, doesn’t this strategy seem super risky?Betting the farm on appreciation is clearly a strategy which any sophisticated investor would most likely avoid, right?
I would like to highlight that most markets in Canada today seem to be at the top of their cycle have been for a number of years. It is increasingly tough to find the kinds of deals we as real estate investors are wanting, which is typically good cash flow and steady appreciation. I personally prefer to swim downstream instead of up, don’t you?
As investors, we must be open to purchasing outside of our backyard, particularly if we can’t find good deals there. This may be out of our city, province or our country. There is a situation going on in the US that has resulted in the biggest real estate sale of our lifetimes; one that is emerging as the largest shifting of wealth our generation has ever witnessed. Sadly, the timeline to continue to find the great deals is shrinking fast and like in anything, there are those that get involved and are rewarded and others that sit on the sidelines as observers.
Considering the current disparity in prices and value between the U.S. and most developed nations, many international investors have been acting upon this huge “buy low” signal. This is a time when a mere downpayment on an investment property in any major Canadian city can buy one, two or more cash flowing properties in the US that have the potential to double or triple in value in a few short years. So why are so many Canadian investors so reluctant to get involved?
The underlying reason for lack of participation in this exciting sales event south of us seems to be fear…perhaps fear of the unknown. Fear is also equated to risk, and as Warren Buffet says;” Risk comes from not knowing what you’re doing.” I’d like to dispel some of the fears many Canadian investors possess which may negate alot of the fear/risk encountered when contemplating a U.S. investment.
Of course this fear/risk perception is quite understandable considering we Canadians get a skewed outlook on the U.S. by the media which distorts and generalizes the details and gives us aggregate statistics on the country as a whole. In actual fact, the U.S. is comprised of over 250 major cities where Canada has 15. These cities do display distinct differences to one other, thus making it necessary to pick one or two cities as a focus…we will help you with that!
Research is Key
Research is an ongoing part of determining where the good deals are located and as such, we utilize many tools such as Trulia.com, Zillow.com, Rentometer.com, Cromfordreport.com and realytrac.com to determine the best cities in which to currently invest and strategies to employ.
The data provided by these sites gives current statistics on housing prices, number of sales, days on market, rental statistics etc. We essentially need to determine what part of the real estate cycle a particular city is in, if it has reached its “bottom” and if it has began to stabilize or even increase in price.
There is additional, extensive research we would do whether a Canadian or U.S. city. For instance, we like to understand if a single industry that drives the local economy or if there is a diverse economic mix. We must also consider unemployment levels and migration of each city. It is interesting to note that the unemployment rate in Canada (as of this writing, Apr. 2015) is at 6.8% and at 5.5% in the U.S., so the U.S. clearly is on a recovery. We prefer working in cities whose unemployment rates are consistently below the national average, where there is strong rental demand and good absorption rates for newly renovated homes. These factors keep our flips moving and our rental properties full.
Taxes and liability
Many Canadian investors seem reluctant to purchase property in the U.S. because some states add a foreign tax amount to your property taxes. There is also concern that there is a 30% withholding tax on rents and profits when you sell a property. This is true if you buy the property as a Canadian in your own name…a mistake many Canadians have made,
We encourage our investors to set up a proper U.S. company structure, one we know works for Canadians; one which essentially becomes an American entity. As a result, you are not subject to these additional tax burdens and do not get double taxed in Canada after filing taxes in the U.S. There are also many business write offs that are available to a company to reduce your taxes further.
It is a common fact that 95% of the world’s lawsuits happen in the U.S. They are a very litigious society and will sue for just about anything. That is why we not only need to protect ourselves from that occurrence, but eliminate the potential for it ever happening.
From a liability stand point, if you are holding rental property in one of your companies and are building equity; that looks like available money for any lawyer to usurp on behalf of their client with the inclination to sue you.
By putting a lien or a second mortgage on the remaining equity amount in your property from say, a Canadian company, you have essentially taken away any and all hope of any lawsuit. There is now no money to sue for!
Managing tenants from Canada
No one likes tenant problems. Even in your Canadian properties, tenant problems are a time consuming hassle. If you are managing your own Canadian properties, my humble opinion would be to hire a competent company to do that for you…and we have property management in place in all the cities we invest in.
As in any business, time is money. I know from experience that with my first rental properties many years ago, I was too cheap to pay a management company and as a result, wasted tons of time both filling the units and keeping the tenants happy. I finally gave my head a shake and realized the time I was wasting dealing with my tenants could be better spent finding other deals. When I thought about the hourly wage I created for myself, I realized it was alot cheaper to hire property management.
Real estate investing is a team sport. We highly recommend having a team for success in place as you would in Canada. Including property management, your team should include a lawyer who knows the best corporate structure for a Canadian; an accountant that understands taxation on both sides of the border; an insurance person that knows investor situations such as property renovations and rental properties; a contractor you can trust to do work on time and budget; lenders that will finance your properties; an escrow agent/title company who appreciates you are doing business from another country; a banker who can assist in your account set up and money transfers; a mentor who can both educate and find you a stream of great deals…we have all that in place as well!!!
We had to painstakingly create a success team which took many months, many meetings and a number of deals to finally decide on the team members. We now share this team with our students and save them tons of time and money.
What about financing?
We get asked alot about this. The banks have gone from being incredibly lenient with their lending criteria during the boom to being extremely stringent with their lending policies, however with the current U.S. economic recovery, there are many backs who want your business.
Remember, we have about 7 banks in Canada to choose from and a few Credit Unions…in the U.S. there are over 2500 banks!
For U.S. purchases, obviously cash purchases are your best bet. Even if you pull the cash from a HELOC or other credit line, it is the cheapest money you will be able to use and the best kind of leverage; using the bank’s money at 3 -4% to get 15 – 30% returns is a pretty good use of tax free cash.
There are a couple of ways for Canadians to get financing with U.S. banks. With ‘second home’ properties, where you can get up to 80% LTV, the process to acquire a mortgage in the U.S. is very similar to in Canada. If you can qualify for a similar mortgage amount in Canada, chances are you will qualify for a U.S. mortgage.
Other lenders are equity lenders who will get you from 50% up to 70% LTV and in a lot of cases, these LTVs are on after repair value (ARV) and not the purchase price, and these are non – qualifying loans! That’s right!!! The lender is concerned with the attributes of the property, not you. Your property will be purchased into one of your companies and if you hold the property for a year or two, you can refinance and pull out all or a good chunk of your initial capital.
Appreciation
Some properties are still available at below the cost of construction prices, however the prices are rising in areas that saw major crashes. Since the crash in 2007, a number of U.S cities saw little to no construction however, as the recovery continues to be significant year over year, construction has begun again. In fact, there is a housing shortage in a number of areas because of both increased migration and the huge number of people who were foreclosed on during the crash and forced to become renter…these people are qualified to buy again. With supply shrinking and demand increasing, prices will naturally go up. So, this is no time to sit idle on the sidelines! There is still time for good deals but the timeline is shrinking.
Closing thoughts
There could not be a better time to get involved as a Canadian investor, even with the exchange rate. With good deals becoming super hard to find and super expensive in major Canadian cities with a real estate cycle clearly at its top, we highly recommend investigating a real estate cycle that is low and recovering and on the move.
Not since the Great Depression has the U.S. experienced a recession with interest rates so low. Never before have investors been able to purchase properties at prices that are the same value as they were 14 years ago.
