Funding is one of the hottest topics I always get at any of our events or on calls with clients. I thought I would spend a few minutes going through some options and how it works. The short answer on accessing funding in the US to invest, is that it is difficult. The long answer is that is is difficult…but there are options.
First and foremost, what I would like to do, is address a common misconception or major difference in strategy between AU investing and investing in mid-west USA. In Australia, purchasing a property at 80% or even 90% leveraged and having minimal return (or negative as is one of our most popular investment strategies) while holding the property for 10 years accumulating capital growth on the leveraged amount can certainly work as a wealth building strategy over time. Understand though, that you will need to either borrow against your newfound equity or sell the property to realise this profit, but it is certainly wealth. Leveraging is quite an important part of this strategy, as you will only have 10-20% funds in, but earning the growth (5-6% with luck, or more!) on the entire leveraged amount.
In the mid-west US though, prices are generally quite flat. There is not a lot of growth to speak of and even if a property grows 10% in a year, on an inexpensive property of $70K that’s only $7,000. To be highly leveraged so that your return on the property is low (essentially undermining the real reason for investing overseas in the US – HIGH CASHFLOW) and not get substantial growth is now kind of a moot point. The mid-west US shines due to the affordability of the properties and the high cashflow you can generate from these. You don’t need to sell, borrow against or anything to realise this profit, it just goes into your bank!
OK, now having said that, funding is possible if needed and if there are strategies that can utilize the funding well. As per the information above, I don’t generally suggest people to access funding for rentals, or at least not highly leveraged. For renovations and flips though, it can be a solid option, possibly purchasing the property and getting construction or rehab funding, sell the property and pay back the funds and the profit is yours! There are two common avenues available to obtain such funding, with a third opening up over time:
1) Obtain funds in Australia for US investing
This can be a more simpler or possibly more accessible option for a lot of people. Traditional lending methods can be difficult but certainly not impossible. Getting a line of credit against equity you have in a property is certainly an option. This would be one of the most cost effective options if you have equity in your home, or in an investment property that is not working for you. You would want to make sure in your feasibility for the project you are looking at, to account for the 5% or so interest that you would have to pay in your numbers so you can see and be still happy with the profits. But given most flips should be bringing around that 20% return after costs, there should be funds here to handle the interest rate and still have a tidy profit.
If you don’t have enough in equity or have investment properties in Australia to get into the market for a flip, possibly then private lending might be an option. Maybe someone you know would be interested in lending you the funds for a higher interest rate? You could offer rates of 10-15% annualised or even a return based on the project which could be quite attractive to someone with some funds in the bank doing essentially nothing. Maybe there is a family member or a friend you can joint venture with and work out a profit share arrangement? All these can be an option.
2) Look to the US for the funds to invest
This option can be a little more tricky. Without over 2 years trading and positive tax returns lodged, most traditional lenders will not look at “foreign aliens” or non US citizens without a Social Security Number and credit rating. There are however, a number of private lending or “hard money” options which can be utilised, but again without any history or experience, many of these will struggle to lend to you as well. One of the easier methods i have found over time, is to purchase property cash and then look to source the renovation funds, or what they may call construction lending from private lenders. This can be a better and easier option particularly to get in early without experience. They may still want to see an experience person managing the renovation or project to help ensure it goes smoothly but this can be done by employing a Project Manager for the project. Rates for these types of loans can vary from as low as 7-8% to as high as 14-16% in some cases. Make sure to shop around a bit as well.
Finally as a third option, once you have proven experience over a number of projects, positive tax returns, your LLC earning profits and a bank account for some time, the lending options for traditional lending start to open up and become low cost options. Most traditional lenders start at around 4% and again, owning the home outright can help significantly in accessing funding as it gives them an asset to lend against.
For any more information on the lending options that might be available, or if you would like to discuss getting started in US Investing, book a call with us TODAY! below.