7 Red Flags to Watch Out for When Buying USA Property

By Gerald Tay (guest contributor)

In this article, I would like to provide you with more specifics on the USA real estate market, and educate those who have intentions to invest there.  I hope this article will help you to separate the ‘Truth’ and the ‘Hype’ about investing in the USA real estate market, and provide a more credible source of advice than that from a salesperson.

The advice and tips are below have been put together with the help of my partners who are American locals and professional real estate investors themselves with more than 30 years of investing experience in the USA. The advice below can also be generalized to other large mature overseas real estate markets, such as Western Europe.

There are a few red flags you should be aware of as a foreign investor who wants a predictable, safe property investment as part of your retirement portfolio. If you come across any of the below, say sayonara and walk out of the room.

1. The rental is higher than market rent and guaranteed by the government

There’s always a good reason why something is cheap and guaranteed.

There’s a housing program in the USA called Section 8 housing or the Housing Choice Voucher Program. This program is also used in other countries such as Brazil to house its large homeless population.

Section 8 is a U.S. government housing subsidy program to help people who don’t make very much – or any – money. They generally have unstable income as well, and no credit or bad credit. Essentially the local government agrees to pay some portion of their rent (usually 60% to 90% of rent) directly to the landlord. The government will pay landlords higher than market rents to attract and compensate them for taking on higher risk tenants.

There’s no free lunch in this world. Even for experienced local American investors, many are shunning such types of properties for the many drawbacks and disadvantages of owning one, even though they can be very cheap.

As a Section 8 property owner, you will enjoy less freedom and will have to follow a stricter set of government laws and regulations. On top of it, there are compulsory stringent inspections made by home inspectors. Your rent is absolutely controlled by the local housing authorities, and you could also incur high vacancy losses due to complex procedures for the next tenant to be approved. You will also have to deal with the not-so-nice tenants who destroy your property because they don’t own it, and worse, hefty fines if your property does not meet the stringent regulations.

As a foreigner buyer, you want to check if the cheap property on sale is a Section 8. Unless you are a local who stays there and can oversee the entire tedious process of property management such as screening the tenants, property upkeep and the other active property work involved, Section 8 properties are NOT for the busy part-time foreign investor who wants a safe hassle-free investment.

Beware of local seminars and exhibitions marketing such low-quality properties on ‘dreams’ of owning multiple properties to the unknowing mass market investor at inflated prices of USD$10,000 to USD$40,000 with ‘promised’ fixed yields as high as 20% a year.

2. Beware claims that properties with high cash flow equal quality investments

Never confuse cash flow with quality, because cash flow on paper doesn’t tell the whole story. Older, low-quality properties require more repairs, and have frequent tenant turn-over. These things not only cost you money, but time. In addition, a low-quality property won’t appreciate as rapidly as a high-quality property.

3. Beware claims of motivated sellers who offers bargain properties at ‘below value’

What exactly makes a property a bargain? By definition, a bargain property has an appraised or estimated value above what you paid for it, i.e. a single family home appraised at $100,000 that you purchase for $80,000. The catch is this: if no one is offering to pay $100,000, then the property is NOT actually worth $100,000. (And if they are, your $80,000 bid will be ignored.) If you purchased a “$100,000” property for $80,000, you’ve just bought a property worth – guess what – $80,000.

What does it mean when the seller is ‘motivated’? It means he has a property he can’t get rid of, or that he needs to sell so quickly he’s willingly to discount the price or offer concessions. Too often, the truth behind the motivated seller is that the property is not a good investment. If it wasn’t a good investment for him, it probably won’t be for you.

Quality properties in good markets don’t have motivated sellers. And I only recommend foreign investors to buy quality properties in good markets.

4. Beware of buying overseas properties in the “best markets”

A successful property deal doesn’t have to be the deal of the century for it to work for you. For example, an investor emailed me recently and said, “I read an article in the newspaper that said New York was one of the best markets to invest in real estate today. Why don’t I just invest in New York, and ignore the other states?”

First, what suddenly turned New York into one of the best markets in the country? Prices shot up dramatically in the past year, which meant that it was no longer a great place to buy. He was shooting himself in the foot!

Second, who cares about the article? Next week there will be article about Detroit…and the week after that, Memphis, and the week after that after….you get the point. Trying to keep tabs on the “best” markets in a huge country like the USA is a big waste of your time. It’s more important to find one good market, buy there, and stay there.

5. Beware of buying freehold land and property marketed as “affordable”

Believe it or not, anyone can own an acre of freehold land (43,560 square feet) for just USD$10,000. That’s only USD$0.22 per square foot! In huge countries like USA with an abundant land supply, it’s never the worth of the land that matters, but what is built on that piece of land that will be profitable.

You can also own a freehold landed property for as low as USD$1 per property and there are many such properties available for sale in the different US cities. i.e., Detroit.  (Now you know how some property “gurus” can claim to own 100 properties)

You have to think logically and wonder why many foreign investors are getting plucked by some of these land banking companies and property “gurus” who are re-selling these cheap junk at inflated prices to the unknowing foreign investor.

6. Beware of “cheap” properties that claim to come with “high” returns

For a predictably safe, quality and profitable rental property such as Single Family Homes, you should aim for high-quality homes in the range of USD$100,000 to USD$180,000. Such properties are located in very good neighbourhoods with a good tenant profile, typically the affluent middle-class American family.

The net rental yield will be between 7% to 10%, which is a safe and profitable investment margin for many USA professional investors. Do AVOID those that are marketed below this price range and claim to give 20% return a year.

7. Beware of buying condominiums or homes in prime city areas

Firstly, experienced American investors would normally go for Single Family Homes located in good sub-urban areas, simply because they are the stuff of which the American Dream is made of. Secondly, condo expenses can be very high and may not justify a good rental yield. Thirdly, the investment numbers don’t make sense.

If a condo is still your preferred choice, ensure that you do buy a re-sale in the sub-urban areas of Sun Belt regions instead of buying a brand new development near or in the city where prices can be inflated.

My personal tip for buying overseas property

If the local pros are not buying it, you should avoid it as a foreign investor.

There are many types of properties you can choose from, especially in a complex real estate market like USA.  The pros are going to beat you to the best stuff, and you, the busy part-time foreign investor will get the leftovers.

However, with the correct education and knowledge from a credible source, choosing the right property type in complex foreign markets will help you ensure a long-term sustainable investment and build your wealth. As they always say, if you want to score an ‘A’ in Math, you’ll only learn from the ‘A’ math student, and not the ‘C’ student.

By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.

1 Reply to “7 Red Flags to Watch Out for When Buying USA Property”

  1. Gerald,

    Interesting article, there are definitely many misconceptions that I hear on a regular basis from foreign buyers that are looking at Florida real estate to buy. In my market Cape Coral/Fort Myers, FL, I hear buyers tell me they can buy homes for $100 at tax deed sales, that there is 100% financing available for non US residents and other misconceptions. I have found though that most foreign buyers are realistic in terms of buying a second home or investment property.

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