Sunday, 16 December 2012

Interest rates: are your investment decisions sending you to an early grave?

On the first Tuesday of every month something happens that gets every property investor and commentator curious.

I am talking about the meeting that the Reserve Bank of Australia (RBA) has every month to talk about all things interest rates. 

It may seem insignificant to change interest rates by 0.25%, but 0.25% means millions of dollars for banks and financial institutions. If property owners are treading that fine line of only just being able to service their loans, then one rate change in the wrong direction could leave them struggling to make ends meet, and a couple rate changes could leave them close to having to sell their home or even facing bankruptcy.

This is why it is so important that people take into consideration the potential consequences of rate changes before they sign up to a new loan. A property loan is a long-term deal. Even with refinancing you could still be locked in for up to three years - and facing 30 potential rate changes in that period.

It's a matter of needing to hope for the best but plan for the worst.

I still remember when I got my first home loan ... the standard variable rate at the time was about 5.80% per annum and with that rate I was comfortable making the repayments, even being able to manage some extra repayments. But before I finally signed off on the contract, I wanted to make sure that changes to the interest rate wouldn’t leave me bankrupt. Having done the sums, I would have still been able to make the repayments if the interest rate rose to 10.00% per annum.

A simple way to check is to add 3.00% to the current standard rate and see if you are still able to make repayments. If you can then you should have no problems servicing the loan.

It’s interesting to note that most financial institutions don’t advise you to carry out this sort of simple, yet very important, check. I was given pre-approval for a loan amount way out of my limit. Add to that a few rate changes in the wrong direction and I would have been on the brink of not being able to service the loan.

In my opinion, this is just pure greed on the part of financial institutions and is plain negligent. A lot of people will take the pre-approval amount and start looking for properties up to this price range, completely unaware of the precarious position they are putting themselves in. Add to this the tendency for Australians (at least in the past) to live way above their means and you have a perfect recipe for disaster.

At the end of the day, however, people still need to take accountability for their own actions and should take a greater interest in their finances. Getting finance is the most powerful tool property investors have in regards to building wealth, but, like most things, it is a double-edged sword. You need to take stock of your current situation and plan for the different circumstances that could arise in the future.

I have watched my parents worry about bills as they come in and get stressed at the increases to grocery prices. One of the things that they did do right was to pay off their home loan as fast as they could. Couple that with a large deposit and they didn’t need to wait for RBA’s monthly interest rate announcement with sweaty palms.

It is this mentality that I have emulated. When I see the interest rates change, I know my large buffer will keep me going before things get tight. As I increase my investment property portfolio, I make sure that I use these ideals in every investment decision. The last thing that I want is to be watching the news once a month, praying that the RBA does not increase interest rates, knowing that if they do, it would lead to financial catastrophe.

Investing is about growing wealth, not about growing stress.

Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Saturday, 20 October 2012

Does US Tax Make Sense?

Realising that we are going to have to start filing a US tax return at the end of the year (the US financial year runs from January to December), I started to look into how the tax system works and what forms we need to fill.

I have not figured out all the complexities of their system but I believe we are going to change the classification on our LLC so that it is classed as a corporationn(C Corp) for tax purposes.

I remember seeing C Corp and S Corp when we were first setting up the LLC, but did not know the repercussions of each class, so we ended up going for the default partnership arrangement. Unfortunately, if we leave it as this, it means that both us will need to apply for an ITIN and file individual tax returns. Essentially each tax return will declare 50% of the income and deductions and you also have to file a tax return for the LLC.

While I was looking at the rate of tax paid in the US system, it made me realise that the way Australian tax is done is a lot simpler and seems to make a lot more sense. What I mean by this is the amount of tax paid is linear, as you earn more, you pay more tax. Whereas, in the US system, it is has big steps between the brackets. I will show you what I mean:

10% on taxable income from to $8,700, plus

15% on taxable income over $8,700 to $35,350, plus

25% on taxable income over $35,350 to $85,650, plus

28% on taxable income over $85,650 to $178,650, plus

33% on taxable income over $178,650 to $388,350, plus

35% on taxable income over $388,350

You can see that there is no tax free threshold like there is in Australia (currently $16,000), and there is no marginal rate for amounts over a certain amount. What does this mean? Let's look at the following situation:

Person A earns $35,300 in annual income - pays a rate of 15% tax, so net income becomes $30,005

Person B earns $35,400 in annual income - pays a rate of 25% tax, so net income becomes $26,550

It is amazing isn't it, Person B earns more income, yet because of how the US tax system is setup, it forces him to be taxed more and end up with a lower net income! It really does not make sense. I am tempted to ask my US accountant if this is true. It would make me want to ask my boss for a "de-raise" if I was close to one of the brackets or look at what tax deductions I could claim to lower my taxable income. What do you think?

Saturday, 22 September 2012

The Myth of Negative Gearing

I remember when I was younger, asking my mum what Negative Gearing was. I had seen it advertised everywhere, from free seminars on television to articles in magazines and newspapers, it seemed to be the buzz phrase of the day. My mum explained that negative gearing was when you buy a house and rent it out to a family and let the rent pay for the mortgage. I guess she kept it simplified because I was not even a teenager at that stage but even still, it sounded like a good idea to me, you basically get a house for free! So what could possibly go wrong?
A few years later, when I really started to look into investing, I began to see the “negative” part of negative gearing. I guess the answer was always in the name, if something is called negative, then it is never going to be a good thing, right?
So, what is negative gearing? Put simply, negative gearing is purchasing a property as an investment, where the money coming in (rent) does not cover the money coming out (loan repayments, maintenance, agent's fees etc.) and you are forced to use your own income to cover the difference.
But so many people have made so much money out of negative gearing, "how can it be a bad thing?" I hear you ask. Well to make money out of a negatively geared property, the value of the property needs to rise consistently over the medium to long term of the loan. Back when negative gearing was really popular, this was the case but in the not-so-flash property market of today, you need to give things a second and third look before jumping in. In a rapidly rising market like Australia had during the 2000s, it was next to impossible to lose money investing in property. In the end, all these people who invested in negatively geared property were able to still make money despite an unsustainable investment strategy.
So, what makes it so unsustainable? Well it is a fact that the majority of property investors own 2 or less properties, I cannot remember the exact percentage, but I believe it is something like 90% of property investors 'only' own 1 or 2 properties. The reason for this is simple, the majority of properties are negatively geared; they cannot afford to hold any more. 

As an example, let’s say you have $1,000 extra cash flow a month. Because a negatively geared property is taking money out of your pocket, assume it costs you $500 per month to maintain the loan (cover the difference between the rent and the loan repayments). Already you can see that you are only able to cover 2 properties, as after that, you are out of extra cash flow.
So why do people negatively gear into property? Well again, the answer is simple. They have to. They want to invest in property because according to a lot of people, it is a great way to invest, just about risk free, just about a guarantee to make a return and the saying “safe as houses” does come from somewhere after all. 

As it stands now, if you want to invest in property as part of your portfolio, you will see that almost all of the available properties are negatively geared. This is mainly due to the extremely high house prices in Australia, particularly in the major cities. House prices rose dramatically over recent times, and the increase in rent simply did not keep up. I remember when I was renting back in 2009; we paid $550.00 per week for a 3 bedroom house in Sydney. Looking at comparative sales nearby, the house would have been easily worth about $800,000. Assuming an interest rate of 7.00% per annum, that gives a weekly interest repayment of $1,076.00. Repayments at this level don't even begin to "eat" away at the principal amount as the rent is nowhere near the amount needed to service the loan. This is the situation across most of Australia, rent prices just do not come close to the loan repayments and all the properties have to be negatively geared.
Another reason that people invest in negatively geared property is to reduce their tax bill. People are under the illusion that they can end out better off because they're paying less in tax. Of course it is true that you can claim expenses on the house on your tax return, but this is offset by the money out
of your pocket to service the loan, so you still end up out of pocket. Let me show you an example:

Your initial taxable income is $150,000 per year

Tax rate of 45%

Rent collected of $600 per week

Interest repayments of $1,100 per week

Other deductions of $5,000 per year (property maintenance, fees etc)
Option 1 – Not investing in property
Taxable Income = $150,000

Tax Paid = $150,000 - [$150,000 x (1 – 0.45)] 
               = $67,500 (approximately)

Net Income = $150,000 - $67,500
                   = $82,500
Option 2 – Investing in property
Taxable Income = $150,000 + $600 x 52 - $1,100 x 52 - $5,000
                         = $119,000
Tax Paid = $53,550
Net Income = $119,000 - $53,550 
                   = $65,450
So as you can see, your net income is almost $20,000 less in this example, so just to break even with a negatively geared property, you need to ensure there is at least $20,000 in capital gains over the course of a year. Now as I said earlier, when the property market was going well, this was fine, but without the large rises, negative geared property should be heavily scrutinised before committing to buy.

Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Tuesday, 18 September 2012

The End Of Our First Tenant

We got the news the other day that our tenant at our first US property has left. They had signed a 12 month lease, and yet they have vacated the property after little over 3 months.

According to our property manager, the husband's grandmother had fallen sick, and the family moved to a different state to be by her side and help her out. It is unfortunate for us because not only have we lost our tenant that had so far been quite good to us, they also left in such a hurry, that the property was left with a lot of rubbish and a lot of cleaning required. I was hoping to be able to get some photos of the state the property was left in, because one person's definition of trashed could be another person's definition of perfectly acceptable.

Regardless of the condition of the property, we have had cleaners go in and fix up the property, and it is back on the market and hopefully we will be able to find a new tenant in the coming weeks. The tenant did pay a bond of one month's rent, so this should more than cover the cleaning bill required, but there are still other costs that leave us out of pocket.

Firstly, the tenant had not paid rent for the month of September, and they had left halfway through, so we are out of pocket a couple weeks' rent there. Also, the property management we have, charge a fee of one month's rent for finding a new tenant.

Sometimes there is a benefit of a tenant leaving in that you can justify in raising the rent for the next tenant, which can sometimes be a little difficult with an existing tenant. But unfortunately, in this situation, the market has not really moved significantly enough and it looks like we will have to stick with aiming to get a tenant in there paying $700 per month.

So at the end of the day, this is the the end of our first tenant, I am sure it could have gone a lot worse but also it could have gone a lot better. Hopefully our next one will be able to stay on to at least fulfil the end of the lease they sign on for.

Friday, 7 September 2012

Tips and Tricks to Help You Get Ahead of the Pack

Property investing should be fun. It’s by no means an easy task but making money should at least be enjoyable. To help ease some of your stresses, we here at Streamline Investing have come up with a few key tips and tricks that will put you in front of the pack.

Time is Money – no matter if you are planning on renovating, investing for a high rental yield or purely purchasing a property as your primary place of residence, time is money. Over-runs can cost you thousands of dollars. Delays in finding a tenant or commencement of renovation work can severely eat into your profit. You must be ready then to start doing what is required immediately after settlement takes place.
To assist with this, it is always good practice to put a clause in the contract which provides that the seller will give you access to the property before settlement at reasonable times and upon reasonable notice. A suggested clause could be the following:

"The seller will allow the buyer or the buyer's trades people and manufacturers access to the property, at reasonable times and upon giving reasonable notice to the seller in writing before settlement, to allow the buyer and its trades people and manufacturers to take measurements and obtain quotes for the cost of carrying out work for the buyers following settlement."

A clause such as this will allow you to progress with your plans for your new property without delay, while maximise any potential profits.

Another reason to agree on a long settlement period is to reduce the time it takes you to find a tenant. If you can agree with the seller to show people through the place during the settlement period, it can mean you gain an extra 4-8 weeks’ worth of rental payments. This is something that is easily forgotten during the purchasing phase.

Conditional Clauses – These can be double-edged swords and must be used with caution. I’ve heard of dodgy buyers adding “subject to building inspection” clauses in their contracts and subsequently asking the seller to agree on a lower price due to a negative building inspection. This is fine when it’s true but if you use this as a way of bargaining down, it won’t be long before the seller catches on. You don’t need an upset seller, especially if you’re also trying to get a long settlement or have the seller rent the property back from you. The key message here is to be honest and not to try and ‘pull the wool over the seller’s eyes’. Adding ‘subject to property inspection or valuation’ clauses can be a good strategy as long as you use them the right way.

Buying Off the Plan – This one is simple. Don’t do it. There are numerous reasons (and cases supporting those reasons) as to why buying off the plan is a bad idea. Over-stated prices, dodgy contract conditions and simply not knowing what the workmanship is going to be like are only some of the negatives. I really can’t see too many positives in this kind of purchase so my only advice is to not buy off the plan.


Disclaimer: By viewing and using this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Monday, 27 August 2012

The Evil Insurer - Tips and Tricks to Help You Come Out on Top

Insurance is an evil industry. It never ceases to amaze me when yet another insurance policy is invented to protect the unsuspecting public from ridiculous events that are extremely unlikely to occur. I know this sounds pretty negative but when you ask just about anybody who has had to deal with an insurance company, they will be just as cynical as I am. Now I’m not saying to abandon all of your insurance policies, as some are warranted and can protect you from horrible, unforseen events, what I’m saying is, you need to do a hell of a lot of research before signing up. Before I get started, let me just tell you what the number 1 thing that you ALWAYS need to ask before considering a new insurance policy, “What’s not included?”.

This is something that is almost always overlooked by people seeking an insurance cover. Insurers produce exhaustive lists of what is covered but rarely, if ever, list what is not included. This just means that unless your loss occurs due to one of the items on the list, you are not covered at all. Your cover is always more inclusive when the insurer produces a list of what’s not covered in your policy.

Below are some more common traps:

Under insurance – there is a clause in most modern policies which states “This type of clause requires you to bear a proportion of each loss or claim if the sum insured is inadequate to cover the full potential loss. In effect, you are taken to have self-insured a proportion of the risk, because you have not insured the full value of the risk.”

So, for example, you bought a house for $300,000 ten years ago and insured it for its replacement value at the time ($300,000). Fast forward to today, property prices have risen, you’ve done some upgrades on the property but have left the insured amount at the same level due to laziness or being comfortable in knowing that you’ll at least get $300,000 should something unforseen happens.

In a horrible turn of events, your house is burned down. You go to your insurer and make a claim for the $300,000, although your house is now worth $500,000. The above clause means that your maximum claim will be:

$300,000/$500,000 x $300,000 = $180,000

In summary, you should review your insurance cover every couple of years but make sure that you don’t over-insure as this won’t provide you with any extra cover. It’ll just mean you pay higher premiums for no good reason.

Insure ASAP – When you enter into a contract for the purchase of a property, you’re instantly liable for the property. To avoid entering into a hasty, long-term insurance contract, you can take out interim insurance with most insurers. If for some reason you can’t take out an insurance policy upon signing the contract, you can put a clause in the contract that will pass all liability to the seller until settlement. I would suggest contacting a solicitor to get the correct wording of such a clause.

Two Policies – A common question by a seller usually arises when a contract is signed. “Should I now cancel my policy as the buyer is now responsible for the property?” The answer is no. You never know what kind of policy a buyer has taken out and whether or not everything has been disclosed. If something goes wrong and the buyer’s insurer cancels the policy, your property is in effect not insured at all.


Disclaimer: By viewing and using this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Saturday, 25 August 2012

How to Choose the Right Property Manager

So, you’ve just purchased your property. You’re over the moon that you’ve finally made the leap into the property market and can now start reaping the rewards. Well, unfortunately the hard work is not over. The number one, most critical decision outside of when to buy and sell a property is choosing a suitable property manager.
A property manager’s role is broad and can cover anything from choosing a tenant, collecting rent, carrying out repairs, and providing sensible advice on management decisions. A good property manager will do this and more, covering all of the little, but very important things as well. These should include, but are not limited to:

  • Find prospective tenants
  • Check a potential tenant’s criminal record
  • Prepare the lease documentation
  • Advertising
  • Maintenance
  • Take initiative with undertaking repairs under a nominated dollar value
  • Organise bond documentation
  • Pay authorised account and statutory charges
  • Undertake regular property inspections and provide good feedback back to the landlord
  • Check a potential tenant’s credit history
  • Give you up to date advice on rentals and the property market
  • Administer rent reviews
  • Pass on the rent payments to you promptly
  • Provide regular statements
  • Handle arrears
So, how do you choose a good property manager? There are a number of ways that good property managers can be found. It’s rare that the best one for you will be the buyer’s agent. It’s much more common to find good property managers through word of mouth, looking through investment forums etc. Here are some tips for finding a good property manager:

  • Always contact the property manager’s current and previous clients to get a bit of perspective on his or her character
  • Have a clear contract set up with your property manager which outlines all the services that will be provided
  • Generally, try and steer clear of really cheap property managers as it’s likely the services will be of a much lower quality and will end up costing you more money in the long-run
  • Try and gauge the reputation of the company that the property manager works for by looking on the internet and contacting other professionals in the industry
  • Find a property manager that specialised in the types of properties that you are planning on buying

Here are some other articles that you might be interested in:

American Real Estate Listing System

If you have any questions or comments feel free to email us at

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.


Sunday, 12 August 2012

How to Find a Buyer's Agent

Finding a good buyer's agent and property manager can be the difference between having a very successful and prosperous investing experience, compared to having a horror one.

A buyer's agent will be your point of contact when purchasing a property in the US, they will put offers in on your behalf and also keep a lookout for properties that you might be interested in. Because we are purchasing a property on the other side of the world, in an area we have not even visited before, let alone researched significantly, it means we are putting a lot of trust into the buyer's agent to find us a property that suits us, and give us an honest price guide on the property. Because an agent works on commission, i.e. they make money by selling houses, it can be easy to believe that an agent does not have your best interest at heart and they simply just want to make the sale and collect their cheque.

Of course in my opinion I believe the agent should do everything they can to be honest and trustworthy to the seller, especially in our case. For our first property, we were simply trying it out to see if investing in the US worked well for us, if it did, then there is no reason why we would not be investing significantly more into the US property market. So by being dishonest and collecting a smaller commission, they are potentially missing out on building a solid relationship with us which will benefit both of us financially in the long term. We were lucky that the buyer's agent we ended up going with was on the same line of thought with regards to this. She is initially from Australia, and now lives in Fort Myers, Florida, so being initially from Australia, she is able to better understand our concerns with regards to investing overseas, and is also able to decipher the jargon that is sometimes used in the US and relate it back to Australian terms that we understand better.

While we were looking at houses to purchase, we would have contacted probably around a dozen buyer's agents in the Lee County area, and just about all of them were very responsive and seemed very eager to help us with regards to purchase a property, but I guess we just did not feel as comfortable as we did with the buyer's agent that we ended up going with. It is important to note that the system in the US is different to Australia with regards to buying a property. A property is not simply listed with a single real estate agency and sold through them; it is listed on a database, and gives all real estate agents the ability to see all the properties on the market, so it is not like you are missing out on a good property by going with one particular agent. That being said, we were talking with one agent, who claimed she had information on properties that were about to go on to the market, and what price they were looking at. This way, you could put an offer on it instantly as it went on, and get it before everyone else saw it. I have a feeling this was not quite ethical and perhaps even illegal; anyway we did not feel comfortable working with this person.

Building trust with your buyer's agent is another very important aspect of the process of purchasing a US property. You are not going to feel comfortable sending over $50,000 (or more) of your hard earned money into the US if you are not confident you are getting value for money. You want to make sure you are purchasing a good quality house and not getting something that is just going to continue to drain your money. The main way we were able to build trust with our agent was just by constant communication with her, and by continuously asking her questions just to make sure she knows what she is talking about. Another good idea would be to talk to other people who your agent is currently working with, we did not do this as we believed to be confident enough with her to not need to do this.

The process we used to find a house for us was fairly simple, our agent set us up to receive notifications of new houses that met a criteria on the database of properties. Basically all the houses for sale are listed on the database, and by entering certain criteria to find a house you are looking for, such as price, size, location etc. You are sent a list of all the current houses that match your criteria. When we got the list, normally there would be about 40 new houses or so a week, we just sent our agent a list, normally of about 10 or so properties that we thought looked good on the photos. Our agent with local information and being able to see the properties for a property inspection would then review the properties and provide her own opinion. One of the reasons we were comfortable with our agent was that she would reject 90% of the properties we suggested, which lead us to believe that she was not simply in it for the commission, and that she was looking out for our best interests. Our agent would also look at houses herself and send us (and her other customers) a list of all the properties with her review of them.

The last aspect that made us comfortable with investing with this agent, was that she too is a property investor in the area, and quite often with the properties she saw as good value, she would say that we should put an offer on the property, and if we didn't then she would put an offer on the place herself. So if an experienced investor sees a property as a good investment, then it is a good sign that it would be a good place to put our money.

So as you can see finding a good buyer's agent is very important, they are your representative on the ground and you need to work together to make this successful. At the end of the day, you need to find a good, honest, genuine and trustworthy agent that you feel comfortable working with; otherwise the process will just never work out.

If you would like more information and the contact details of our property manager, or have any other questions you wish to ask us, feel free to email us at





How to Acquire an EIN

An EIN (Employer Identification Number) is essentially the equivalent of an ABN (Australian Business Number) in Australia. Basically it just allows our LLC to be recognised with the IRS in America. Because we used an LLC to purchase a property, it meant we required an EIN. If we had purchased as an individual, we would either require a SSN (Social Security Number), which is not possible as neither of us are American citizens, so we would have required an ITIN (Individual Tax Identification Number). I remember reading initially that to obtain an EIN; it was required of at least one member of the LLC to obtain an ITIN first. I can tell you now that this is not true, as we were able to acquire an EIN with neither of us having an ITIN.

To obtain an EIN, we used the same company that we set up our LLC with, INCORP. Dealing with Incorp allows you to be assigned your personal company representative, who we were able to contact to help us get out EIN. When setting up an LLC with Incorp, you can opt for a package deal where you set up the LLC and get an EIN, but we thought we could set up the EIN ourselves and thought we would try and save some money. We were told by our personal representative from Incorp that if we had an SSN or ITIN, then we should be able to get an EIN within 24 hours of applying, but due to not having either of these numbers; the process would take a lot longer. In the end it took about 3 weeks before we were assigned an EIN. The cost to us was $69 (US Dollars) by going through Incorp. As I said before, it is possible to obtain the EIN by doing it yourself and free.

You are also able to apply for an EIN online, similar to obtaining an ABN, but again, without an SSN or ITIN you are unable to use this service, and have to follow one of the other methods on this website - How to Apply for an EIN. Essentially you are required to fill out Form SS-4 and submit it to the IRS.

So overall acquiring an EIN for us was not very involved as we simply went through a company, but if you are doing it yourself you may find it slightly more challenging, unless of course you have an ITIN or SSN, then applying online should be relatively easy.

If you have any questions then feel free to email us at

Placing an Offer

When we first started looking at properties in the US, our first reaction was of amazement, simply due to the amount of properties that were for sale. Not only just by the sheer bulk of properties, but the amount of properties available under $50,000. Even though we had narrowed our search down to Lee County area in Florida, which includes Fort Myers, Lehigh Acres and Cape Coral, there were still hundreds of properties listed for sale.

Looking at information on Lee County, the population is approximately 620,000. Yet there is more houses for sale in this area than there is in the whole of Sydney, which has a population closer to 4,000,000. I guess when we saw data like this, it just shows the crisis the area was in.

So our initial thoughts would be that finding a property would not be a problem at all, there almost seems like there is an unlimited supply of houses, so when we are ready we can simply go in, put an offer in, get accepted and be done with the search and start investing. I think I was also falsely optimistic when I purchased my first house in Sydney. I only really looked for a couple weekends, went to approximately 6 open inspections of houses, submitted one offer and it was accepted. So I started to think that there was nothing stressful at all about trying to find a house.

Once we started to dig a little deeper in the Lee County houses, we soon found why there were so many houses listed for sale, basically 90% of them were just not worth the money, even for $50,000 they were just dead investments, either they had Chinese dry wall issues all throughout, or they were trashed inside by the previous owners leaving the property needing tens of thousands of remedial works. Quite often houses had termite damage, or simply the properties were just too far away for anyone to want to live there. A lot of the properties were also in undesirable areas, such as areas with a strong gang presence, typically Mexican gangs in this area.

So here we are now, looking at hundreds and hundreds of houses, where only 10% are of any good, still sound like there is not much of a problem. With discussion between the property manager and ourselves, we can find out if a house is worth it or not. Unfortunately, as I have discussed in a different post, there is a difficulty with communicating with our property manager in Florida, with the time zones making it very hard to have an effective and efficient talk. These delays meant that the properties we saw that met our desired criteria had just about always been sold before we had the chance of putting an offer in. The good properties seem to get snapped up very quickly, normally within hours of being put up for listing, seems professional investors keep a very close eye on new listings, and are ready to act fast. It made it very hard to compete with people like this, I imagine it would have been a lot easier if we had been in Florida in person and been able to work physically together with our property manager when trying to find a property.

As you can see, with things going very fast, it is important that you have everything ready when you start placing offers on houses, this turned out to be quite annoying for us, as we had $40,000 sitting in our Interactive Brokers account, in US Dollars, waiting to be used to buy a house. This would have been fine, except we initially put the money into the account in December 2011, we did not end up purchasing a property late April 2012, so there was effectively 5 months of money doing nothing for us. This money was taken out of my home loan offset account, which meant I was forced to pay extra interest. At a 7% interest rate, this equated to an extra $1,200 or so, a significant amount.

So although we did not end up getting a property until April 2012, we did start putting offers in on properties from December 2011, at first we were very hesitant and thorough, making sure we read through all the offer documents and making sure we understood everything, over time we were able to trust our property manager more and in the end we almost signed the offer papers without even reading them. There is a cooling out period in the offers, typically 10 days, so we were able to withdraw the offers if they were accepted, and we had a better chance to be able to look through the property.

At the start, we also only made sure we had one offer in at any one time, if we submitted offers on more than one property, if they were both accepted, we would be responsible to purchase the properties, well actually I guess we could cancel one of them during the cooling off period, but it was still dangerous to offer on more than one property just in case. But soon we found that the waiting time between submitting an offer and being notified if you were successful or not, was weeks, so it was just wasting our time. So we ended up quite often having offers on up to 5 properties concurrently. We also found that short sales tended to be even slower, and would quite often sit with the banks for months before they accepted or rejected the offer.

In the end the property we purchased ended up being a short sale. I cannot remember the exact timeline of how everything went, but from memory it was something like this -

January 5th 2012 - Initial offer submitted at $42,900
January 10th 2012 - Offer accepted by owner of the house
January 20th 2012 - Bank counteroffers with $44,000
January 31st 2012 - We re-offer the asking price of $44,000
March 10th 2012 - Bank reject our offer for the property
March 25th 2012 - Bank changes decision and says offer is back on the table
April 3rd 2012 - Bank accepts offer for $44,000
April 28th 2012 - Money transferred into title account, house is officially ours!

As you can see from the above, there were a couple of months between initial submission of the offer, and the final purchase of the property. Being a short sale, the bank seems to slow down the process to a snail's pace. Which to be honest I do not understand, you would think a bank is trying to get as much money as they can, and although they are accepting a loss on the property as the sale price would not match the existing loan, it is still better than holding on to the property.

Anyway, in summary, I believe we submitted offers on about 20 properties, and approximately 16 of those were rejected by the owner or the bank, 3 or so would have been withdrawn by us due to issues found during a more stringent inspection, and lucky last was accepted and is now officially ours. 

If you have any questions, please feel free to email us at

Why we chose Fort Myers

Where to invest in USA

When we first started looking at investing in the US, there seemed to be almost unlimited amounts of opportunities. The opportunities were not limited to a specific area; they were literally all over the country. We would read stories about one investor who made money flipping properties in Las Vegas, another who purchased unit blocks in Detroit, others who invested in Atlanta, etc. Basically it seemed like we could find good properties in a number of places, all of which had advantages and disadvantages. At the end of the day, when we finally picked a place, we made it based on a hunch, I believe that you could invest in a number of areas and be successful, but by selecting Florida as a state, it at least meant one decision was finished and we could focus on the next steps.

So why did we choose Florida?
As I said before, we really only chose Florida as a necessity to make a decision, where the result of the decision was not that important, but it was essential that a decision was made. One of the reasons we chose Florida is that the properties there seemed to experience the biggest gain in value during the real estate boom, and subsequently experienced just about the biggest loss since the bust. For example, the property we purchased for $44,000 in 2012 was sold for $133,000 in 2007 and $110,000 in 2004. So although the value of the house in 2007 was undoubtedly too high for what it is worth, we believe the house is still worth significantly more what we paid for it. And this was a similar situation all across the state, where property values had dropped by upwards of 75% of its value from just a couple of years ago. So expectation of capital gains was a big factor for us, if the value of our property reaches half of what it was in 2007, then that is a 50% capital gain of what we paid for it.

Another factor for us was the properties in Florida seemed to be relatively newer compared to other places we were looking. One option for us was Rochester in New York State, where many properties had very high rental yields, but it was very common for the properties to be nearly 100 years old, and although maintained all those years, still showing significant signs of wear and tear. Whereas in Florida, and typically in the Fort Myers area, there were thousands of houses that were built during the boom, which are now for sale, so there was a good opportunity to get a house that is less than 10 years old and still in as new condition. Actually there were several properties that had never been lived in before. However it should be noted that there are many instances of defective drywall in newer properties called "Chinese Drywall" which should be avoided at all costs. So age of property was a big factor for us, although in the end, we ended up purchasing a house that was built in 1966, so one of the factors that drew us to Florida, we did not really adhere to in the end.

We also knew that tourism is a big industry for Florida, and since there will almost always be tourists of some nature, there would always be associated business that would aid in the economy of the local area. So while several areas seemed to have dying industry (Detroit being a big one), we believed Florida to at least be able to maintain the tourism industry. Part of the tourism aspect is the fact that Florida is a popular retirement area of the US, with a lot of senior citizens looking to escape the cold northern states and into the tropical Florida climate, with an ageing population, we believed that in the future, Florida's population would only increase and there will always be some demand to live in this area.

There are many other positive aspects, and it should be noted there are also a lot of other negative aspects with Florida compared to other areas in the US. I have not been able to go into them, but above I have outlined our main reasons for investing in Florida, at the end of the day, choosing an area to invest in, when there is so much choice, is just a personal preference and you need to make a decision that you are comfortable with.

Why do we choose Fort Myers?
Again narrowing down a state to a certain area was no easy task, there seemed to almost be unlimited areas where we could obtain the results we wanted. One of the biggest factors was that we knew a fellow successful property investor, Steve McKnight, was investing in the area. Being a very successful and astute investor, we believed that he would have put careful consideration in selecting an area to invest in, so in a way we took that as a reason that it would be a good area to invest in. In a similar way, if you see McDonalds is building a new restaurant somewhere, then it is typically a good place to invest in property too, as the people at McDonalds would have put significant effort in choosing a location, and it is not common that they get these things wrong.

Another factor in choosing a specific area was we found a property manager we really trusted and wanted to work with. Our agent is originally from Australia but now works out of Florida, so she understands our position and knows the issues that we will run into before we experience them ourselves. So as I have said before, rather than finding an agent in a place, sometimes it can be effective to just find an agent and invest in where they operate, as a good agent is worth their weight in gold at the end of the day.

So these are the reasons why we selected the area we ended up investing in, like I said at the start, there seems to be an opportunity everywhere. So it is not always important what decision you make, just as long as you make the decision. If you want any more information on how we came to select our location, or anything else you wish to ask us, feel free to email us at

Set up an LLC (Limited Liability Company)

Once we decided that we wanted to invest in US Property, the first step we made was to set up an LLC. If you would like a description of what an LLC is then please see this LINK.

There are many different entities that you can create to purchase a property in the US, and there is nothing stopping you buying a property in your own name. There are advantages and disadvantages with every entity, however we believed an LLC suited our purpose for the following reasons:

We needed to create a separate entity to purchase the property to protect us from litigation. The last thing we wanted was to purchase a US property, only to have a tenant slip and fall and then sue us for our own personal assets. An LLC means that the only assets that can be taken in the event of a lawsuit is what the LLC owns, in this case, the property we purchase. Of course this means that we could technically lose our property in the event of severe negligence on our behalf, but it would be better than losing my personal property in Australia as well.

An LLC allows one entity to be set up to represent the two of us, because we are not investing individually, this allows a simpler transition to purchase the property, instead of having two names on everything, there is just the company name.

Setting up an LLC is relatively cheap, in all, the total cost to set up the LLC was $350, see below for a breakdown of the costs.

Overall the LLC entity is simpler and has much less paperwork compared to other entity types.
So now that we had decided to start the LLC, the next steps we had were to determine how we would set it up. You are able to set up the LLC yourself by filing forms with the IRS, I will be honest and I am not sure which forms you require as we did not do it ourselves. However to make the process easier for us, we decided to use the help of a US company to start up our LLC.

The company we used was Incorp, which specialises in the set up of LLCs. They also provide Registered Agent services for a relatively low price. It is compulsory that an LLC has a registered agent in the state that you register the LLC in. It is just to ensure that there is some address the IRS can find if they need to. The registered agent can be anyone provided they are not members of the LLC.
The following is a breakdown of the costs to set up an LLC in Florida:

Incorporation Fees - $150.00 (compulsory)
Service Fee - $99.00 (Incorp service fee)
Compliance Service - $49.00 (for 1 Year - optional)
Certificate of Good Standing - $35.00 (compulsory $5 fee with $30 service fee - optional)
2 Day Shipping - $18.00 (overnight shipping is $24)

The registered agent was free for the first year, and $99.00 every year after that. However I believe you can purchase 3 years at a discounted price of $270.00 approximately.

So the total cost to start up the LLC for us was approximately $350.00. Looking online, the typical fee you would be looking at would be between $500.00 and $1000.00 to set up the LLC if you went with a solicitor or similar, so I believe by using Incorp we were able to save some money. It should also be noted that although they are cheaper, I do not believe the people at Incorp were any less knowledgeable. When we submitted our application, we were assigned a personal salesperson, who helped us every step of the way with the LLC set up. As we did not fill out the forms correctly the first time, the salesperson was able to help us ensure the forms were filled out correctly. Overall I would highly recommend Incorp for their services, they allow establishment in all states of the US, and respond quickly to all queries you many have.

Step by Step Guide to Buying in the US

Below is a list of the steps we took to acquire our property in the US. I am not saying it is the best example of how to do things, and most likely not the most streamlined approach, but it worked for us so I do not know why it would not work for anyone else.

Step 1 - Choose an Area
There appears to be opportunities all over the US at the moment, and if you read around, there seems to be dozens of people who are promoting every area. It can be a big decision to make when you choose what area to invest in. However I believe that if you just make a decision, then you will see that there is an opportunity wherever you choose to invest. Also when I say by area, I believe if you first narrow it down to the State you wish to invest in, then it will help a lot of your problems down the line. We ended up settling on Florida for our State to invest in, although we ended up investing in the Fort Myers area, we did not narrow our search upon later in process. For more information on why we chose to invest in Florida, please see this ARTICLE.

Step 2 - Set up an LLC (Limited Liability Company)
This is the main reason why I feel it is important to pick a state you want to invest in first, because an LLC is registered by the state. And I believe if you set up an LLC in a different state to where you purchase then it can become fairly difficult, however I have no experience with this as our LLC was set up in Florida and we purchased in Florida so it was a fairly smooth transition. For more information on setting up an LLC, then please read this ARTICLE which outlines the steps we took to set up our LLC and any recommendations we had.

Step 3 - Acquire an EIN (Employer Identification Number)
Our next step was to acquire an EIN for the LLC, this number is basically a tax number for the IRS (Internal Revenue Service), so pretty much the equivalent of an ACN for the ATO in Australia. I have been told by others that one of the members of the LLC need to have either an ITIN (Individual Tax Identification Number) or a SSN (Social Security Number), however please note that neither me or my business partner have an ITIN or SSN and yet we were able to acquire an EIN for our LLC. For more information on acquiring an EIN, please see this ARTICLE.

Step 4 - Find a Specific Area
Once you have everything set up, you need to narrow down your search to find a specific area you want to invest in. Ideally you want to narrow your search down to a county, which normally encompasses a city and surrounding areas, or maybe a couple smaller towns. We ended up settling on Lee County, I am not sure why exactly, but we saw a lot of good opportunities in the city with low house pricing, and decent rental returns. Please see this ARTICLE which explains why we came up with investing in Lee County and some information on the area.

Step 5 - Find a Property Agent
This is probably the most important step we had facing investing in the US. As neither of us had ever been to the US, and had no intentions of travelling there due to work restraints, we had to make sure we would find a property agent that we could trust. This can almost decide what area you want to invest in, if you have a good agent then you will most likely be swayed to invest where they work. Alternatively if you have a great area, but cannot find an agent that want to work with, then you will most likely end up taking your money elsewhere. We talked to approximately a dozen agents, and although none of them were outright criminal, most of them we just did not trust. Since they were all born and raised in the US, they just did not seem to understand the concerns we had as an Australian investor. In the end we ended up choosing a property agent who is originally from Australia and invests in the Fort Myers area herself. For our advice on how to find a property agent and our experiences, please read this ARTICLE.

Step 6 - Get money ready
This might sound obvious, but when dealing with things across the other side of the world, transferring money can end up taking longer than expected. There may be delays with depositing money, converting into US Dollars, or sometimes your withdraw limit may be lower than you thought. All these things happened to us and affected our ability to purchase our property. To convert the money from Australian dollars into US Dollars, we used an online broker company called Interactive Brokers. Using Interactive Brokers we were able to deposit money from our Australian accounts, however the maximum limit we were able to do from our accounts was $15,000 at a time, so it took several different deposits to ensure we had enough money into the account. As you can see this took longer than we expected, lucky we had the money ready before we had a property lined up. Converting the money into US Dollars was relatively straight forward and we actually got a great rate using Interactive Brokers. With the money sitting in the Interactive Broker account ready to be placed into the Escrow account, it made the last step to purchasing the house run a whole lot smoother.

Step 7 - Find a Property
This could possibly be the most stressful step in the whole process. It is not that different to finding an investment property in Australia, the only difference was that we had no idea about the area, seeing as we had never visited there before. So this meant we were completely relying on our property agent's recommendation for our property. This meant there was a significant amount of trust we had in her hands, this is why it is so important to find a great property agent. One of the things that let us gain our trust in our property management was that not only did she invest in the area herself, she also rejected probably 90% of the properties we suggested to her. This showed us that she clearly was not just after our commissions and that she wanted to help us out. With new properties becoming available daily, it is only a matter of time before a property you want comes onto the market, unfortunately a property that you want, is typically a property any investor wants. This means that a good property goes fast, and when I say fast, I mean it can be gone within hours. I believe a lot of this is because the seller's agent has their own contacts for the property, and they tell the contact before the property becomes officially listed, so as soon as it is put on the site, it is effectively already sold. Persistence is the key, keep searching and eventually a property that suits your investment needs will be there for the taking. 

Step 8 - Place an Offer
Once you have found a property you like, same as Australia, get your property agent to submit an offer on your behalf. This does not have to be the advertised price of the property, with your property agent try and submit an offer that reflects the true value of the property. A lot of the time we found that the advertised price was purposely low to get more people interested, and in the end it turned into a bidding war driving the price up to almost double of the listing price. Other times, the advertised price was higher than the selling price. Essentially, the listing price does not reflect the true value of the property, so make sure the offer you submit reflects the true value of the property (or at least as best as you know). If you would like to hear more about our success rate regarding placing offers, and also about the short sale process, please read this ARTICLE.

Step 9 - Organise Inspections
Your offer has been accepted by the seller/bank so now the time has come to perform your inspections to make sure the building is structurally sound. The last thing you want to find is the house is constructed with defective dry wall, or significant termite damage. Luckily there is typically a 5 day inspection period you can use to carry out inspections and withdraw without losing anything more than the couple hundred dollars spent on the inspections. We were lucky that our property manager's partner is a professional builder and is able to carry out these inspections for us free of charge. Assuming everything goes well then you are up to the final step in the process of acquiring a property.

Step 10 - Celebrate!
This is the final step, you have acquired your property, and although this may seem like the end of a long process, it really is the start. You have now spent all your money, now it is time to make that money back. Our next step was to perform some rehabilitation on the property, approximately $5,000 worth, but this was known when we submitted the offer and factored into our calculations. Next step is to find a tenant and start collected some cash flow.

We will update you more with how our property goes once it starts renting and getting us some decent money back. But hopefully the above outlines some simple guidelines you can follow to purchase a property in the US. Like I said at the start, I am not sure if it is the most effective way to go about things, but it definitely worked for us.

If you have any other questions or comments, feel free to email us at

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Managing US Property Investment Currency Risk

When investing in property abroad, you should take care to manage your exchange rate risk appropriately, since currency fluctuations can have a significant impact on the overall success of your real estate investment.

Not only is it important to get a great deal on the initial exchange rate that you transfer your local currency at in order to purchase the foreign property, but subsequent exchange rate changes often require management or hedging in order to minimize risks and maximize returns.

The following sections cover some straightforward methods for managing your property investment currency risk efficiently.

Shop around for the best exchange rate when buying property abroad

A key thing to remember when making the initial currency transfer for an overseas property purchase is that you are generally not locked into using your local bank for foreign exchange transactions and forward contract hedges.

This means that you can shop around among various banks for the best forex rate, which can often save you as much as 1-2% on your currency transfers. You can also use reputable currency transfer providers like OzForex, who make sure that all of your currency transfers will be both cost effective and straightforward to perform.

Furthermore, not only can you shop around for the best exchange rate on your large initial property deposit, but you can also get better exchange rates on your regular currency transfers if you plan on making periodic mortgage payments in a foreign currency.

Placing currency limit orders

Placing a limit order with your foreign exchange provider is another way to help you get the best exchange rate on your property-related currency transfers.

When you enter a limit order, you will need to specify an exchange rate level, a currency pair, an amount of one currency and whether you wish to buy or sell that amount at that level.

If the market exchange rate subsequently fluctuates to your specified level, then your foreign exchange provider will buy or sell the specified amount of currency for you automatically based on your instructions.

Limit orders are especially helpful because people cannot be watching the actively fluctuating foreign exchange market all of the time, and so they might miss out on a short lived exchange rate improvement. Although limit orders are often used when dealing through stock brokers, this useful ability is rarer among foreign exchange providers. Be sure to ask whether your currency transfer provider offers limit orders if you think you might wish to use them.

Managing currency risk from foreign property investment with forwards

Most real estate investments have a fairly long time horizon. As a result, people who invest in property abroad typically tend to manage their long term currency risk by using forex forward contracts as a hedge against adverse exchange rate movements.

These contracts permit you to lock in a market-determined exchange rate for a certain amount of currency and a given future delivery date. The forward exchange rate you receive is related mathematically to the prevailing spot rate and the current interest rate differential between deposits in the two currencies involved in the transaction.

Forward contracts can be used as much as two years in advance of when you anticipate actually needing the foreign currency to make payments related to your foreign investment property.

This article is brought to you by OzForex Foreign Exchange Services. OzForex is one of the world’s leading foreign exchange companies, providing live exchange rates and focused on providing a smarter, online alternative to existing international money transfer services. Established in 1998 with the aim of giving individuals and corporate clients a better deal, OzForex has offices in Sydney, Toronto, London, Hong Kong, San Francisco and Auckland. 
The OzForex Group includes OzForex, UKForex, Canadian Forex, USForex, NZForex, Tranzfers and ClearFX. It is a strategic investment of Macquarie Bank, Accel Partners and The Carlyle Group.

Tuesday, 7 August 2012

Funding Property Deposits

If you are reading this then you have most likely made up the decision to at least look at investing in property. And why wouldn’t you, investing in property should be easy right? Purchase a house, put some tenants in, hopefully the rent collected would cover all your expenses and pay the home off. Few years later, capital appreciation has increased the value of your asset and you have made yourself a tidy profit without having to do much at all, money for nothing, as ZZ Top might say.

But the most important part of property investing is the actual purchase of a property. Buying a property at a good price can be the difference between a great investment and a terrible investment. Buying your first property, whether for investment purposes or otherwise, is typically the most difficult. With rising house prices all over Australia, affordability has decreased dramatically and has left a lot of first home buyers with no hope of being able to enter the property market. The first step is getting the required deposit. I am a firm believer in trying to minimize your finance as much as possible. I am not saying that you should avoid finance all together, because I am sure most of you do not have $400,000 lying around to be able to purchase a property outright, so of course you will have to use some finance to be able to fund your dreams. But even if you are buying with someone else’s money, there still comes the difficult part of having to find enough money for a deposit for the property. Gone are the days where you can purchase a property with no money down, obtain a mortgage of 105% of the purchase price to be able to cover all the fees associated with purchasing. This means that we are left with no option but to obtain finance, and in my opinion I would generally try and aim for a LVR of 80% maximum, not only are you able to avoid LMI (Lender’s Mortgage Insurance) but it should also protect you against a negative equity situation and provide a more sustainable mortgage.

But then the question still remains how you can come up with the 20% plus purchasing costs required. For a $400,000 property, that would be $80,000 plus purchasing costs of around $10,000. A total of approximately $90,000, and again I am sure most of you do not simply have this money lying around. So what is the answer? Well I think I will disappoint you because unfortunately my solution is not very exciting. Save, pure and simple, just keep saving up money until you have enough money to comfortably enter the property market. If you are a first home buyer, the government offers a “First Home Buyer’s Account” which means interest earned on your savings is not only tax deductible, but also receives additional government contributions added on top of your savings. There are of course some regulations associated with this account which I will not go into here, if you want a full list of the information for this account, please see this link – First Home Buyers Account.

So what are the benefits of saving, well first of all you will have a much lower financed amount which will mean you will end up paying a whole lot less over time. See below for some numbers to put things into perspective –

Situation A – $350,000 loan with 7.00% interest with a monthly repayment of $2,500 will take 24 years to pay off. Total cost of $720,000 + $50,000 deposit = $770,000

Situation B - $300,000 loan with 7.00% interest with a monthly repayment of $2,500 will take 17 years to pay off. Total cost of $510,000 + $100,000 deposit = $610,000

So as you can see, even though you may take an extra 5 years to save up the extra $50,000 deposit, you will still end up owning the house faster and paying $160,000 less. This is a very simplified example which does not take into account a lot of variables such as capital appreciation of the asset, rent money required while not living in your mortgaged house, and several other variables. But the main point you need to take out of this is the power that having a sizeable deposit can have on your overall loan term, and the overall return you can make.

Once you do own your first property, you will find it much easier to be able to fund future deposits, because provided you did have a good sized deposit, you should be able to discuss with your lender about accessing equity in your property which you can use as a deposit for future properties. For example, if you purchase a property valued at $400,000 with a finance amount of $300,000, you have access to $100,000 in equity which you can use for further deposits. In one year’s time, if the property value has increased to $420,000 (5% increase), then you would have access to potentially $120,000 in equity. You would need to discuss this with your lender as they would typically not allow you to access ALL of the equity you may have in a property, and a more realistic assumption would probably be the lender would allow you to use up to 80% of the equity available in your property.

Using equity is probably the easiest way to be able to fund property deposits, and one of the best things you can do is to be able to purchase a property below value and then you have access to instant equity. For instance, if you purchase a property for $200,000 and the bank has it valued at $220,000, well then you already have access to potentially $20,000 in equity and you have not had to wait for any capital appreciation. Other ways to increase the equity available to you is to force the property value to increase, such as by performing renovations and the like. Both these methods can allow you to access equity a lot quicker, without having to wait for it to grow naturally like you would with capital appreciation.

The only potential issue with using equity is that you are essentially borrowing 100% of the property value for your new purchase, this would increase your LVR and your lender would start looking at your ability to service the loan before it instantly allows you access to the equity.

There are countless ways to be able to fund property deposits, but I hope I have outlined the most common ways, and unfortunately they may not be the most adventurous ways but they are proven to work and nobody ever went broke by saving a dollar.

If you have any questions or comments feel free to email us at

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.