By Gerald Tay (guest contributor)
The success of my overseas property investments in the last three years is due to co-investing with trustworthy foreign partners, whom themselves have decades of property investment experience in that particular country both as a local and investor. I have never bought an overseas investment property from property seminars or exhibitions, simply because I don’t trust salespeople with hard-sell tactics for investment advice. This article is written to educate you how to invest in overseas property safely, especially for those of you keen to invest but would like an independent third party view.
The context is specifically for the USA real estate market which I’m familiar, thanks to three years of education and experience from my USA partners, but I believe these basic pointers should serve a useful guide for other similarly mature real estate markets like Australia, Western Europe or Japan.
Can I really buy a USA or Overseas Property with “No Money Down”?
You have to understand what “no money down” really means. It simply means that the property is 100% leveraged. In other words, the purchaser has borrowed the entire amount, including the down payment, to buy the property. The term “Seller Financing” for example is referred as financing offered by the seller. From experience, seller financing or “no money down” is not the bed of roses most people think, especially for foreign investors. Just because it’s possible does not make it probable.
The type and quality of the property offered by sellers willingly to finance is rarely mentioned. Quality properties in good markets, rarely if ever, have motivated sellers. Unfortunately, many local property ‘gurus’ and exhibitions have made buying USA or other overseas properties with no money down more important than buying a quality property. A property that will make a sound, long-term investment will be a quality property in a good neighbourhood. Even if it’s 100% financed, a bad property is a bad property
What are the different USA properties and how much do they cost?
There are two primary segments favoured by experienced American investors:
Single-Family Homes/Duplex/Triplex/4-plexes: These are similar to Singapore landed properties, but the key difference with property valuation lies in the building structure itself and not the land. Good quality SFH investments in good middle-class markets range between USD$100,000 to USD$180,000 based on the current market.
Condominiums: Typically range between USD$60,000 to USD$100,000 for two to three bedroom unit.
Single-Family Homes are the stuff of which the American Dream is made of. More than any other type of real estate, SFH are always in demand, and are therefore the most liquid. Again, this will depend heavily on the type of property and location of market.
Multi-Family Large Apartments (100 units & above): Depending on market location, the price ranges from as low as USD$500,000 to USD$2 million. (And yes, just for the price of a re-sale HDB flat or condo in Singapore, you can boastfully tell your ignorant friends you’re also a property ‘guru’ owning 100 properties – in ONE building that is!)
Large Commercial Buildings with one or multiple business tenants: The tenants are generally small to large-scale businesses. Prices range from USD$1 million onwards depending on the market.
Where should I buy or invest in overseas markets like the USA?
Most novice property investors are told to “invest only within 30 minutes of the city or train station when buying overseas properties like in Singapore.” This advice can be fatal! In high priced markets, this doesn’t make sense especially when mortgage payments are higher than your rental income.
Unlike Singapore, experienced local investors in the USA or other countries, seldom, if ever, invest a property near the city or train station especially in matured real estate markets. Break the 30 minute rule and buy where it makes sense to buy!
The 5 Essential Criteria of a Good Overseas Property Market (Example: USA)
The importance of location can’t be overestimated. What is a good market?
1. Big City
Economic diversity ensures investment stability. Source large cities with multiple employment sources to ensure rental profitability.
2. A Good Rental Market Where the Numbers Work
A good rental market in the USA has properties that will yield a reasonable cash flow. Note the word ‘reasonable’, and not over-promised! Any number that seems overly high should be questioned by any savvy investor.
The rule-of-thumb used by USA investors for good quality Single-Family Home is 1% rental income a month versus the purchase price. So, a USD$100,000 home should rent for USD$1,000 a month.
I believe you can safely apply this rule for most other mature overseas property markets.
3. Not a booming Market
A booming market is NOT where you want to invest, especially for overseas property.
It’s IMPORTANT to buy in a market where prices are only steadily going up, but not one in which prices are escalating rapidly.
I don’t just mean that prices are rising rapidly. Booming also implies a kind of frantic public mind-set, in which buyers feel they must buy right away, before prices rise higher. It also implies inflated prices.
4. Low Median Price
High priced markets in USA such as San Francisco, Los Angeles, New York or even London, Tokyo or Manila may not be good places to buy, especially for residential properties. First, the investment numbers don’t work: rental prices are too low in comparison with the monthly mortgage payments. And second, expensive properties require jumbo loans, which means the down-payment can be as high as 25% in the USA.
A good market in the USA for quality Single-Family Home investments will have median prices of USD$100,000 to USD$180,000.
5. Sun Belt
The Sun Belt is the fastest growing region in the USA. With its warm weather, growing employment and lower housing costs, it is an attractive region for many USA investors. Buying a property in the Sun Belt markets will help ensure that your investment will continue to grow over the long-term.
As foreign investors, AVOID properties that are located in the cold northern regions of USA, namely Michigan, Detroit, Dakota, the Niagara Falls region etc.
Some of the best residential markets in the Sun Belt Region include:
- Phoenix, Arizona
- Orlando, Florida
- Tampa, Florida
- Jacksonville, Florida
- San Antonio, Texas
The Truth about Buying Cheap Overseas Property
Bargain overseas properties such as foreclosures or those with little or no money down, are the classic real estate lure. Go to a couple of local popular property seminars and you will see “Own multiple properties with little or no money down” fever in action. Instant wealth! Overnight Success! Ordinary people can now ‘realise’ their dreams to live the life of the rich by simply owning many properties at just a fraction of what it takes to own one in Singapore. You have to think logically. If you dive into this “can buy cheap” mentality for overseas property, you may find that instead of you plucking, you’re the one who’s getting plucked!
Doesn’t it stand to reason that if there’s really a good deal out there, the savvy locals and professional investors will get to it long before you do as a foreign investor? Of course they will! So what’s left over for you, the busy foreign part-time investor? I can tell you what’s left over: the junk that no one else wants.
You’ve to be careful. It’s too easy for more experienced ‘business’ people to manipulate and sway the ordinary guys on the streets. You think you may have gotten a great overseas property deal. You know what the seller thinks? “What a sucker! I’ve been trying to get this white elephant off my hands for two years!”
The pros are going to beat you to the best stuff and you’ll get the leftovers.
Invest in foreign markets with partners, not salesmen
Invest in unfamiliar markets with foreign partners who understand the game well and are willing to put their money in the deal with you. Use a little common sense and invest only when it makes sense.
Don’t simply invest overseas because you think the grass is greener there or you believe you can buy ‘cheap’ with ‘high’ returns. From my experiences, it’s often the “I know it all” investor who buys on hearsay and takes investment advice from experienced salespeople, and guess who’s getting plucked instead?
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.