Readers who can benefit from reading this article are potential foreign (non-American) investors who are interested in the US real estate market, that is, those who are unfamiliar with the American culture and are therefore in difficulty in facing a non indifferent, that is, investing overseas.
Below I will describe my personal experience and how I organized myself from Italy to invest in the USA.
Then I will describe in detail the properties purchased, the difficulties that are encountered, with the maximum transparency.
Unlike other sites here you do not sell anything, this is my personal diary where I describe the experiences experienced as an investor, highlighting both the positive and negative aspects, this type of reading can be useful to anyone who wants to undertake the “same” my path .
I wondered and did research to understand how to invest in America with relative peace of mind, so I later moved on to action.
We get carried away by the idea of setting up a business but then, thinking concretely about how to do it, we often get stuck for various reasons, including:
- distance and loss of control of real estate.
- not knowledge of culture and cities and neighborhoods.
- the language that can become an obstacle if you do not have fluent English in the relations with your accountant or American bank, or with the subjects connected to the real estate world (realtor: real estate agent, Title Company: American notary … etc.).
Certainly an American who invests in his own country or even better in his own well-known neighborhood is certainly advantaged: he knows the local reality, the laws of his market are more familiar to him, he knows people, the language to perfection.
In America we often come across houses that have greatly re-evaluated in a short time, particularly in my trip to Florida I have evaluated the purchase (with the group of investors I will talk about later) of a house that, in just a year ago, it had risen from $ 35,000 to more than 100,000 (after being restructured). Crazy dynamics (not even a penny stock), which a foreigner barely understands.
In fact, the reason is that the house was located on the outskirts of a ghetto and within a year, following the population expansion, the “good” area of the city has incorporated part of the periphery of the latter. It is clear that if you do not know these things, and if by mistake, you buy a house, ignoring that the neighboring property is a notorious droug house (house of drug dealers), it makes a not good investment !.
This is to say that many are the reasons, even legitimate, that make desist from intent; therefore, the need arises to build a network of trusted professionals, who can assist and assist you and manage your property. At the same time the need arises to invest in a group and not alone because it allows you to distribute risk, have greater purchasing power, and make fewer mistakes.
We often ask ourselves how to build a network of reliable people, being so physically, culturally and linguistically distant.
This article just tries to answer the question How can a foreigner successfully invest in the USA? What are the forms and methods that can protect it? In Real Estate, substantial sums of money are invested, thus protecting investment becomes the first essential point.
First of all we consider why it is worthwhile to invest in America in real estate:
- Protection of private property (in America within a few days the tenant is removed from the county sheriff, with a few hundred dollars of legal fees, which are then compensated to the owner by the tenant himself, in Italy times are much more long and the outlay is far more burdensome both from a legal point of view and because of the missed rent paid).
- Profit higher than in Italy on rent: the net rent from a rent can fluctuate from 7 to 11-12% per year currently (2018), in Italy when it comes to 3-4% is already a lot.
Consider that the formula prince that the famous coatch and American real estate developer Robert Kiyosaki teaches to evaluate the purchase of a property finds application in America, in Italy no, as Italian houses exceed the parameters and is inapplicable. Kiyosaki says that a property suitable for renting (rent) must cost no more than one month’s rent * 100 which translated with an example means, if you find a property that costs 120,000 dollars and you know that the tenant who occupies it pays 1000 of rent , the building does not meet the minimum requirements according to the formula; the monthly rent should be at least 1200 to be taken into consideration or the house should cost no more than 100,000 (at least 120000). Now try to apply the formula to the houses in your area where you live in Italy, the houses meet the requirements of the formula?
- Differentiation in dollars of their assets: it is assumed that an Italian already has assets in Italy such as home ownership or otherwise, differentiating with other currency by buying foreign assets is certainly good, especially today.
- Property control even if many miles away: certainly it would be better to have the property in the house, but being an investment abroad America allows, through the property manager, a specific professional figure that in most of the world does not exist and that manages the property from structural problems to those with the tenant, certainly greater control than in other foreign countries, then we will see that the business model chosen to invest in America (Section 8), which I will talk about further on, it gives me more peace from this point of view.
- Transparency and absentee bureaucracy: doing business in America is much simpler than in Italy and the bureaucracy that we know in America is absent.
Having made this essential introduction to frame the topic, I will tell you about my experience in the USA as an investor in real estate and how I have dealt with the investment in America, to reduce the risk to the maximum.
I had already assessed the purchase of a property in Tampa through an independent financial advisor but I abandoned the idea when I asked to view the property in person before the purchase. The financial consultant went out of his way to say that it was an investment for me and not the purchase of a house that I would have to deal with, that I would spend some money to go to the US to see the house that would have burdened by investment income etc …, but because control is essential for me, I gave up this “armored” form of purchase.
After various research I came into contact with a group of Milan that invested in Florida since 2014, I met the people (now my partners), they inspired me and with them I have dealt with my investment in a particular form that I will describe here below.
Starting from the beginning, there was a person (Lorenzo) who, tired of the job as an employee, had the courage, after studying well the American real estate market and the opportunities it offered, to travel to Florida in St Petersburg, to create from scratch a network of professionals on site: accountant, bank of trust, a contact person for the purchase of real estate, a handyman to be hired for any repairs if necessary.
It was not really easy to start, nothing is generally simple at the beginning.
The first house was bought in 2014 by Lorenzo, later, as the house produced a constant and interesting cashflow (at the time a net 14%), other investors were involved in the purchase of other houses and the latter entrusted the management of their houses to Lorenzo, since he had already shown that he managed to successfully manage his home remotely.
He preferred to entrust the house to him rather than to an unknown property manager of the place.
In this way, Lorenzo, besides creating his first investment in the American Real Estate, accompanied other investors, assisting them and subsequently managing the house, thus creating a very interesting additional income derived from the percentage granted by the investors for the management of the building, equal to 10% of income received by rents in a year.
It went on for a few years with this method: the new investor went to America accompanied by Lorenzo, opened his LLC (American company), opened a bank account, bought the property with his American company.
Meanwhile, real estate was growing in value, it came from the Subprime mortgage crisis, and a single house, purchased at 50K dollars in 2014, in 2017 was worth almost double, so a single investor had to expose themselves with a fairly substantial investment of about 100K dollars, a bit ‘too much in an area so remote from home.
So they began to buy the houses together: two investors bought a house with their LLCs, holding the shares of the building; this however generated exit strategy problems, if one of the two wanted to leave the investment, so the turning point in November 2017, the foundation of the LLC on top.
A group of 3 investors, who traveled to America in November 2017 for the business tour for the purchase of real estate decided, under the advice of the American accountant, to join in the purchase of houses, structuring in this way: founded an LLC on Top that he would buy the houses, the personal LLCs, belonging to the various physical partners, would have contributed capital for the purchase of the houses, receiving in exchange for company shares.
The image describes the organizational structure designed to invest in real estate in America.
Basically now every personal company holds the shares of a company that buys houses. In this way you get a series of advantages:
- risk distribution: you have many houses, if a purchase goes wrong or if a house has problems, it does not affect the others.
- Compound annuities: with more income derived from renting you can first buy new houses that produce additional profits (alone you would be much more slow).
- Group synergies: among the members (now we are 10) there are professionals who cover different fields, we have an accountant, a notary, a logistics expert, computer consultants, commercials, all figures that can bring added value to the company top. The undersigned, for example, who is a software developer, is working to create a management software for property management.
- Simplified exit strategy: if one of us wants to get out of the liquid investment its share.
Besides these advantages, there is certainly some disadvantage from my point of view:
- being in many means greater difficulty in making decisions.
- Organizational problems are greater than if we were alone, we are in fact going through a phase in which we are structuring properly.
- A less direct personal control of the investment
- Of necessity it is necessary to delegate to a president certain delicate tasks, trusting in its integrity, mutual trust is necessary, but it is necessary in any society, even not on American soil.
The main difficulty encountered so far consists in the recalculation of the company shares when a new member enters by bringing capital, it is necessary to take into account the revaluation / depreciation of properties that has taken place in the meantime, clear that in this type of reasoning can not break the penny , but we have elaborated a model to carry out this calculation taking basically as parameter the estimate of Zillow (American portal where the properties are evaluated), even knowing that sometimes the estimate is not updated, so to be taken with the pliers and if anything by being assisted by agents real estate in the area.
Another aspect that we are taking care of is the drafting of an Operating Agreement, an official document that we all subscribe to, in which we insert the company rules.
The objective of the company on top is to reach, within a maximum of 5 years, a capital invested of 2mil / 2mil and a half dollars, about twenty houses that allow with the profits derived from the rents to buy another pair of houses ‘year, thus triggering the mechanism of rent compounded on real estate, not something easy to obtain because of the cost of the same.
The partners have decided not to bring home the profits of the rent before 5 years, the profits will be reinvested, after which, whoever wants it, can start to benefit from the passive income.
After this somewhat boring part, which describes in general terms how we organized ourselves from the corporate point of view, we move on to the more concrete and interesting part, describing the houses, the heritage of the on top company, concretely analyzing the costs and profits incurred , taking as an example the costs and profits of one of the houses.
America is very large and therefore every place in which it is invested has different climatic peculiarities, for example Florida has a non-rigid and humid climate. The florida houses therefore do not need heating but the woods are subject to maintenance and attack of the termites, often infiltrate rats in the houses so you will need to intervene to remedy problems caused by these animals. Moreover, in summer it is very hot and every house must be equipped with a powerful air conditioner and fans.
So it can be seen that the maintenance costs include the replacement of the air conditioner every 10 years (cost of the air conditioner about 4-5000 dollars), termite treatment to be carried out every 2-3 years (cost over 1000 dollars). Other interventions that need to be done are hydraulic or maintenance / structural. In addition, the roof should be redone every 10 years, the cost for roof renovation of our buildings is around $ 10,000.
Our houses in St Petersburg are single houses built on a plot of land with a garden. They are social housing, so they are not homes with high quality finishes because our business model is based on section 8.
Section 8 is an American government program that recognizes a voucher to pay rent to the neediest, (in America the unemployed person has the right to accommodation).
Our houses are according to section 8 and are rented to people with financial difficulties.
The state is therefore detached from the monthly allowance, and this is a convenience for us that we do not live on site, as we do not have to run after rent.
Furthermore section 8 provides an inspection whenever the tenant changes. The inspector checks that everything is up to standard and therefore renews the suitability of the house.
Even this aspect is convenient, not being able to check the status of houses every day because of the distance. The inspector in a sense works for us because it lets us know if a house has problems or not, if it were not for the inspector we would have to pay special figures.
Above typical section 8 homes (St. Petersburg) owned by the LLC on top.
We choose this type of houses because they are the best homes for investment purposes, condominium apartments or hotel rooms or other have fixed costs and problems that can significantly lower the ROI.
Lately, as the Florida property market has grown a lot and is no longer so profitable in terms of ROI, we have turned to the Syracuse market in New York.
We went to Syracuse because we have some knowledge that has advised us to invest and manage our investments.
The market in this city is very different from the florid, the value of the houses is much more stationary; one should not expect a large increase in the value of real estate as occurred in Florida, but the proceeds from renting should be good, around a 10% annual net. I say they should because we started investing in March 2018 and we still have to do annual budgets.
As I say this is another reality, even climatic (Syracuse is the snowiest city in America) so the costs of maintenance and the structure of the houses are different.
We realized that the state of Newyork has undoubtedly more complex bureaucracy than Florida and property taxes are more expensive than in St Petersburg.
We’ll see, certainly the corporate structure that we have given us has allowed us to “risk” the first purchase on Syracuse because it allows us to lower the risk on investment through risk sharing.
Over the first house bought in March in Syracuse.
Returning on the expenditure / profit calculations I promised you that we would treat a real case as an example. Below is a summary of the costs / profits of a house in St Petersburg purchased in November 2017:
From the diagram we immediately understand how the house generates a net profit equal to 8.10% per annum on the investment which was 110K dollars.
The gross monthly rent received is $ 1191, equivalent to $ 14,292 / year, assuming a 0% vacancy (our houses are rarely vacant as there is more demand for rent than houses for this purpose). If we deduct all the expenses from the rent we obtain a net profit of 755.90 dollars / month or 9070 dollars / year (a 8.10% on 110K dollars which is the cost of the house).
In addition to the cost of the house it is necessary to bear the purchase cost, that is the skills required by the title company (the American notary) equal to 2000 dollars. The costs of mediation in this case were included in the cost of the house, as we purchased the property from one of our referents in America and not from a realtor (real estate agent).
We also give a quick explanation of the expenses entered:
accounting and condominium fees: non-existent because the property is not a condominium.
Insurance: we pay a fire insurance, the insurance does not cover hurricanes, tornadoes or anything else, it would be too expensive and would affect the profit too much. Usually even the American investor does not stipulate insurance on his real estate investments against hurricanes for the reason explained.
When Hurricane Katrina passed, our houses had some damage to the fences (fences), and some tiles flew away, we adjusted the damage with a few hundred dollars.
Then it is a statistical matter, the chances of being hit by a tornado are very low, there is the possibility of flood from hurricane, here we also rely on the location of houses and a statistical statement, on the other hand is an investment and how this has its own risk component, we try to limit the risks as much as possible, but if the expense to ensure is too burdensome and not convenient, the lesser evil is chosen.
Maintenance: we keep a cash fund of $ 1000 a year for routine maintenance for each home.
Property manager management: for the management of the house and tenants there is a specific figure called Property manager, the rate of an annual property manager is equal to 10% of the rents received.
Taxes on property: federal property taxes
Pest control: expenses to be estimated for the termite treatment (about $ 1,000 every three years
There would still be a lot to say and I would have material to write an ebook (maybe in the future I will), while I hope to have given enough suggestions to be able to guide with knowledge of the cause in this market.
However, I would like to clarify that I invest in real estate recently and it is still premature to express with certainty what actually remains in the investor’s pockets after overcoming any taxes (costs or fiscal aspects) that may not yet have been disclosed, the experience in Real Estate serves precisely to clarify this, those who do not risk not rosica you say, well I’m on my way, I opened the door, this experience will clarify if the real income at the end of the fair, are about the same results expected, higher or lower, much also depends on the performance of the economy and many factors.
Moreover, it is good to keep in mind that the journey to financial freedom is not straightforward, it has setbacks, sometimes it recedes, mistakes are made, the important thing is to start off in search of valid assets; to build them it is necessary to experiment, to act, to inform oneself, to educate oneself, only in this way can one discover truly profitable revenues and discard false myths. Beware of the Gurus of financial freedom that simplify and generalize things, always think with your head, only you can build your path, no one will do it or it will do it for you.
With the next articles I will keep you updated on developments in US real estate.
I conclude by explaining what my personal goal is. The American investment is one of the pieces I’m trying to build on the journey to financial freedom, one of those 3 passive income that a person should have, with a view to differentiation. Specifically, therefore, my goal is to put an initial capital as an investor that is sufficient to trigger those dynamics of compound returns and that, within 10 years, will lead me to double the capital and completely reduce costs, being able to deduct 100% all expenses (accountant, taxes, etc.), only in this way the investment will be fully operational.
At present, the capital injected does not generate sufficient profit that allows me to cut costs … but we are only at the beginning, it is likely, if things go right, I will inject more liquidity by increasing my company shares to reach the intent described.
Good financial freedom to everyone !.