These are actual questions emailed in from our buyers, with our actual replies.
- Why do the rents for the properties seem the same or very similar ($675pm) even though the houses range from 2, 3 or 4 bedrooms and have 1 to 2 bathrooms?
- Under available properties, what does 'Total Monthly Payment' include?
- What is the property management fee for looking after the property?
- How many properties does a property manager look after?
- Do these properties come with title insurance and when you buy and are they free from any debts or liens placed on the property? What about a warranty?
- Are tenants able to be removed easily if they do not pay or are causing damage, or nuisance?
- I understand I need an American bank account. Can you set this up?
- I'd like to take some further steps into owning an investment property with you guys, and would like to know what it is that I have to do?
- Who pays the taxes?
- How do you pick which properties to purchase, renovate, fill with tenants, and sell?
- How do you determine eligible tenants? Do you do background and credit checks?
- If I am an overseas investor from an area that does not have a tax-treaty in the U.S., does Mid South have to withhold 30% of my cash flows?
Why do the rents for the properties seem the same or very similar ($675pm) even though the houses range from 2, 3 or 4 bedrooms and have 1 to 2 bathrooms?
There is a lot I can say about this. We put a lot of thought into where our rents are at because we feel that it really affects how the investment performs. While some people that sell investment properties push their rents to the max the market will bear, allowing them to advertise flashy cash flows, this typically causes the property to turn over at the lease end, and this vacancy reduces the return on investment for the investor over what the inflated rent brought them. Not only do we not push our rents to the max the market will bear, we believe our business model is so successful because we rent our properties at slightly below market rates. A little bit about our philosophy:
Keeping rents at slightly below market rates increases the likelihood of a long term tenant. Vacancy is the biggest killer of return on investment for rental property. Our typical property rents for $675 per month, not the $700 - $725 per month that many other similar properties in the same area rent for. Although $25-$50 per month is not a lot of money for us investors, it *is* a lot of money for our tenants. This small difference, combined with the high-quality of our homes, encourages lease renewals and keeps your property occupied and cash-flowing.
To further answer your question, we do price the properties based on varying factors, just often more than simply bedrooms and bathrooms. Let's take two of the many neighborhoods we work in as an example, Mid Town & Frayser. Mid Town rents are a little higher (but so are their taxes, so cash flow is mostly the same) so a 2 bedroom in midtown may rent for $675 while a three bedroom in Frayser rents for $675. Also, sometimes we have a two bedroom that is on a slightly larger lot, or has a garage, or there is a three bedroom but the overall square footage of the house is not as big as some, etc. For example, our typical house in Frayser is a 3 bed 1 bath that rents for $675, and in that area second bathrooms were not common in construction, so we probably could get $700 instead of $675 for a 3 bedroom 2 bath, but we prefer to choose from a bigger pool of applicants and land with a tenant that is very invested in staying there, taking care of the property, etc.
Under available properties, what does 'Total Monthly Payment' include?
Total monthly payment is going to be a reflection of the information you've entered into the 'Customize My Cashflows' box at the top of available properties. It is the figure subtracted from your monthly rent to come up with your estimated cash flows. For cash purchases, the figure includes monthly taxes and insurance costs. For financed purchases, The Total Monthly Payment reflects your estimated debt service (monthly mortgage payment, principal and interest), and your monthly taxes and insurance costs as well.
What is the property management fee for looking after the property?
Our management is second to none and is a key reason why our properties perform so well. Please check out our management agreement at www.midsouthbestrentals.com (a website we have set up for our tenants to view our available properties, our property management company is called MSBR) by clicking on the "owners" tab. We mange at 10% of the monthly rent and this includes a whole host of administrative services including depositing your cash flow check. MSBR is able to deliver unparalleled value because it does not exist to make a profit as a typical property management company would. It exists solely to support its parent company, Mid South Home Buyers, ensuring MSHB properties perform their absolute best.
How many properties does a property manager look after?
We have an entire team that works in our property management department. We currently manage around 2400 plus properties.
Do these properties come with title insurance and when you buy and are they free from any debts or liens placed on the property? What about a warranty?
You do not have to buy title insurance, however it's relatively inexpensive and we purchase it ourselves on all of our properties. When you buy a property from us, it will absolutely be free of all debts and liens. Our closing attorney, is extremely experienced with overseas closings and can provide you with top-notch legal council, title insurance, proof that the property is unencumbered with any liens or debts, etc. Regarding a warranty, all our properties are completely renovated from top to bottom with no deferred maintenance. However, all our properties come with several comprehensive warranties, please see the warranty of our section of our website for more details.
Are tenants able to be removed easily if they do not pay or are causing damage, or nuisance?
In Australia, the laws seem to protect the tenant rather than the home owner. Tennessee and Arkansas are considered "landlord friendly" states; we can evict 30 days from the first missed payment. We typically develop very good relationships with our tenants to try to avoid this and work with the tenant to minimize any expense for our investor-buyers.
I understand I need an American bank account. Can you set this up?
That may not be necessary. We use the American Express International Payment system, and can transfer money almost anywhere in the world. If the receiving bank account is in any currency other than U.S. dollars, there is zero charge for the transfer!
I'd like to take some further steps into owning an investment property with you guys, and would like to know what it is that I have to do?
The shortest and simplest way to proceed is two pronged.
- Move forward with picking out your house. They're almost interchangeable due to the nature of our business model. You'll notice as you click through the website that we buy in the same neighborhoods over and over again, because they've proven to be safe and profitable, and we do the same renovation again and again, and rent at the same rates, so minor differences in cash flow due to different property taxes is one of the few differentiators.
- Move forward with getting pre-qualified for the investment purchase. Unless you would like to pay cash for the full purchase price, (which some of our investors do and which of course gives you the highest cash flow… however most of our investors do use financing of some kind) we will be setting you up with our preferred lender who specializes in investment deals, and can get you a fantastic interest rate and closed fast. Our typical investor puts 20% down on a 30 year note. If you would like, I will introduce you via email to our preferred lender, and she can get you pre-approved for an investment purchase.
- As soon as you're pre-approved, we can write a contract for the house of your choice. Not only are our contracts very short, simple, and easy to read, we do not require any earnest money so if for some reason you have to cancel or there are any issues with the loan and we have to cancel the contract, you are out no money what so ever.
Our typical investor is closed and cash flowing on their own investment property about 6 weeks after contract.
Who pays the taxes?
Taxes are annual city and county taxes, and the homeowner pays them. They are pro-rated from the day of closing, meaning we will pay the portion of the taxes covering the time we owned the home and the investor becomes responsible for them from the day they close. Investors with loans pay their taxes in monthly installments through their mortgage companies, so these taxes become part of their monthly payment to the bank (thus PITI). For you, even though you will probably pay them for the year when they're due, you can still average them out to a monthly cost to understand what your true cash flow on the property is.
How do you pick which properties to purchase, renovate, fill with tenants, and sell?
Terry says that he never makes an offer to purchase and renovate a property unless it's a property that he's willing to keep long term. We typically review 25 homes before we make an offer on one. In our markets, there is a sweet spot for profitable investing in stable, blue-collar neighborhoods. We focus our investing efforts in that area because if you go down too low you will have tenants that will be problematic and war zone type neighborhoods. If you go up too high, the taxes go up, the insurance goes up, the debt service goes up, but the rent does not go up enough to keep pace. Especially in Frayser, which is one of our favorite places to invest, the cash flow is tremendous. Their size and construction lends to great return on investment.
How do you determine eligible tenants? Do you do background and credit checks?
Ability to pay is king. We check credit, verify employment and time on the job, check criminal background, and make sure that the rent is a small enough percentage of income.
How do you deal with nonpayments and evicting tenants if need be? The owner is always the boss on this one, but we have developed strategies to minimize any lost income. We develop fantastic relationships with our tenants and they go out of their way to pay us or work on a payment plan. The way we proceed really depends on the tenant and their circumstances (we treat a tenant that has paid on time for a year that suddenly lost their job differently than someone that, for example, has been a chronic late pay and is uncommunicative).
According to IRS, the property manager is responsible to either withhold the 30% tax from the resource or file the Form 1042 on behalf of client. This tax is the most serious concern that I have with regard to U.S. property investment, as it will erase a large portion of the cash flow and make the investment unattractive.
*MSHB consulted with our certified public accountant on this issue, and below is his answer, from 6/25/2013, re-posted verbatim. Tax laws change frequently; you must consult with your own CPA to assure compliance with tax laws. Investors are personally responsible to make sure they are aware of current tax laws and compliant.
This problem can easily be solved by the foreign buyer setting up a USA LLC and the individual obtaining a tax number from the IRS (ITIN). Tax returns would be filed for both the LLC and individual.
By filing a tax return the taxpayer is taxed at net income (income minus expenses) with this usually a very minimal profit because of depreciation.
By doing the withholding at source the individual is paying a higher tax rate on gross income (not deducted for expenses).