Overseas Investor humbly request for expert advice on REO

[bigbird]

Hi guys,

I am an overseas investor from Singapore. Its a tiny country in Asia and its not in China. I am highly attracted to the states with the rare opportunity to buy up REO properties at such an attractive price.

I have been reading through all the threads in this forum and I must commend on the highly sophisticated investors here. Some of the "real" pros here are really fantastic in their advice.

Please kindly give me some advice as I share my investment plan after reading most of the investment books and the going through some of the coaching tapes.

My investment plan in the states:
I plan to buy up SFH(3 and 4brs) in some of the major cities. I am planning to start with Detroit and Chicago.

I am targeting REO houses with a price tag of 10-15k which requires a rehab cost of 10-15k. At this price tag, I am looking at an average house for the blue collar worker. I plan to pay cash on the REO and also rehab.(I do this despite fully understanding the power of leverage and also the disadvantage of locking up the equity in the house). My aim is to build up a portfolio of around 100-150 properties in 5 years and just retire with the monthly cash flow and will pass this cash flow to my son whom I watch Sesame Street with everyday(thus the nick). Hopefully, in 20 year's time, the land value under the SFH will rise 100%(5% every year) and he can in turn put it to good use. Yes. I am in this for very long term rental.

The monthly numbers will look as follows:
Monthly rental: 800
Property management@10%: 80
Property Tax: 250
Maintenance cost: 80
Insurance on property: 50
Income Tax@5%: 40
Net monthly Cash flow: 300
Annual cash returns: 3600
Assuming a purchase price +rehab cost of 30,000. The annual cash on cash return is 12%. This is considered very high to me and I am very happy with this type of return.

However, did I underestimate any costs involved and over estimate my rental ? I would really appreciate any advice given to a beginner.

As an overseas investor, I will depend solely on the local management property company to manage my properties and also the local contractor to rehab the place. Can any experts here give any advice of any potential pitfalls that I can fall into? I can think of a few problems like the management company pocketing the rent and telling me that the place is not rented out or the contractor not carrying out some of the works and still charge me for it. Can anyone give some suggestions on how to overcome these problems? I have already set up my bank account with citibank and have transferred funds so I am ready to start making offers for the REO properties. Lastly, I understand the importance of setting up a LLC to protect the asset but do I put all the properties into one LLC or do I put like 5 SFH into one? What do the pros here do?

In Singapore, I have a few properties that have been fully paid up but rental yield over here is a myth with most yields at 3-4%.

lastly, I sincerely thank you for reading my long post and I wish everyone achieve find their financial freedom.

[Bluemoon06]

I would look at vacancy of at least 10% with the associated make ready cost.  At minimum

Cleanup $200
Paint $800

[bigbird]

Hi Bluemoon,

Thanks sincerely for the reply. I have been following your posts and they are really constructive and informative.

Pardon my ignorance but do you mind elaborating on the phrase
"look at vacancy of at least 10% with associated make ready cost"?

Also, the cost of paint and clean up are extra cost that I have not factored into the 15k rehab cost?

many thanks.

[alex79]

Hello Bigbird,

$800 rent in Detroit for SFH is optimistic in my opinion. I live near Detroit, so I am somewhat familiar with market there.  You are a brave man if you want to start with investing in Detroit.
If you have some questions about Detroit area then send me email, I'll see if I can help you.

Good luck!

[Bluemoon06]

On average about 10% of the time a house will be empty.  If you have 10 houses 1 will on average be empty at any given time.  The tenant will move out or be thrown out.  When that happens you will have to make the house ready for the next tenant.  You can use some of the deposit but some items will be normal wear and tear and you will have to pay for.  You may have to get a cleaning crew which should be around $200 or you may have to repaint or touch up the paint for around $800.

[MichaelQuarles]

bigbird

Good to meet you

The issue that pops out at me is the cost of rehab and the distance you are away...

I am not certain you will be able to control those costs.. Even in your post you hinted that you see the states as a benefit because of returns may be greater then where you are located.. How will you know if a rehab is within local standards from both cost and quality...

Why not buy units that only need the basics; Trash out, carpet, paint etc... You can typically figure 4.00 a sq ft for Flooring, paint and clean up. Even as I write that I know there have been times that if I weren't on location that the cost would have greatly exceeded those numbers. Especially in a time when labor is out of work, forcing rehabs to drag on longer than usual.

I love single family housing as a secure base BTW.  However look at locations that are dominated by Owner Occupied housing.In high tenant occupied areas pride of ownership is eliminated and obsolescence starts occurring. Creating low income tenants.

Anyway...

Good luck and welcome

Michael

[bigbird]

On average about 10% of the time a house will be empty.  If you have 10 houses 1 will on average be empty at any given time.  The tenant will move out or be thrown out.  When that happens you will have to make the house ready for the next tenant.  You can use some of the deposit but some items will be normal wear and tear and you will have to pay for.  You may have to get a cleaning crew which should be around $200 or you may have to repaint or touch up the paint for around $800.

Hi bluemoon,
Yes I understand that so I plan to set aside a sum of money for emergency like a period of no rental and also breakdown in the water heater etc. For each property that cost 30,000. I will put aside 10%=3000 of cash for emergencies. Is this how you guys do it in this aspect of risk management?

[bigbird]

bigbird

Good to meet you

The issue that pops out at me is the cost of rehab and the distance you are away...

I am not certain you will be able to control those costs.. Even in your post you hinted that you see the states as a benefit because of returns may be greater then where you are located.. How will you know if a rehab is within local standards from both cost and quality...

Why not buy units that only need the basics; Trash out, carpet, paint etc... You can typically figure 4.00 a sq ft for Flooring, paint and clean up. Even as I write that I know there have been times that if I weren't on location that the cost would have greatly exceeded those numbers. Especially in a time when labor is out of work, forcing rehabs to drag on longer than usual.

I love single family housing as a secure base BTW.  However look at locations that are dominated by Owner Occupied housing.In high tenant occupied areas pride of ownership is eliminated and obsolescence starts occurring. Creating low income tenants.

Anyway...

Good luck and welcome

Michael

Hi Michael,

I really appreciate the excellent advice being dished out.

Let me see if I get it right. In a nutshell, it will be more appropriate for me to buy a house that is almost move-in condition, that only requires  a bit of touch up. So instead of buying a run-down place for 15k and spend another 15k on rehab( which I do not know if they confirm to local standards or even do what they charge me which also has the potential on spiraling costs), I should focus on buying a move-in ready at 25k and spend 5k on minor touch up. Is that the general picture?

I did not know of this $4 per sqft rule for carpet, paint and clean up . Its a good rough estimate to know how much cost to factor in. Thanks for sharing this golden tip. I love SFH as well as I can own large parcels of land on which the house is built. I come from a society where 95% of the population live in high rise apartments and I land is a highly priced commodity.

I agree with you that its crucial to buy into neighborhoods with high ownership with a majority middle class population for long term stability and rental. I would appreciate if you can email me some suggested areas based on your expertise if possible.

lastly, thanks for spending time and effort in educating a layman like myself.

Cheers,
Bigbird

[bigbird]

Hi guys,

I thank all of you for the great advice given so far to me.

When I am searching for properties on Homepath, I see many listings with this phrase:" EMD to be held with the listing office".

What exactly does this mean?

Many thanks.

Confused Bigbird 

[alex79]

EMD = earnest money deposit

Hi guys,

I thank all of you for the great advice given so far to me.

When I am searching for properties on Homepath, I see many listings with this phrase:" EMD to be held with the listing office".

What exactly does this mean?

Many thanks.

Confused Bigbird 

[bigbird]

Hi alex,

thanks for the advice. it was really great chatting learning from you earlier.

I have already emailed you a potential area in detroit.
Please have a look and give me some comments.

Thanks.

Big Bird

[Rob in Atlanta]

This sounds like a recipe for disaster.  I don't like 'raining on your parade' but unless you have the trusted parties involved in these deals, you are asking for a very expensive lesson.  It would be advised to travel over here and manage these acquisitions and rehabs as well as interview management companies to your satisfaction.  Also, you might want to consider smaller costs per unit and buy some apartment buildings with professional management companies with long term reputations to take care of that property.

You can do much better with returns with no risk and have absolute certainty with Annuities and other investments by multibillion dollar firms and no market risks.  Why would you risk turning your money over to contractors to rehab properties 6000 miles from home where you have absolutely no control?  Not sure I understand your motivations.

Wishing you well.

Rob
R.E. Investor/Mentor

[bigbird]

Hi Rob,

Thanks for the frank comment. Its straight professional advice like this that  I am looking for when I posted the ad.

I agree with you on the high risk factors involved in the acquisition, rehab and property management with me 6000 miles away . I am prepared to do this as I see it as a calibrated risk and I have already entered the Japanese Keibai market and also the UK, NZ and Aussie with this approach.

I wish to spread my risk by buying into different Real estate markets in different places. I personally believe in the long term value (100 years) of real estate and I am involved in property development in Singapore. In the case of the states, your population is growing at a strong rate and I foresee an increase in Real Estate prices in the long run with increasing demand in major cities.

From how I see Real estate, an apartment building does give a better rental yield in the short run but it  fast but it gives much more problems in the long run (I speak based on my experience with such apartments in Tokyo etc). As a result, I prefer SFH with a piece of land on it which gives me much more value.

In the current unique economical situation in the states, its also a great opportunity to buy in the foreclosure market especially at the REO market. I realized that if you go to a bank and offer to buy the REOs with full cash and close within 5 days, they are very willing to negotiate.

After talking to many of the friendly and helpful investors here, I have decided to buy better quality houses in the better neighborhoods. In this case, the rehab is brought to a lowest with the need to depend on the contractor lowered. The paperwork involving acquisitions will be handled by my lawyer (will send him over on a year consignment). The situation with property management is again unavoidable and a risk is taken.

Lastly, all the above comments are just my personal opinions which could be opinionated and based on fiction so please do not take it too seriously. I am here to learn from the REI pros and I regard you guys to be the most sophisticated in the world from my experience.

Regards,
Bigbird

[Rob in Atlanta]

OK, Bigbird!

Best wishes for success.  I like the 100 year plan and generational thinking.  I started doing owner financing with 40 year mortgages.....guess I need to expand my thinking.  Good call!

Let me know if you need any information in Southeast U.S.

Take care for now.

Rob
R.E. Investor/Mentor

[furnishedowner]

BigBird,
If it were me, beginning to invest in the United States, I would look to New Mexico and Texas as having well-priced housing stock that didn't hyperinflate in the bubble market.  Homes are affordable there, and people are moving there.

Furnishedowner