USA Property: Cashflow AND Growth in the USA

 

If you are at all interested in property investing and take note of news and media related to property investing—and let’s assume at this point that you are, given that you’re reading a property investing magazine—then you must no doubt have heard about amazing opportunities to be had in the US property market.  It certainly took me some time to take notice of the media hype, though I’m sure that people ‘in the know’ were investing in the US market well before I knew anything about it!

Investing in the US

Certainly if you just look around at many of the well known property investment ‘gurus’ in Australia you’ll find that they have been investing in the US market since the opportunity first presented itself.  Steve McKnight from PropertyInvesting.com, Rachel Barnes from Property Women, Dymphna Boholt from I Love Real Estate—all examples of well known figures in the property investing space in Australia who are all active investors in the US and have been now for some years.

What happened?

So what actually happened in the US real estate market and the economy in general that lead current circumstances and opportunities for Australian investors?  I certainly don’t profess to be an economist or expert in the US housing market and after having read many articles outlining the history of events that lead to the sharp downturn in property values and huge number of foreclosures it appears that quite a number of economic factors seemed to come together to form that ‘perfect storm’ for the US.
US advert
Much of the blame seems to lie with questionable banking and financing processes which saw thousands of people in mortgages that they, perhaps, should never have been in to begin with. The following shop front window shows a typical advert for a subprime mortgage in the US, one of many sold to would-be home owners.

Although it’s beyond the scope of this discussion for us to delve into each of the economic factors leading up to the financial crisis in the US, the diagram on the following page helps to summarise some of the causes of the housing bubble that formed back in 2006 in the US.

Wikipedia, http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Wikipedia, http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

As we can see, there were decisions on the part of individual as well as decisions on the part of lending institutions that contributed to a financial climate of high levels of debt, elevated housing prices and high risk borrowing behaviour in the US.

Far reaching effects were felt as the flow on effect from the housing market, to financial markets to government and industry came into play.

By 2008 the market had fallen significantly.  In fact between June 2007 and November 2008, Americans lost more than a quarter of their net worth.

The domino effect is highlighted in the diagram on the following page. Once again, a detailed discussion of each of the factors in these diagrams is beyond our discussion here today, but it is interesting to see how a chain of events, actions plays out with such far reaching consequences.

The result of all of this, in terms of an investing opportunity for Australian investors, was the abundance of hugely cashflow positive property investments.  The cost of housing in some locations in the US were, and still are, unheard of in Australia.  We’re talking properties that cost $35,000, earning rents of $650 per month.

Many Australian investors, me included, could simply not fathom these sorts of numbers!  Others, quick to spot and jump on an opportunity, got on board quickly.

So what is the opportunity now? We’ll take a look at that in our next post. Tune in!

EPI 050 | Happy 50th birthday EPI

Things we talk about:

  • Celebrating 50th episode of the Everyday Property Investing podcast
  • Answer questions from listeners about buying close to where you live, what we want to know most when it comes to property investing, and about mining town purchases
  • Includes a very special guest!
  • Clint – our very awesome voiceover guy – Check him out at Marsden Vox.

Quick Tip & Action

Many ways to skin a cat in property investing

property investing - many ways to skin a catThere are many ways to be successful in property.

I’m very fortunate to get the opportunity to speak to many different investors in my role with Everyday Property Investing.  I also read magazines, books, newspapers and property blogs to keep up to date and learn more.

You will hear different strategies from different people and these strategies may have made these people a LOT of money.

Those strategies may be fantastic strategies and if you’re anything like me then you get excited to hear about the many ways you can be successful with property.   There are many ways to ‘skin a cat’ when it comes to property investing.

BUT – here’s the thing….

You can’t do them all.

Sad, I know, but it is really important that you educate yourself about the strategies that may work, then choose what yours will be and focus on it.  Really learn about it, immerse yourself in it, live it and breath it and make it happen.  Too many people get caught up in the hype of ‘the next big thing’ or get on the merry-go-round of seminars and learning and never actually implement or implement a little bit of everything and never perfect their craft.

One thing that you’ll note from many successful people is that they focused on one technique and perfected it.  Think about that for a minute.

I was listening to the recordings of a business seminar recently and one speaker described it like this.  If you jump from one thing to the next all the time it’s like you’re digging a little hole but you don’t find treasure so you move to the next spot and dig a little there, but you also find nothing, pretty soon you’ve dug a whole bunch of little holes in the ground but you just never went deep enough to find the treasure.

You need to determine your one technique and perfect it too.  The importance of focus cannot be underestimated, it will accelerate your success.

The other point that I want to make here is that sometimes property ‘gurus’ will assert that their method is the only method that will make you successful and if you aren’t doing it that way then what you are doing is wrong.  Once again, there are many ways to skin a cat.  So don’t be put off by people telling you that there is only one way to succeed with property investing.  There isn’t.  In fact you are spoilt for choice!

Now read the first part of this post again – and focus on your choice!

 

EPI 047 | Being Invested with Nathan Birch

Things we talk about:

  • How to choose the right locations in which to invest
  • The 3 key factors that must be present in a good investment property before you purchase
  • How to choose the right type of property (hint: it has nothing to do with the type of property!)
  • BInvested.com.au – mentoring, education, buyer’s agency service
  • PropertyDealFinder.com.au – deal finding subscription service
  • MyTradesPeople.com.au – renovation project management and trades
  • MyPropertyTracker.com.au – property portfolio management software service

Getting your head right – 4.Knowing your endgame

Now if you’re a regular listener to our show, Everyday Property Investing, then you will have heard us ‘banging on’ about your goals.  What are your goals, are you actions in line with your goals and so on.  We mention goals so often for a reasons – you need to have one!

Most people start investing without a goal or they have a very vague goal that they haven’t really thought through.

Me included.

When I started investing I had a ‘mantra’ of ’15 by 50′ which meant that I wanted to own 15 properties by the age of 50.  But really, what does that mean?  I needed to dig deeper than that and work out what was my ‘endgame’ and how I was going to get there.  What specific strategy did I plan to implement?  What were my 15 properties supposed to deliver?  Now, I’ve actually changed my goal as I have evolved as an investor, but you get the point.   You need to, in the very wise words of Steven Covey (7 Habits of Highly Effective People) ‘Begin with the end in mind’ – your exit strategy.

You first important step is to work out what you endgame is.  I’m going to assume for most people, what they are looking for from property investing is that they are looking to achieve ‘financial freedom’, meaning that they are no longer obliged to ‘work’ for money to sustain themselves and their family to live.  Financial freedom is having the choice to spend your time as you wish to spend it.

How much money do you need?

So the first question is to work out how much money you will need to reach that point of financial freedom – and this will be different for everyone.  How much money would you need to live on per year?  Now you can be as extravagant as you wish, but that will only mean that it will take you longer to get to that point.  So really think this through – if someone said to you that you no longer need to work for a living but you need to live on, say $50k per year, is this enough for you?  Maybe you loath going to work every day, so $50k would absolutely be enough for you to throw in the job you hate.  Or perhaps you like your job, so you’d be happy to keep working for another 5-10 years extra to give you a better retirement salary.

Let’s assume that you decide that $100k is a nice round number – because, well, it is a nice round number.  And one that I reckon I could live on!  So, to obtain $100k per year, you’d need at least on of the following:

  • $100k of passive income from rental properties – let’s say  roughly seven fully owned properties fetching approximately $300 per week (assuming approximately 7% management costs and 5% maintenance and expenses per annum).
  • $2 million dollars in the bank (assuming 5% interest).
  • A cash flow generating development project or renovate and flipping strategy that was yielding at least $100k per year

So work out what you magic number is.

How do you plan to obtain the money  from your properties?

The second question is then how will you use property to achieve this:

  • Is your plan to buy many properties and then sell them all to live off the interest of the profit you have made?
  • Is your plan to live off the passive rental income from your investment properties?
  • Is your plan to buy, renovate and sell properties to build up enough money to retire?
  • Is your plan to develop properties for profit or develop and keep them?

What is your timeframe for achieving financial freedom?

This is a big question because the type of investing and property transactions that you will be involved in to reach your target by your timeframe will need to be aligned with the timeframe in which you want to achieve your financial freedom.

If you realistically want to quit your job in 5 years time then your strategy and methods will be very different to someone who has 15 years to make it happen.  You need to think this through very carefully.  Getting there faster can mean using strategies and techniques that may have a higher risk that others.  This may or may not suit your risk tolerance and risk profile.

What I have found for myself is that I initially chose one particular method (positive cashflow buy and hold), but worked out during the course of my journey that this method was just not going to get me there fast enough!  I then decided to introduce other methods to ‘fast track’ my plan (renovation and development).

Determined yet flexible

You need to be determined and committed to your goal.  Committed enough to weather the tough bits and to keep striving to reach it.

You also need to be flexible enough to assess and revise your goal along the way.  We all change and evolve as investors and as people.  For me, in my earlier investment journey I was committed to building wealth, nowadays, as I have evolved as a person, my priorities have changed.  I would be happier with much less if it meant I could spend time with my family doing what I loved – so for me, achieving financial freedom and buying back my time as fast as possible is what is most important and so my ‘magic number’ is lower than when I initially set out on this adventure.

Short Term Goals

We’ve spoken mostly in this article about our long term goal.

But it’s hard to move forward and put your goal into action when you’re looking at this ‘helicopter view’ – you need to get down and dirty in the details.  This means working out the specifics of what you need to do next.

Once you’re happy with your big goal you’ll need to think about all the little steps you’ll need to take in between and to identify a set of short term goals to work on that will take you closer to your endgame.

I’ve covered this in great detail on this site previously, so I’ll refer you to this three part series for mapping out the steps you will take to reach your goal:

 

EPI 043 | Everyday Property Investor – Jo Flood

I love catching up with Everyday Property Investing listeners who are out there and taking action in property.  Today’s interview is with Jo Flood, Everyday Property Investor, and previous Everyday Property Mastermind participant.  Jo has a good head for numbers and is keen to build her wealth and create a situation where she can spend more time doing what she loves.

Sounds like a good plan to me!

Quick Tip

Our quick tip and action this week – check out the awesome property research online resource www.ripehouse.com.au.  We’ll be interviewing creator of Ripehouse, Jacob Field, very soon on our show!


Getting your head right – 1.Why invest in property?

Everyday Property Foundations

This series of articles is for the beginner investor. It’s designed as a set of articles that will cover the basics of getting started in investing. It’s also appropriate for those who may wish to revisit their overall goals and investing strategy, after all, many of us have started out as the ‘accidental investor’ and developed our knowledge and strategy along the way.

In part 1 of the series we’ll be covering ‘Getting your head right’ – which looks at why you want to invest, the successful mindset of the property investor, your risk profile and setting your property investing goals.  Today’s post specifically look at why you would invest in property.

Let’s get cracking!

Why invest in property?

People invest for a variety of reasons, using a variety of investment vehicles and in a variety of ways! For most people investing is about accumulating wealth and even though when you ask people why they want to accumulate wealth you may get a bunch of different answers, for the most part, it comes down to being able to buy the things you want to buy and, more importantly, do the things you want to do.

For me, investing in property is about buying back my time. It means not having to work in a job that I may not want to be in just because I need to pay the bills, it means building up enough income producing assets to be ‘financially free’ which means instead of working for a living, I can spend my time doing the things I want to do.

We’ll take a closer look at your motivations a little bit later, but firstly, let’s talk about why people invest in property as a primary investment vehicle.

There are a many different ways to build wealth through various forms of investments. There are savings accounts and term deposits, shares and managed funds, business investments and of course, there is property.

Savings Accounts and Term Deposits

The main advantage of these items are that they are very low risk and keep your money safe and accessible. Of course, the main trade off for a low risk investment is a relatively low return, however, for many people this suits them and the concept of low risk is more important.

Shares and Managed Funds

Shares are often considered a fairly risky investment. This is because although they can offer high returns, their volatility means that they can also drop in value quite quickly and you can lose money. Investing in shares yourself means that you must take the time to educate yourself about shares and share trading or investment strategies or you can pay for that service from someone else. Managed funds are a way to handover all of the choice on which shares to buy, how many to buy and when to sell, to a third party fund manager. You also pay fees to a managed fund for this service. Many people invest in shares through their superannuation fund and until recent years, shares were really one of the only types of investments that a superannuation fund could make.

Business Investments

Many people build or invest in business to build wealth. Many people build a business without really thinking of this as investing, but in reality, building a business is also investing and businesses can, like other investments, produce cashflow and capital growth. Building a business, of course, is a big undertaking and is also relatively high risk.

Property

Property has a lot of advantages as an investment class.

  • Easy to understand – sometimes, getting your head around shares can be difficult and learning to invest in shares requires a lot of knowledge. Investing in property also requires knowledge but property is, for most people, easy to understand and deal with.
  • It’s real – you can touch it, see it, paint it, photograph it! Many investors, like myself, like the idea of having something tangible for their money.
  • You can improve the value of it – unlike other investments where you really are just a passive observer, with property you can take the ‘bull by the horns’ and manufacture your own capital growth, through renovating, developing or even thinking of creative ways to use the property. This is a really exciting part of investing in property.
  • Property is forgiving – the volatility of the share market can be scary for many and thankfully, changes in property values are not as dramatic or fast as you see in the share market. Of course when share pricing are rising sharply it can be very exciting, however, when they drop quickly it can be heartbreaking. With property growth is often far more gradual and although decreases in value do occur they are not as great.

Why do YOU want to invest in property?

So now that we’ve looked at property as an investment class, let’s look closer at why YOU want to invest in property, what is your motivation? You see, at the end of the day, owning 5, or 20 properties is usually not what it’s all about and when things get tough, like you’re trying to save for a deposit, or you have to cut back on your budget or you have some dodgy tenants that are giving you grief, then thinking about how many properties you can have or how much money you can accumulate is not something that will drive you. To understand your real motivations you need to go a little bit deeper than that and think about what your real motivation is. The things that drive me are:

  • Not having to work for an employer
  • Being able to spend my days doing things that I enjoy
  •  Being able to spend my time with my young children
  • Being able to enjoy holidays and time at the beach house

Having property to me is just the means to the end. I want to be financially free of my job and be in control of my time and my financial future. That motivates me.

How about you?

Before you get started, have a think about what your primary motivation is.

  • What is important to you?
  • What would change if you didn’t have to go to work to pay the bills?

These are the things that will really motivate you.

In the next section of this series, we’ll be looking at the success mindset and why this is important to you!

EPI 042 | What YOU want to know about property investing – Listener Q&A (3)

Well it’s about time!  About time, that is, that we answered some of the questions we’ve been sent over the past few months!

Things we talk about:

We really appreciate the questions that you send in and do our best to answer them individually.  This episode gives us a chance to share our responses with the EPI listeners and discuss the issues that you’re interested in.

In this episode we cover questions from:

  • Robert – Low Doc Loans
  • Tim – Tax Variations
  • Michael – Buying where you know or diversifying your location
  • Dion and Nicki – Buying on a Highway

We have heaps more questions we’d love to cover and so we’ll be doing a few more Q&A episodes coming up to get through them.  We love the great questions and hope you keep them coming!

Quick Tip/Action:

Do a  little ‘property immersion therapy’ to rejuvenate your enthusiasm and motivation for investing – this could be going on a property road trip, reading a property magazine or jumping onto a property website and looking around at what’s available!

Buying off the plan – a bird in the hand?

buying-off-the-plan

Is a bird in hand worth two in the bush?

To those who might be considering buying property off the plan, I am here to suggest that doing so might not always be the best idea.

Take a quick look around property websites and you’ll soon see that there are quite a few properties for sale off the plan. One of the main reasons for this is so the builder can use the money generated by pre-sold apartments to fund the entire project. The benefit to the purchaser is that you may be able to purchase very cheaply, and pay far less (or no) stamp duty. It is worth, however, keeping in mind that as these properties haven’t yet been built, any value we place on them is purely theoretical.

My first investment property was off the plan and I bought it nine months before it was due to be completed. As soon as I signed on the dotted line, I committed the funds for the entire purchase. Two years later, it still wasn’t complete. My financial commitment to this property precluded me from buying any other investment properties. To make matters worse, the completed apartment wasn’t worth the forecast value (but at least it was worth more than I paid!). Ultimately, buying off the plan meant that my beginning in property investing took a lot longer than it could have.

So the lesson to be learned here is that if you’re looking at buying off the plan, you really need to ensure you fully understand all the implications of the purchase;

  1. You will most likely be quoted a value for a property that doesn’t yet exist so you can’t really know what it is worth, you can only guess
  2. You don’t know what the property market will be like upon completion (and for me this was two years after I signed on the dotted line, and over one year late!), therefore any guess as to what your property value will be at that time is pure conjecture
  3. You will definitely hear (from the builder) about the “massive stamp duty savings”. You will save money, but be sure you know your figures (there are stamp duty calculators on most property websites)
  4. As soon as you sign on the line to say you’re going to buy a property off the plan, it means you’ve committed that money. This means that you won’t be able to get a loan using any of that money but you don’t have any equity either because you actually don’t own the property yet. So for the time that your off-the-plan property is getting built, further loans will be very, very difficult to get and you will need to have money elsewhere to be able to continue to invest.

My advice to you when you find a “dream off-the-plan” property, spend a little bit of time considering properties that exist right here and now to see if there is anything similar. Investing in something that exists right now will give you both equity and returns immediately.

In short, be aware of off the plan properties. Nobody knows what they are actually going to be worth when they’re complete. Nobody even knows exactly when they will be complete! If you’re conservative with your investing, like me, buy properties that actually exist. That way you minimise your risks.

And good luck with your investing.

EPI 041 – Rags to Riches in Property Investing

In this episode we talk about the joys of finding a good property manager, good tenant and good team members – how do you even know who is ‘good’ anyway?  We also talk about the perception of  ‘rags to riches’ property success stories and whether many of them are about good planning, good management or simply good luck!  We talk about diversification in property investing.

Things we talk about:

  • Property Managers
  • Finding good tenants
  • Diversification in property investing

Action:

  • If you don’t have enough time to keep up with the ‘property investing’ media, then check out our Facebook page where we’ll be showing you the best articles of the week that we come across.