Lindsay Stewart is a successful property investor and founder of Star Dynamic Property Investments which helps its clients find properties in the US to invest in. He has been investing in property for nearly 15 years and has been investing in US properties for 6 years. He has a wealth of knowledge when it comes to the US property market and we are lucky enough to learn from him on how we can jump into that market.
Come with us as we learn about one of Stewart’s clients, an entrepreneur that wanted to diversify his property portfolio and find some positive cash flow properties in the US, we delve into the strategies that he used to build his portfolio, the advantages of buying in the US compared to Australia, some incredible differences in the property market between the US and Australia, and much much more!
In this episode we are going to be talking about investing in the US with Lindsay Stewart but first we learn about what he does and his background.
We've been investing in the US market for probably coming up to, well gosh, what is it 2020? So 8 years now. And we had been investors in Australia for quite some time. What attracted me most of the time back in the end of 2012 in the US market was the affordability of the properties. That was probably the first thing I noticed. We had a lot of funding tied up in a development here. So we were sort of at a bit of a stalemate. Developments in Australia as we know, can take quite some period of time. So we've sort of been going backwards and forwards with council approvals and all that sort of thing for quite a long time.
So I sort of felt we were getting nowhere. So that's what really attracted me to the US. It was something that I thought we could do while we were still developing. And what ended up happening, we sort of jumped in, I ended up buying some properties over there. The results were astounding. And in the end our developments here in Australia have taken a back seat and and we now focus generally, predominantly on the US. We still do a lot of properties ourselves. We've, you know, in the last year alone, we were able to do 85 properties in the US which was fantastic. You know, for ourselves and for clients as well. So, you know, a lot of activity now over there. That's sort of my primary focus and we have moved a lot now to helping other Aussie investors be able to get into the market and show them how to do that safely and sort of how to avoid the pitfalls and what strategies to use to make sure it's profitable.
It was interesting to learn that he was able to invest into the US whilst still living here in Australia. We find out about how he was able to do that?
I think the first and most important thing you can do whenever investing, particularly in a, I want to say a foreign country, it probably wouldn't matter if you're an investor in Victoria investing in Queensland for instance, or if you're an investor in Sydney investing in Perth, you need to build a team on the ground. And this is probably more so exacerbated once you get overseas because you're now talking about a market that you really don't know a lot about and you need to rely on people's expectations. You need to rely on people's advice. So building a team is probably the first and foremost important thing. We have an online training course that we do. And I think after the first module goes through, you know, finding a location and building a team on the ground as the first and foremost thing you can do.
You need people you can trust. Now this is the hard part and from a distance that can be difficult, but it's really just built up over time, it's built up with referrals, you know, talk to people that you know over there. We tell a lot of people and we have a lot of clients who may have friends or relatives or colleagues or something like that in the US or possibly they have friends or relatives here in Australia that know people in the US and that way you can sort of leapfrog into those areas. And you know, let's just say you have a colleague who actually works in Texas, you can reach out to them and you can say, I'm interested in investing in that region. Do you know or have you used any realtors that were very good?
You know, and they can start putting you in touch with some people that they know that was good for them. And that gives you a bit of, nothing's guaranteed, but it gives you a little bit of certainty that this person's probably fairly straight up and down and above board and can help you. So then you can reach out. And then of course if you're looking for property managers within the realtor that you've got a contact with now can say, well look, I have a property manager who is very good and here is his or her number and you can contact them. If they're looking for contractors, well often the realtors will have access to some good contractors because you know a lot of these properties might need a little bit of maintenance. So slowly but surely you can start building your team from referrals and then as you go through you can start finding extra people in additionals. And there's nothing wrong with having two or three realtors that you’re using. two or three contract teams, two or three title companies, etc.
Next, we delve into the background of one of his clients that he helped jump into the US property market.
It's amazing the diversity that we have of people coming to us. And this gentleman, you know, was certainly an extremely successful entrepreneur. Him and his wife run a seven or eight figure business already in the marketing, online marketing space. We actually got introduced to them. My wife actually signed up to do his wife's course that’s actually how that started. And the information that we use for a lot of our marketing has come exactly from that course that my wife did. But her and her husband were so intrigued by our business because it was such a different business from most of the ladies that she teaches. He decided he wanted to give it a shot. He could see a lot of potential.
So, you know, in the last 12 months, he's bought three properties in the US now and you know, the first one was actually in a very great area of Michigan called Harper Woods which is tucked in behind and I don't know if a lot of listeners may or may not have heard of an area in Michigan called Grosse Pointe and it is probably one of the most expensive areas of real estate in Michigan. So Harper woods is the next suburb just inland from Grosse Pointe, a very, very nice area. You know, lovely properties. Most of the properties are in very good condition, generally quite expensive. But in this particular case, we were able to get this property for him for around about $40,000 US dollars. Now, it needed a lot of work, admittedly you know, now over the next six months, he went on to spend around $50,000 on that property.
So you know, all out the whole process, the whole purchase and renovations and holding costs and everything probably cost him less than $100,000 US dollars. Now we were able to then put that property back, straight back on the market. This was a, what I would call an owner occupier strategy. So what he's done here is he's purchased a property to do up to a very high end standard so that the person who's going to buy the house is the person who's going to live in it. You want to, you want to wow the people when they walk in. You want that really nice sort of feel to the property, you know, beautiful kitchens, beautiful bathrooms. That side of things. And if you're an investor and you've got a bit of a flare for interior design or decoration or that's something you like, then that's certainly the sort of strategy that you'd look at because you can sort of, you know, you can really do some lovely things within the house, within the homes, make them unique. And that's what really can attract people.
Stewart explains his client’s living situation and the reason that he wanted to start investing in properties in the US.
I think Adam would be about in his late thirties, him and his wife. I would think both. They don't have any children at this stage. I don't know whether that's something they're looking at doing down the track. I know he's got three or four sports cars. I don't know if he treats them as his kids. They've got a couple of dogs. They have a beautiful acreage. I think they've got a five acre property in the Adelaide Hills, just in Aldgate. It is such a beautiful property. They run a lot of their marketing masterminds from their home, and they've got facilities on their property to run a lot of this which is good. They spend a lot of their time also in the US that they've got a very big following in it.
A lot of their clients are also in the US as well, so they do a lot of travel backwards and forwards. And that, you know, as you can probably understand, very busy people you know, they'd be turning over, I couldn't even begin to estimate. I would certainly say it's a seven figure business. If not, I wouldn't be surprised if they're probably up around the eight figures now. So very successful. They've been doing it for the last 10 years, I think now. So, you know really at the end of the day, investing in property in the US it was not something that would have necessarily been on his radar, but his own business generates such an income for him. But when he heard about what we were doing, it was something that was quite fascinating for him. And, and he sort of wants, he loves the diversification of it. So I think what he was really looking for is to be able to diversify and possibly put together a bit of a property portfolio that would then also generate more passive income as well as the business side. That of course you've got that safety there if anything happens on either side.
Before just jumping right in one of the most important aspects is deciding on the strategy you are going to implement.
We spend a good couple of hours when we first start up or talk to any client regarding their strategy. You know, the first and foremost important thing when you're putting together any form of strategy whatsoever is to determine what it is you're actually after. And I think a lot of people, I think an investment strategy is probably something that a lot of people are quite remiss. They don't really have an investment strategy written down. They don't have it really mapped out exactly. You know, first and foremost, why are you investing in property? Now you can say, well, it's the passive income. All that's all great, but why passive income, right? I mean, you're not going to be investing so that you can have the dollar in your hand and you can look at it.
There’s something that you want. That might be safety, it might be security, it might be to be able to give up a little bit of work, spend some more time with the family. It might be travel. All these things are what is really the core underlying reason as to why you're investing. So the first and foremost thing is to just sit down and determine exactly what it is you want. Then what you can do is start to build a strategy using property, which is really just a vehicle to be able to get you what it is that you want. And that's really the best way. Once you've got that strategy mapped out and you've got it really crystal clear, then of course it's really easy because then when you see deals, you can look at the deal and say, right, is this my strategy? Yes or no?
Well, if it is, then you can assess it and say, well, yes, this is a good deal and you take it. If it's not, it's easy because you just flick it and go to the next. So you know, without that strategy, that's where a lot of people buy the wrong types of properties. You know, they get themselves cornered and it might not be that they bought a bad deal. It just simply wasn't the right deal for their strategy. So, you know, this strategy is really important. We spend a good couple of hours with him and now in his case, of course, he's in quite an advantageous position a lot more so than probably a lot of us in that funding and finance was not really an issue for him. What he was looking to do was to develop an income that was to diversify so that he had a bit of safety and security.
Whereas, you know, he has not unlimited funds of course, but the amount of funds to invest for him wasn't necessarily an issue. So that was an easy one for him as far as strategy goes. Buying the higher value dollar properties that were in good areas was probably something he was looking at because he preferred that sort of safety and security of the A class B class properties. That's sort of what fitted his strategy. Whereas you know, there's a lot of other people that come to us that are probably looking for more of that B class, C class property because they don't have a lot of funds there. They're happy to try and get the best they can get their money working as hard as they can for it. And that way they can then start building their equity and building their capital so they can reinvest and not sort of paint themselves into a corner.
Can you elaborate a little bit more about what A, B and C classes are? Just for the listeners who might not know what that means.
I mean in Australia, here we have a lot of A class and B class property and that would be primarily what you would see, particularly on the east coast without going into some rural areas and things like that. But I mean really there's probably actual definitions of this in a property handbook somewhere, but in essence an A class property would be something like the very high end regions. I mean in Sydney you'd be looking at sort of North Shore, Glebe, inner suburbs, those sort of areas.
They're quite expensive, large properties, very, very high-end fittings, you know, marble floors, all this sort of, you know, that would be your A class sort of property that you'd be looking at. And the B class would be, I would hesitate to say, what a lot of us would be living in. Lovely homes in nice areas. Varying in prices of course, depending on the regions. But you know, very solid homes, very nice areas. Now C class is a little bit lower than that. So, you know, you can have homes that probably need a little bit of work. You know, the people can make these quite homely, but you wouldn't necessarily walk in and go, wow, this is a nice place. It's someone's house. But now that might be where it is that it's probably working class.
You might find that there's a lot of people in the area looking for jobs possibly or working in factories and you know, that sort of area. Now the US also has a D and an E Class, which we don't have over here. And that's where a lot of people can get themselves into trouble because you can buy some very cheap properties in some ordinary C and some bad D and E class areas. Now a D class area is a very poor area, generally not a lot of people working. Genuinely, there's not a lot of employment opportunities and there generally isn't a lot of schooling in the area. So, that sort of gives you a bit of an idea that you would find a lot of people would be on the streets, they'd be talking and walking around because they've got not much else to do during the day.
Properties are genuinely in pretty poor state of disrepair. Both exterior and definitely interior. And that can be, you know, quite visible. And then an E class area was what you would call a ghetto, you know, and these are properties that would be hardly liveable. And there are people probably living in properties that are run down or squatters and so on and so forth. So you've got, you know, this is sort of a whole range, unfortunately in the US there is quite a vast difference between the top and the bottom. In Australia where we are a little more fortunate not to have a lot of that lower class areas.
We learn more about the area classes and the type of areas that he is looking to get into and what he would stay away from.
I certainly wouldn't go into any D class areas or I wouldn't recommend anybody does. Now look, if you are an investor on the ground and you know the areas really well, there's probably ways you could mitigate a lot of that risk. But, from afar it's just too dangerous. It's too difficult to be able to mitigate a lot of the risk. From our perspective what I would call sort of C plus those sort of areas would be about as far as you'd want to go. Now look with anything, I guess there's always a risk versus return, right? So you know, you go into an A class area, you buy a house, you try and do it up, your return's going to be relatively small or the amount of return you can get in an A class area is a lot less than you're going to get if you were in a C class area for instance.
You might be able to get 10 or 15% return on your money in an A-class area by doing up a property and selling it. In a B class area, you’re probably looking at that 15 to 20%. In a good solid C class area, you could possibly get that 25 to 30%. Now having said that, you may also find that you might get a property in a C class area broken into at some point if you don't take precautions, whereas you're not going to get that in an A-class area. So you've got these two dichotomies or you know, areas I suppose of regions to look at. So when we go through our strategy, and this is getting back to what you were saying about the strategy, we also want to help the person sum up what their sort of risk level is.
Now, people who are quite risk averse don't want to be looking at strategies to buy properties in C class areas. They're going to be finding that too hard on their nerves if something goes wrong. So that's why you'd sort of lead them towards the more A and B class properties. Whereas on the other hand, someone like myself, I have no problem with a reasonable level of risk. I understand how that works and I can understand how to mitigate it and I'm okay dealing with that. So the A class areas are not necessarily something I look at because I prefer a higher return and I'm happy to manage and mitigate the risks in the C class areas.
Stewart details how the strategy they implemented is working and we find out in more detail about how his client is able to build up his portfolio because of the strategy.
First and foremost his strategy was to invest an amount of funds into the US and to treat it like a business and to have that business turning over and giving him a return of which he would then invest a percentage back into that business to keep generating that return. So that's in essence what he was looking at doing. And he wanted it to be able to build a property portfolio that was developing and giving him a nice return on his investment and then be able to invest a percentage of that back into keeping improving and increasing that return. So to start with, our strategy with him to start with was to look at what we would call owner occupier flips, sort of that B class area where we could buy decent properties, do them up to a really nice standard, sell them for quite a good return.
And now what that does is that gives him really good high level capital equity improvement and boosts to the amount he's got invested. So, you know, arguably, and I'll just use some example numbers. I can't really give you too much detail of course about that exactly. But you know, let's just say he wants to invest $500,000 Australian dollars, he's going to get around about 360,000-$390,000 USD for that. So what he does is, we're going out and buying two or three properties for him in that amount. Trying to get him around about that 30% return on his flips. So within a year or so his 360,000-$380,000 USD is going to be around about that 450,000-$500,000 again. Then what we're looking at doing for him is being that he's very interested in multifamily properties.
So then what we'll do and once we finish, we've probably got another six months of his strategy to go in his initial phase, I guess first phase. Then in the second phase, what we're going to do is look at buying an apartment block that needs work. We'll do up the apartment block for him. He'll get all the properties tenanted, increase the value of that property. He's now developing a relatively decent capacity income. I'd say, you know, if you get six or eight or ten apartments in a block that needs work, you can do up all the apartments, you can start tenanting them. And then what happens with apartment blocks, of course is apartment blocks are more like a commercial strategy. So the value of the property is more hinged on the net operating income of the property. So as you can do up the properties, each unit itself can start getting more rent. You can start putting tenants in them and asking more rent then the value of the property starts to rise. Then what he's going to do is borrow and refinance out most of his funds and then go and do the same again.
Stewart’s client travels to the US frequently which is a little bit of an advantage for him when investing over there.
The other advantage he's going to have of course is by doing the first few flips in the first 12 months and he gets a tax return. He does that over in the US that starts generating you a bit of a credit rating over there. The lenders start looking at you a little more seriously once you've done some tax returns and so on and so forth. And they start looking at you a lot more seriously when you've had some experience. This is all favourable for him. So when he's ready and does that apartment building and when he refinances out, he should be able to get about 70 odd percent of his, you know, loan to value ratio out of that property. Now if he's had a 20-30% uplift in the value from when he's renovated all these units and as you can see, he'll probably get pretty close to all his funds out. Now if you're paying around about 6, 7, 8% even if you're paying private equity at 7 or 8% and the unit block itself is giving you, including a vacancy rate of say something like 15 or 16% net, which it would, the difference between your loan repayments and your net amount is still going to be around that 7 or 8% which is definitely worthwhile. And then you've got most of your funds back to go and do it again.
Investing in properties in the US has its advantages when it comes to balancing out your portfolio.
Even Adam in his case, he owns property here in Australia as well, and he has the growth coming in through there. So what you said before about balancing your portfolio is absolutely perfect. In his case, that's what he was looking for. I personally am not an advocate for negative gearing. I still have never been able to see the sense in spending a dollar to save 30 cents in any case. And even in Australia, I don't see, you know, there are properties available that you can buy that you can make at least neutrally geared, if not even some form of positive. You know, at the end of the day, and I sort of keep going back to Robert Kiyosaki's rules of investing from Rich Dad Poor Dad, to some degree, you know, to be classified as an asset it's got to be putting a dollar in your pocket.
Anything that takes a dollar out of your pocket is called a liability. I think really even a property can be a liability as much as it can be an asset. It depends on how you’ve got it structured, you know, having a property and even if it's only giving you a dollar a month that is at least a positive or at least a neutrally geared property, and then you're on the wind, you know, you can't be going backwards at least if it's giving you a dollar, because here in Australia you're going to get growth. In the US or in the Midwest of the US you don't have the growth like that. So what you're going to want is you're going to want higher cash flow. You need that higher return. I'd never buy a property in the US giving me 2 or 3 or 4% because tying up your money for that sort of small return isn't worthwhile because the property is not going to be worth significantly more in years to come. So that's why you're going to want that 10% plus and particularly multifamily is great because you can be looking at 15% plus.
We delve into the term ‘multifamily’ and he explains to us what the term means and gives us some examples.
Multifamily property is literally any property that will have more than one tenant occupying the property. There's a number of ways that that can be done. In the US it's very popular to find what they call duplexes and triplexes. Now in Australia, a duplex, you'd probably see on one block you'd have two houses directly side by side. In the US that's not generally the case. What you find a duplex is one house which is actually divided inside into two units. That might be an upstairs unit and a downstairs unit or they might be a unit on the left and a unit on the right as you go through the front door. So it can, the format can be a little different, but that's what you would call a duplex property.
So you've got one house literally under one deed or one title and you are renting it out to two separate families under two separate leases. Now a triplex, it goes one step further where you would have three units inside one property. You know, and again, this could be an upstairs unit and two downstairs units or in the US in a lot of cases you can find an upstairs unit, a ground floor unit, and maybe a basement unit because they're very big on their basements in the US and that could be a triplex. Now, there is such a thing as a quad or a fourplex. They're a little harder to find and I don't necessarily recommend them as a strategy. There's quite a few little drawbacks with them. But then beyond that your next step would be apartment blocks.
Now in the US again, this is a little different when we talk about apartments in Australia, you're thinking of buying one apartment, a two bedroom apartment or a one bedroom apartment, in the US that's called a condominium. Not an apartment. So these apartment blocks are actually all on the same title. They're not strata titles. So you can't buy an individual unit. The only way you could do that would be through a condominium. And again, not necessarily, unfortunately quite a popular strategy that a lot of the international, should I say the US companies try to sell to international investors because you know they're very glamorous and they're overlooking the San Francisco Bay or Miami, right. And they're beautiful and they've got pools and you've got tennis courts and you've got all this in the complex, which is fantastic to live in, but to own one that you have what they call homeowner association fees, which is very similar to our body corporate fees here in Australia. These can be extremely high and particularly when you buy in compounds that have tennis courts and pools and gyms and all this sort of thing, what you can find is your HOA fees can be as much as your rent.
I had a lady come up to us only a couple of years ago and she had a condominium in Atlanta and it was costing her money to hold onto it. And you know, again, there's not a lot of capital growth there and there's another step that's even worse in a lot of cases you can find that some of these homeowner associations have built into their contracts that you have to get approval from the homeowner association to be able to sell the property.The HOA was not giving her approval to sell so she couldn't sell it. So there's some real traps there but apartment blocks are quite good strategies where you're buying an entire block of four or five, eight, ten, thirty, however many apartments come under that block. You renovate those out, you can make them very good cash line apartments. And you can increase the value of the block itself by increasing the value or the amount of rent that each individual one gets. Because the more rent you get for each apartment, the higher the net operating income becomes of the entire block.
Therefore increases the value, very similar to commercial property in Australia because the value is determined because of the rental income.
It's pretty much exactly the same. You'll have a cap rate in an area that, you know, commercial property in this area is bringing 10 to 12%. So if you're getting, you know,10,000 or $100,000 a year in rent from that property, then if you're getting $100,000 net rent then you've got a property that's worth $1 million. If the cap rate of the region is 10%. So you know that it really just boils down to that.