Looking to buy...

[daverobev]

Hi all,

long time lurker, looking for some help.

I am looking to buy a house in the US, as a Canadian resident. I have one house in the UK which is let out, and am living in one in Canada. Now I'm looking to round out my retirement portfolio with one more place - something with an awesome rate of return.

I have one contact (real estate agent) in Texas, but living near Ottawa I got to thinking that I'd be better off with something a bit closer.

So. I am looking for this to be a hands-off, managed property. I may or may not get a mortgage with the US branch of the Royal Bank of Canada, as they will do a pull on my Canadian credit history. Up to 60% loan-to-value.

I am plannng on taking some of March to find this property. I am looking to cashflow $100-200 per month.

The issue is.. where? The US is a big place, and I intend to have no emotional connection to this house at all. It is an investment (which goes against the "somewhere closer" - Texas should be fine, as should Spain, New Zealand, etc!)

Texas - sounds fun/nice but it's a long way away. My contact is in Lubbock.

Other thoughts - closer. Not New York/New England generally as it's expensive. I think.

How about St. Louis, MO - not Detroit, but lots of cheap houses, seemingly. Where do I go to ask these questions? I basically need a starting point - stick a pin in a map?

Looking at paying max. $50k for a place, maybe $10k or $15k of "real" money in, the rest financed through this mortgage or a line of credit.

Alternatively I can forget this whole idea, pay off the remains of the mortgage I have in the UK at ~5%, and buy index ETFs.

Thoughts/suggestions?

Thanks!

[daverobev]

Hmm, too vague a question I guess.

Let me try again:

Am I likely to find something that roughly satisfies the 2%/50% rules that can be pretty much entirely hands-off? Has anyone done this with just a property manager dealing with everything? Or is the price range I am looking in - $50k or under - likely to be too low to find a good enough tenant to make it NOT a nightmare?

Any thoughts on Texas generally/Lubbock specifically (I know, big country, smallish city).

Currently thinking I'm going to be better off paying off my UK mortgage and shoving any extra into DRIPs, TFSA, RRSP...

[Jack]

The price range you're looking for (<$50k) is too low to get a mortgage.

I also think you are definitely being too vague. The folks on HGTV aren't kidding when they talk about real estate being about "location, location, location." I live in Atlanta, and I can look at one part of town and find a market like [stereotypical] Detroit's, then look a few miles away and find a market like St. Louis', then look a few miles more and find a market like Los Angeles', then look a few miles more and find a market like Lubbock's. And I'm sure I could do the same thing in each of those cities, too!

IMO, if you're not interested in spending your time researching the market (and not just the city, but the neighborhood and specific property you're planning to invest in!) then you should spend your time finding a partner who can. Or just buy into an REIT (or REIT index fund) instead.

Of course, I'm just talking about my ass because I don't own any investment properties yet...

[amyable]

Any thoughts on Texas generally/Lubbock specifically (I know, big country, smallish city).

I know nothing about Lubbock real estate, but Lubbock is crazy far from everything.  If you ever need to visit your property for any reason, you are looking at a 5 hour drive from Dallas--an incredibly boring, desolate 5 hour drive across a very flat, featureless plain. 

[daverobev]

Hehe, it's even further than Ottawa. I would not visit for work-purposes.

Price range is NOT too low to get a (60%) LTV mortgage from RBC Bank; I checked that already.

I'm thinking a REIT is probably a more sensible route for me, but Canadian prices are high. There is a good REIT ETF - ZRE.TO - which I have a small amount of already, but it's 0.55% MER. I may invest in the Vanguard REIT ETF as the MER is much nicer. But - the price is about the same. And I think the yield too. So I could (tax effectively) only put it into an RRSP, not TFSA which is MUCH more flexible...

0.55% MER, well, I guess it's better than the 9.5% my agent in the UK charges to let my house ;)

[Hunny156]

I'm doing decently in the midwest, but everyone here is right, you need to establish a relationship w/someone you feel comfortable with and can trust, and then you can look at buying.  The other thing to consider is that your $$ available and the purchase price are on the low side. 

That's OK, I have been recently buying SFH's in the $30K range and Duplexes in the $60K range, but in order to work w/people who can find you the ROI you'll need to make it work, they tend to expect you to buy in cash, or have enough of a down payment to buy something larger w/a mortgage.

Maybe wait a little longer, double your cash reserves, and then start looking at where to invest?  I live in TX myself, and I don't think of Lubbock as the place to invest.  I haven't done a ton of research out here yet, but from what I've heard, the best returns can be found in the border towns (I'd be worried about the high crime rates there), or in the cities of San Antonio and Houston.  But my research is very preliminary, at least for TX.

[DoubleDown]

Personally I am not comfortable with investing in real estate in an area that I don't know intimately from firsthand experience. But, if I was going to do it blindly, so to speak, I would investigate the Las Vegas area. Besides appearing to be a favorable market with properties in your price range, it would be a great place to be able to visit while writing off travel expenses (at least within US tax law, don't know about Canada), and it's easy to travel there with its own international airport.

[aclarridge]

If I were you, I would go the "pay down UK property and buy ETF" route. Buying a single property that you can't easily visit sounds pretty risky for many reasons. Property management fees, maintenance, insurance, property tax, and I'm guessing there are income tax issues you'll probably need an accountant or many hours of research to reconcile. Not to mention finding a place which will surely require lots of effort on your part if you want to make sure you aren't getting ripped off.

I also wanted exposure to US real estate and went with VNQ (in my RRSP for tax reasons). It's not the same thing since there's very little SFH exposure, instead you will own pieces of apartment buildings, malls, office buildings, etc. but I'd argue it's better because it's far more diversified and still has reasonable return potential. Less risky and much, much easier.

A way to potentially get some more SFH-specific exposure though if that's what you really want (although again, it's not perfect), is buying one of these:
iShares Dow Jones US Home Construction (NYSEArca: ITB)
SPDR S&P Homebuilders ETF (NYSEArca: XHB)
I haven't looked at them in detail. I just think in your situation there are many better options than trying to own a house in the US and doing it all "at arm's length". There are many ways you could get screwed.

[daverobev]

Thanks for all the replies.

A couple of comments:

1. The house in the UK I barely ever visit, and so far (touch wood) it's all worked out ok.

2. Benefit to buying a house is the leverage. I can't borrow to invest at anything like as good a rate - because my mother in law cosigned our mortgage here (due to not being "established" as a self employed person.. well, whatever). We have a line of credit at Prime + 2.9%. A house returning 10%, with ~40 or 50% paid in cash and the remainder at 4%, is much better than the alternatives - *if* it's a good house, obviously!

But no, I think I have come round to putting the $15k or so into the British mortgage to close it off, then split any leftover cash between repaying the mortgage we have in Canada (at 3.5%) and investing. I have a few DRIPs set up, plus TFSA and RRSP, where I throw money haphazardly. I'm hoping that we can close off the Canadian mortgage when the term is up and just turn it into a HELOC!

Mostly I just wanted a good excuse to go somewhere warm and near the water (I grew up near the sea) ;) It was something crazy like -30 degrees C, -40 with windchill, this week. Needless to say - I remained inside!

[daverobev]

Reviving this one... I got the UK mortgage paid off and am re-looking at stuff in TX. My wife's cousin lives in Lubbock, and her husband is a realtor, so we're good on that front.

There seem to be high rents and low prices. We'll see if any deals pop up in the coming weeks... sadly the CAD is much lower vs the USD now, as is the GBP.

[KingCoin]

I recently posted this in another thread. Could be a good starting point for your search:
http://blogs.wsj.com/developments/2013/04/04/bang-for-the-buck-where-investing-in-rental-homes-is-most-profitable/

What kind of cap rates are you seeing in Lubbock?

I suspect a 2% (mo rent)/(price) bogey is going to be very difficult to hit, unless you're willing to take on a very management intensive project (it seems like you're not). You're probably better off in something higher quality a little north of 1%.

[daverobev]

I recently posted this in another thread. Could be a good starting point for your search:
http://blogs.wsj.com/developments/2013/04/04/bang-for-the-buck-where-investing-in-rental-homes-is-most-profitable/

What kind of cap rates are you seeing in Lubbock?

I suspect a 2% (mo rent)/(price) bogey is going to be very difficult to hit, unless you're willing to take on a very management intensive project (it seems like you're not). You're probably better off in something higher quality a little north of 1%.

Thanks, will take a look later.

Based on gross rent to gross purchase price, I think you're right, I'm seeing > 1% but less than 2. Closer to 1 than too, as well. Not going for high end stuff. Students, potentially. Not sure, will see what the agent comes up with - he's taking a look at a couple this week. I really need to get up to speed on all the things associated *with* buying though - like, should I be trying to pre-arrange a mortgage now? How much will lawyer costs be (in TX specifically), etc, etc - to do more number crunching.

Good fun.

[arebelspy]

I'd be targeting something closer to 1-1.5% than 2% if you're long distance, since 2% will likely be in a much worse area and cause you headaches.

On a SFR, that is (I'd shoot towards 2 on a multifamily), and there are always exceptions (you probably won't find them on the MLS though.)

It's not a bad idea picking a place you'd like to visit.  If you aren't going by that criteria though, you'll want to pick a place that will get you the best return.  Is Lubbock that place?

Or is it the place with the cousin/realtor husband?

Realtors are a dime a dozen, and a cousin-in-law one isn't necessarily going to be able to do anything for you any other one can't.

If the cousins were in Houston, Memphis, or Atlanta, would you be buying in those places, or would you still be looking in Lubbock?  If you can genuinely say the latter, go invest there.  Otherwise you need to think hard about why you're buying this property - is it for a decent, stabilized, diversified return?  Or is it so a cousin-in-law can do you a favor and/or collect a little commission?

[daverobev]

I'd be targeting something closer to 1-1.5% than 2% if you're long distance, since 2% will likely be in a much worse area and cause you headaches.

On a SFR, that is (I'd shoot towards 2 on a multifamily), and there are always exceptions (you probably won't find them on the MLS though.)

It's not a bad idea picking a place you'd like to visit.  If you aren't going by that criteria though, you'll want to pick a place that will get you the best return.  Is Lubbock that place?

Or is it the place with the cousin/realtor husband?

Realtors are a dime a dozen, and a cousin-in-law one isn't necessarily going to be able to do anything for you any other one can't.

If the cousins were in Houston, Memphis, or Atlanta, would you be buying in those places, or would you still be looking in Lubbock?  If you can genuinely say the latter, go invest there.  Otherwise you need to think hard about why you're buying this property - is it for a decent, stabilized, diversified return?  Or is it so a cousin-in-law can do you a favor and/or collect a little commission?

Good questions. I don't know the cousin-in-law once removed, however I know some of the cousin-in-law's family and I know they are decent people. Lubbock is the place with the cousin-in-law. I have no preference to place, really, except from the research I've done thus far shows it is 'good enough' - in a landlord-friendly state.

Diversification yes - we have one house here in Canada, I have one in the UK; I moderately expect the US$ to go up over time, and the numbers are much better than I could get on a place in England or Canada, and the entry price is much lower. I don't 'trust' the Canadian economy, what with the end of the resource bull run, and I don't want rentals in Ontario.

I have my own cousin in the Detroit area but he knows nothing about rental stuff.

I am not American, so I am happier going with someone with family ties - than trying to just find a good realtor on my own and risk getting a shark. Someone I feel I can trust. I don't suppose I'm doing the realtor in question much of a favour!

If the c-i-l was somewhere the numbers did not work, I wouldn't be pursuing this at all, but if something can be put together - great. I'm too cautious to jump into something that doesn't work (hopefully!). Saying that, I am a landlord by chance (housing market in the UK collapsed when selling seemed a good idea). So.. yup.

[KingCoin]

I am not American, so I am happier going with someone with family ties - than trying to just find a good realtor on my own and risk getting a shark. Someone I feel I can trust. I don't suppose I'm doing the realtor in question much of a favour!

For what it's worth, I think a good management company is much more important than a good realtor, unless perhaps the realtor specializes in investment properties and can put together a solid team for you. Also, dealing with family can make things awkward if things go sour.

You might want to talk to a turn-key seller like "Memphis Invest" which deals with properties in both Memphis and the Dallas Fort Worth area. They frequently work with foreign buyers, so they'll be able to give you a quick rundown on things like financing procedures and closing costs. They'll also send you spreadsheets with properties currently on offer that outline return rates with and without financing. You may decide not to go with a "turn-key" seller (which actually may not be a bad idea for a casual, remote buyer), but it's a good way to get a lot of information quickly and get some properties to use as a baseline of comparison. You can use their spreadsheets to plug in numbers for other properties in other areas.

[daverobev]

Good info there, thanks KingCoin. Have you used that company (I assume you don't work for them!)?

[daverobev]

Any ideas how important a good 'walk score' is to your average Texan? I happily walk 2km to the supermarket.. guessing in the Land of Cheap Gas *everyone* drives *everywhere* so it's unlikely to be a large concern...

Looking at a solid 3 bed place, 22 walkscore..

[KingCoin]

Good info there, thanks KingCoin. Have you used that company (I assume you don't work for them!)?

I have used, but am not financially affiliated (I realize I sounded kind of like a shill, but thought it would be useful to give you somewhere concrete to start). Turn-key won't be the cheapest, but it will be the easiest. You can pretty easily find fully renovated properties in decent areas on offer at 1.1% or better.

[daverobev]

Well!

I had an offer accepted on a place. ~$30k, maybe $7500 in fixing up to do.. and should rent for $600. Just working through the process of buying now.

As a foreigner, I know I have to make the election for it to be considered business done in the US (or something, I forget the wording) so I don't get 30% withholding. Just wondering if I just file that when I file my US tax return next year, when I apply for the ITIN and all that? Or can that be done immediately/does it have to be done immediately..

Fun fun fun. Hoping the US$ drops vs the CAD in the next few days.. ugh!

[arebelspy]

As a foreigner, I know I have to make the election for it to be considered business done in the US (or something, I forget the wording) so I don't get 30% withholding.

Withholding from what?  Who exactly do you think is going to do the withholding?  Tenant? Property manager?  I'm confused..

[daverobev]

From http://vancouver-properties.ca/blog.html/the-tax-implications-for-canadians-buying-us-property--692981

"A 30% withholding tax normally applies to rent paid to a Canadian resident for real estate in the United States. As such, your tenant should withhold 30% of the rent paid to you, or US$3,000, and remit it to the Internal Revenue Service. That can be eliminated by giving the tenant or agent a form that states you will file a tax return and pay tax on the net (rather than gross) rental income. You must file a personal U.S. tax return, separate from any business returns, by the end of the year. U.S. tax on the net rental income income in the example would be US$2,000 ($10,000 rent minus $8,000 expenses). If the tenant withholds tax, you can receive a refund, to the extent the withholding tax exceeds the tax payable. State tax (and possibly a small amount of city or county tax) may also apply to U.S. rental income."

(The $ values are his own figures on an assumed $10k income).

[arebelspy]

Oh gosh, that's terrible.  I wouldn't trust most tenants to be able to withhold the money and have it be there come tax season.

You're dealing with tenants paying $600 for rent (420 after the withholding) and expect them to be able to "save" aside that $180/mo. withholding and pay the IRS $2160 for you each tax season?

Yikes.

I'd definitely be looking for ways to report the income as gross and pay the tax yourself.  Having it be a business sounds like a good eay around that.

[daverobev]

Yes it's fine; I need to 'make an election' - and anyway, it'd be the management company doing the withholding in this case I believe.

Then I just pay tax as normal. Nobody ever does the 30% thing - you don't get to deduct expenses or anything.

[more4less]

Great tread, guys. I'm trying to pull same trick as you, daverobev. My budget is a little bit higher, so I'm looking for multi-family properties (up to 4 units). I monitor MLS and currently doing some research on property management near cities with interesting properties (i.e. meeting 2% rule, or more realistically 1.5%-2% rule).

daverobev, did buying process require you to go down Texas or it was dealt with entirely remotely? Another thing which quite puzzles me - how did you assess neighborhood (and your prospective tenants)? Or it was a leap of faith?

[daverobev]

Leap of faith! Oh yeah. Completely remote, but the real estate agent is my wife's cousin's husband (not that I have met him, or indeed his wife... but his wife's parents, *my* wife's aunt and uncle, are awesome, so.. I felt fine with it).

The property inspector guy said the house I bought was a nice little house, good, solid, etc. It's turned out nicely in the photos I've seen, too. And, best of all, it was rented from the first of December.

Now.. I just need to either get something from the property manager so I can apply for an ITIN, or wait until filing time to do it.. Not sure if they are on board with the withholding stuff though. All good fun.

[Roses]

Sounds great!  Keep us posted!

[daverobev]

Ok, so the property manager is saying 'they cannot send me a check without a tax number'. Not sure about that, but here is what I think is roughly the right plan of action:

1. Get property manager to send me a letter stating they need a tax number to distribute monies
2. Send form W-7, my passport(!), and that letter to the IRS - W-7 requests an ITIN
3. Once I get the ITIN, fill out W8-ECI and send that to the property manager (despite the fact I haven't at that point filed the election to be 'effectively connected')
4. At tax time, send in 1040NR plus whatever other stuff (depreciation schedules?), plus the letter electing to treat my rental property as an effectively connected business

5. Beer

Not sure if I'm going to get any money until I get an ITIN back from the IRS, but oh well. Over the Christmas holidays, too, ugh.