Top 3 Dangers of Buying Low-Cost Single Family Homes in the USA

By Gerald Tay (guest contributor)

I recently shared my insights on the USA real estate market to local investors and readers. Unsurprisingly, I received many emails from them, in particular on buying low-cost USA Single-Family Homes (SFH) for investment. Some investors shared with me that they are currently facing serious issues on these low-cost properties, and wanted to find ways to resolve them. My direct answer was: “If you can find buyers for such properties, sell at whatever price ASAP!”

With our expensive local property market, financing restrictions and low deposit rates, many Singaporean investors are eagerly jumping on the wagon (like everyone else) to buy low cost properties in foreign countries such as USA for investment. But is this a smart move?

Reasons these low cost properties look enticing

Here are some reasons why these foreign properties look enticing to investors:

1. Low purchase cost – a Single-Family home in the USA (landed property) can be bought for USD$50,000 or lower
2. Potential double-digit investment returns as high as 15%-20% a year (on paper)
3. The property will be in safe hands of a property manager (a terrible misconception)

In this article, I’ll explain some of the problems you’ll have to deal with if you’re intent on going ahead with your low-cost foreign purchase.

Danger #1 – Section 8 Properties are rented to potentially undesirable tenants

Most low-cost properties are under the USA government housing scheme called Section 8.

Section 8 provides housing assistance to individuals with low or no incomes and the high rental income is almost guaranteed to landlords by the US government for a reason – these properties are avoided by most American investors like the plague.

The king of Section 8 landlords is the US housing authority. Other than the fact you have absolute no say in dictating how much you want to rent your property for, there are potential trouble-making tenants to deal with, complicated tenant application processes which can sometimes take months to approve by the housing authorities, and severe property inspections landlords have to adhere to every year.

Unless you’re living near the property, owning such low cost foreign properties is definitely not worth your time and investment money.

Unlike Singapore, most USA states have housing laws that favour tenants more than landlords. Apart from Section 8 properties, there are low-cost properties that are tenanted by undesirable tenants who may cause many legal problems and rental issues for landlords.

Evicting undesirable tenants is like getting rid of a leech as most will simply not leave. A landlord may need to go through a lot of trouble to apply for legal assistance that will cost thousands of dollars in legal fees alone.

I know of a Singaporean investor who was shocked to find out he has a criminal as his tenant. The problem is that the tenant is on the state police wanted list, but the complex housing regulations that protect tenants from being homeless or evicted without going through proper legal proceedings.

Danger #2 – Potentially Huge Property Maintenance Costs

Low-cost properties are often very old, some as old as 50 years! You’ll face expensive and extensive property structural repairs for broken rooftops, corroding wooden reinforcement pillars, old broken water pipes and other potential damages that cannot be easily assessed at first glance.

Even small repairs or replacement for broken doors and choke sinks can get on your nerves, especially as a foreign landlord. Labour is very expensive in the USA, and even finding a simple plumber can cause you infuriating frustration with an inflated repair bill on your hands.

Danger #3 – Property Managers’ Negligence

Hiring a property manager does not guarantee that your property issues will go away like magic.

Unless you are a local familiar with the real estate market, finding a credible and trustworthy property manager to manage your foreign property in a large country like the USA is equivalent to finding a needle in a hay stack without any relevant property contacts and network.

Even if you do find one, it does not guarantee the property manager will be 100% focused on your one small property.

In the USA, a property manager easily gets paid $1,000 a month or more for managing much larger properties like apartments and commercial buildings, while the same property manager gets paid only $100 a month for managing one small property with so much trouble. Which property do you think he would rather focus his time and effort on?

Advice for would-be foreign investors

Be smart about your investments. As I’ve repeatedly advised many buyers of foreign properties, invest based on Partnership, not Salesmanship. What this means is that if you really intend to invest in a foreign country you don’t know well, find and partner a credible knowledgeable local of that country who has sufficient local investing experience to advice you on the pros and cons of the market. This partner will have skin in the game with you. If you don’t have access to such credibility or partnership, my advice is to stay away from that foreign investment or that salesman.

I see many local property seminars and exhibitions cashing in on the overseas-buying hype. Many of them are marketing and selling low-cost foreign properties with illusionary returns as high as 20% a year to unwitting mass market buyers. If I may say so, you should be careful when buying from them as these marketing companies are not regulated by our Monetary Authority of Singapore (MAS) in selling investments to the public. In other words, there is no recourse or any financial protection for you as an investor. If you are buying on your own directly, do note the above inherent dangers you’ll be facing by yourself.

By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.