The pros and cons of using a company to help you invest in the US: Cameron McEvoy
I recently mentioned the 12-month-long research process I went through in the lead-up to deciding 100% that I would be investing in the US property market. Today I chronicle the period of January 2013 up until this month, where I began my meetings and dealings with numerous US investment specialist companies that are either based entirely in Australia or are based in both Australia and the US.
But let me take a step back, first of all. There are effectively two ways to buy in the US as an Australian citizen:
1. You can attempt to do it all yourself. This involves securing finance yourself, setting up a company structure yourself, finding a property yourself (whether this be directly or via a US buyer’s agent whom, you guessed right, you’d need to find yourself), doing any repairs or renovations (aka "rehab" in US property language) needed, finding a managing agent yourself, and so on; or
2. You could pay a specialist company a fee to help you through all, or some, of these steps in the journey.
Being a first-time investor in the US, I decided early on that I would opt for the second option. However, this process was something of a minefield. I must mention up front that I am acutely aware of the fact that if I name any one (or several) of these service-providing companies in my writing, readers may perceive these mentions to be biased, name-dropping, or cash-for-comments appearances. So I will not mention any companies by name.
Instead, I will list the different "types" of companies that exist here in Australia to offer would-be US property investors services that can help with their property portfolio build/plan. I will provide the cons/weaknesses that I observed as I interviewed, enquired, and canvassed these various companies. Firstly, however, I’ll list that option I mention above – the one that does not involve partnering with a company. In other words, going it alone! As mentioned, I am not interested in this option; instead I am choosing to partner with a specialist company for my first endeavour.
Additionally, it is not in my interest to critique or review any single specific company’s operation and present my views based on my experience. This type of assessment must be made by individual investors based on their interactions with these companies. In fact, I fully recommend this critiquing as part of your US property investment due diligence. So in no order, here is a list of the types of options available to Australian investors when it comes to the US market:
Do it yourself (no company)
How it works: You do everything yourself, so you must set up your company structure, source a property, do the due diligence on it, then buy and manage the property yourself. Perhaps you’ll still use a managing agent, but you’ll need to source a trustworthy agent yourself.
Pros: You do not have to pay any professional fees for information or "process costs". You will, of course, still need to pay all "dues" (county taxes, legal costs, LLC set-up costs, etc.), as you would with any other purchase. You also have the freedom to engage any partners – i.e. buyers 'agents, in any process component that you desire, and are not at the mercy of using the "preferred partners" of a real estate investment company (this may come at a higher cost than sourcing these partners individually). This approach can work if you have friends/family who already invest in your chosen state/market and have contacts on the ground there.
Cons: There are a lot of sharks in the US real estate market. You will rely only on their "word" (though you should be requesting testimonials and speaking with other clients, to make sure they can be trusted), but there is no real way to know if the people you are enlisting will do the job properly. Costs may be cheaper for some services, but due to inexperience, you may be unknowingly paying more. Unless you are very confident in buying sight-unseen and contact-unmet (which in itself is a high-risk venture) you will need to fund a trip to the US to do your due diligence on the ground, costing several thousand dollars.
US investment education companies
How they work: These companies exist for the above-mentioned type of investor (say you want to do the process yourself, make your own contacts, and form your own new connections on the ground), but one who wants to fast-track the process. You effectively pay a fee (typically anywhere from $5,000 up to around $13,000) to do a course, to teach yourself all of the skills needed to move quickly with a US acquisition. Usually these courses include a funded trip with part of a class group to go to the location you’re interested in investing in and make your own connections there yourself. Several investors will usually make their first actual purchase while on this trip. These courses typically go for a couple of weeks all up.
Pros: You get to inherit all of the shared experience, knowledge, and expertise of industry icons, who have had tremendous success personally, but developing their own process for property acquisition, and teaching their "secrets: to you. Usually the course curators who are charging for these courses will hold dozens of US properties in their own portfolios, which is evidence that the skills and tactics they’ve enlisted can work very well. You get to fast-track your knowledge and also get to "action" elements while on the ground to fast-track your own property knowledge. You’ll likely form connections and contacts who will continue to partner with you beyond just the first property purchase.
Cons: The risk behind paying for a short course to educate yourself is that whilst you may learn several skills, you still need to be ready to execute while your learnings are top of mind. In other words, if you don’t invest directly during or after your course, you may not benefit. Additionally, course convenors will take you on tours of locations in states where they personally have had high degrees of success. These destinations may not be on your personal target/strategy list. Also, at the end of the day, you’ll still need to do all the work yourself; it’s just that you’ll be out of pocket several thousand dollars.
Single-market specialists
How they work: Some companies exist to only focus on one market that they know extremely well. Their connections on the ground there are usually long-term, highly trustworthy, and can enable them to acquire properties in that city/state for their clients at competitive rates. They can also then "rehab" properties to sell to Australians while also assisting with some, but not all, of the process (e.g. LLC set-up, connecting you to solicitors, accountants, and managing agents on the ground, in that chosen state or market).
Pros: One of the toughest dynamics to put up with, in almost every city in the US, is this dynamic of "good street, bad street". We do not really have that in Australia. This means that there are pockets of good and very bad suburbs within cities that only experts can know. These types of companies will be able to source the "good street" properties more easily than you would be able to yourself. These companies are great to consider if their focus city happens to be one you are interested in, based on your due diligence around cities and market types.
Cons: Only one market knowledge. This means you are at the mercy of the market drivers of just that city/state. Look at Detroit, Michigan, for example. Catastrophic events can turn a once prosperous city into a slum overnight, so there is risk associated with partnering with a company who only backs one city. Additionally, these operators tend to acquire big volumes of townhouses/detached houses (aka "single-family homes" in US property language) in existing estates and mini-suburbs. This can mean risking exposure to high-renter-occupier neighbourhoods, something that is not the best investment strategy. Instead, homes that are less cookie-cutter can be a better investment because there is a greater chance that the neighbourhood is more of an owner-occupier one, and this is usually preferred by would-be renters (in other words, your tenants).
Multiple-market purchase-only specialists
How they work: These company types will be able to source quality properties in several cities/states that they identify as being ripe with opportunity. They may also be able to help with several of the "checklist" elements of the property purchase process. This may include assisting you with registering an LLC in a state that is cost and resource-efficient to do so, along with partnering you with a property manager on the ground to manage the property. These types of companies will not usually have access to finance or be able to assist with it.
Pros: You get the assurance that by offering expertise in several markets; you can have choice and variety. This is important because your finances will usually dictate the states/cities available to you. Having a variety of cities to choose from increases your chances that they will have one you can actually afford. Additionally, these types of companies will start from a finance-first perspective, which is a good thing, as you’ll know what markets you can play in, based on the deposit you have and the likely loan amount you’ll be able to achieve.
Cons: Variety is a good thing, but sometimes good things can be spread too thinly. For instance, if the company is based in one city only in the US, how can you be sure that its claimed expertise in multiple cities is legitimate? Also, if finance is not part of their service inclusion, then these companies may have a vested interest in placing you with a property that is perhaps higher than you can really afford, and you may find yourself in a type of loan that is not very competitive, simply to have a property that was probably $20-$30K out of your affordable range.
Multiple-market full service providers
How they work: These company types will typically operate in a half dozen or even more markets, and they have long-term trustworthy connections with solicitors, accountants, buyers agents, managing agents, all on the ground, in those cities. Similarly to the company type above, these operators will also likely start from a finance-first perspective, so you know your affordability and loan-maximum, from the beginning. Most will charge fees for their service, usually payable upfront or early on in the work process.
Pros: Exposure to several types of lenders within the different states and markets where the company focuses on; multiple-market knowledge that may afford you several ‘price point’ options based on your spend level (aka, ‘buy-rate’) for that property. The connections on the ground in each market will likely be accustomed to working with foreign investors, which is a positive for inexperienced investors. Additionally, some of these companies will let you control how much (or how little) hand holding you’d like, throughout the process, meaning that if you are pleased with your first acquisition, future property purchases can occur directly with the contacts on the ground, and you may avoid paying the company’s facilitation fees again.
Cons: While these providers may seem like the ‘cream of the crop’ because they help you with everything, you should be wary of pricing. In addition to their service fee, you may be paying a premium on the cost of the property, that makes it slightly more expensive than the list-price you’d pay for a property if you were to buy it directly (you can investigate how to know if this is happening, in part #3 of this series where I will detail some useful online tools to use during your due diligence process). Also, they will require a lot of paperwork and pre-qualification, so be ready for an onslaught of document requests from the outset, when working with these kinds of companies.
At this stage in my journey, I’ll likely be proceeding with a full-service company, because this suits my situation.
Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Spectator.