US Property Trends and Strategies

May 2010

888 Wealth Creation

Introduction

888 Wealth Creation Pty Ltd is an Australian company focused on property and finance services for Australian property investors. Our unique combination of licensed buyers agent services coupled with an accredited mortgage brokerage has given us a comprehensive level of service, covering all aspects of property acquisition, finance, portfolio management and strategic ongoing investment. Our aim is to find the best property deals available for our clients and give them all the support necessary to create the wealth they and their families deserve to live a life of financial freedom.

We are renowned for our low cost seminars and progressive strategies over the years and our avid pursuit of property opportunities in SE Queensland. One of these was the aggressive purchase of Brisbane homes a the beginning of the 2003 boom, providing rental returns in excess of 8% and properties that doubled in value within 18 months, making many hundreds of thousands of dollars for our investors. As times have changed we have adopted new strategies and entered new markets that have led us into property development, subdivision and construction for profit.

The entire property landscape changed forever in 2008 with the collapse of the US housing market as a result of the Global Financial Crisis (GFC). Languishing property prices and low rental returns in Australia, coupled with a dramatic tightening of credit created a need for a different approach to property investment. The cash shortfalls of negative geared growth property could no longer be supported by increased lending. What was required is an injection of cash to balance the ledger, a commodity difficult to find in Australia, and this is where the US property market can assist.

The US property market collapsed under the weight of the sub-prime mortgage crisis, leading to a decimation of US property values as millions of homes went through foreclosure. This has created a once in a life time opportunity for Australian investors in a market where properties are being sold for a fraction of their former value and far less than the cost to construct, while rental prices have remained buoyant, supported by the ever increasing movement of former home owners into the rental market.

We have been watching the US crisis unfold with keen interest, realizing there may be a great opportunity to buy assets at a fraction of true worth. In March 2009 the US property price slide hit bottom and stabilized, moving sideways for the rest of the year without any further dramatic falls. Between September and November, the Australian dollar rose dramatically against the US dollar, rising from 65c to 95c in a few weeks. This was the trigger we needed to green light the purchase of US properties, as the market risk diminished and more stable conditions prevailed.

We activated our US network and began consolidating the relationships necessary to provide a secure, safe channel for our investors, where they would get the support, integrity and dedication necessary to ensure a profitable experience buying property in the US. We searched many cities looking for the magic formula where price, rental yield and safety coincide with the reliable agency required to acquire, renovate and manage US property, for the absolute care and benefit of our Australian investors. That initial research led us to Atlanta Georgia.

Project Atlanta

Our initial aim, to provide net returns of 20% after all US expenses, found form in the city of Atlanta, the central hub of the South Eastern US economy. Atlanta is a widespread collection of city-hubs with a population over 5 million. It has unique urban landscape, with large block sizes and an abundance of forest and parklands. These, along with its mild, southern climate, make it one of the most livable cities in the US. It has the busiest airport in the USA and it is home to iconic corporations like Coca-cola and CNN. Atlanta also sports one of the highest rates of population growth in the US, a critical factor for property investment going forward.

Atlanta was one of the hardest hit cities in the USA in the sub-prime mortgage crisis, experiencing widespread foreclosures and displacement of communities. As a result, home prices plummeted, in some cases to below 15% of 2007 values. This represents a fundamental leverage on asset value, ensuring dramatic capital growth for investors buying at these levels. Fortunately for investors, rental prices remain strong, at 90% of their 2007 levels, giving fantastic cash flow for investors entering the market.

• This home sold new for $350,000 in 2006.
• Now bought for $42,000
• Renting for $15,600 p.a.
• Population growth will create demand for new home construction.
• House is free – at land value.
• 1.5 miles from CBD in Atlanta.

We initially engaged the services of an Australian real estate agent living in Atlanta, who brought years of experience as an investor and rental manager. He and his partner helped us to create a team of builders, rental managers, lawyers, insurance brokers and real estate professionals to provide a comprehensive end to end service for buying cash flow positive investment properties in Atlanta. As a result of that partnership we bought a number of properties in Atlanta for our clients, beginning in January 2010.

We have since appointed two other native-born agents who provide a level of local support and knowledge that is essential for making the correct property purchase choices, particularly in a dramatic and changing social and economic landscape. They come with their own tried and proven support networks and are dedicated to ensuring that all the details are managed with due care and professional acumen. This diversity gives us access to a broader market and creates opportunities beyond those possible through a single buying channel. It also creates more safety by providing back-up service providers for every critical role necessary in acquiring, renovating and renting property in Atlanta.

With such concentrated involvement in one location our own levels of knowledge have grown, enhancing our own strategic interests and ensuring our due diligence processes are intelligently directed for best risk and reward outcomes. We like to know everything about the markets we are in and constantly research every aspect of our operation, seeking to improve methods and re-evaluate strategies with each new discovery. This is important, because there are shifts occurring constantly with price, investor activity and foreclosure localities.

888 Results in Atlanta

Since we began buying in January 2010 until 30^th April we have now completed the purchase of 17 properties in Atlanta with several pending. Of the purchased properties, 7 have been renovated and three have tenants. Ten are still being renovated. Our renovations are coming in within 10% and often lower than initial estimates and rental prices have been 100% in line with our projections.

Net rental returns have averaged 17.6% with provisions made for rental management, county taxes or rates, insurance and maintenance. We are generally buying 3-4 bedroom homes, typically at prices between $25,000 to $45,000 with a monthly rental range of $850 to $1300. Renovation costs vary between $5,000 to $15,000. Work beyond this range is considered unprofitable and many potential homes are looked over because of their states of disrepair.

• Built 2007, 4 bed, 2 bath traditional Style home.
• 2.5 miles from Atlanta city in Sylvan Hills.
• Purchased for $35,000.
• Net rental return of 19.5%.

Atlanta Market Trends and Strategies

Due to increased buying pressure, prices for newer foreclosed properties have increased, with our bids often in competition with other investment groups. As a result we expect rental returns to reduce in the near future with averages of 15-16% net expected for newer properties in good areas.

Properties closer to Atlanta CBD tend to have a higher incidence of theft and vandalism, with theft of external air conditioning compressors common in most vacant properties. Other theft includes copper pipes, tapware and appliances. Damage in these incidences includes gyprock, basins, plumbing, electrical and internal HVAC units.

We have had two incidences of theft occurring between contract and settlement, with the vendor agreeing to lower the price in compensation for damage in one of these cases. Despite surveillance and security measures being taken by our agents two completed properties have had theft of external compressors recently with the police making an arrest at one of the properties.

Properties closer to CBD do attract higher rental, increasing net yields. Theft is not a problem with occupied properties, but remains a concern while properties are vacant. Insurance under vacancy has a high excess, making the cost of replacement of air conditioner units below excess levels and generally unclaimable. Further precautions have since been taken, with external compressors fitted immediately prior to occupancy.

There are fewer risks for properties further from CBD and although rental yields are lower, these may be balanced by lower costs over the longer term. As a result we are looking for better neighbourhoods, with increased renovation activity and progressive community profiles. There is evidence of resale for profit after renovation in some areas taking place now, with healthy spreads available for immediate capital appreciation and profit from resale.

There are still some very good buys in the higher value suburbs and we can see increased capital gains and fewer risks for long term investment. In locations with well kept homes and intact home ownership, there are properties that come on to the market that are well below surrounding sales and, with careful renovation, can easily come up to the surrounding standard. There is merit in considering these properties for a balanced, safe long term investment. Net yields of 13-16% are attainable for these types of purchases.

One area of interest for cash flow driven investment is multi-family properties such as duplexes, blocks of units and townhouses. We are performing due diligence on a number of these properties to ensure value is coupled with good occupancy rates. These properties are an ideal choice for investors looking for multiple properties, as one buying action will secure the equivalent of several single family dwellings. Returns can be much higher than single family dwellings and these properties are attractive for those buyers looking for higher cash flows.

Strategic Summary

We recommend our clients to engage in both long term buy and hold for cash flow and also buy, renovate and re-sell for profit. Cash from resale can then be used to increase cash flow holdings. A diversity of property is also recommended with some inner city homes for best cash flow and some higher value homes further out to lower overall risk and propel capital gains. The more desirable suburbs are also heavily discounted and represent good buying opportunity.

This report is to read along with our forthcoming Phoenix Arizona report, where we look at market trends and strategies there. Subscribe to this blog for automatic updates as posted.

Vincent Selleck
US Property Buyers Agent
Wealth Creation Strategist

888 Wealth Creation Pty Ltd ABN - 37068435665
vincent@888wealthcreation.com

Ph 02 66 857 888 - Fax 02 66 858 388 - Mbl 0403 255510

Shop 6/14 Middleton St. Byron Bay NSW 2481

www.888wealthcreation.com