For Canadians Investing In Phoenix, AZ

[Rickson9]

Distressed Property In Phoenix, AZ

As a Canadian who is currently buying rental properties in Phoenix, AZ there are a few things that Canadians should keep in mind when investing there.

First, for those who own Phoenix, AZ real estate already, make sure you visit the Maricopa County Assessor's web site at:

Default

Use the 3rd line "By Name & Street". Enter your "Last Name" and the "Street" that your property is located. Make sure your property tax bill is being sent to the correct address and that your payments are up to date. Americans are sometimes confused with our "weird" postal codes and don't understand that they're alpha-numeric and may change the letters into numbers to match their idea of a zip code. This would cause your property tax bill to fall into a black hole - not something that you want!

Second, Canadians also need to fill out a Form W-7 to get their Individual Taxpayer Identification Number (ITIN) to pay their share of U.S. taxes. An accountant familiar with the Canadian-U.S. Tax Treaty should be able to help you out. For more information, go here:

Individual Taxpayer Identification Number (ITIN)

Keep in mind that the identification that you submit along with your Form W-7 needs to be Notarized. I used my passport.

Third, if you're renting your property out make sure you have the proper Residential Property Classification. As a property owner that will be using a property for investment it is your responsibility to notify the tax assessor's office that the property is a class 4 residential property (rental) as opposed to class 3 (residential). If your property is not properly classified you will be subject to fines and penalties. Your property manager should be able to help you out with this.

Fourth, if you own 6 or more lots or homes within a subdivision you need to file a disclosure document when you plan to sell, with material information about the development and surrounding area. As an investor, if you purchase 6 or more lots, homes, condos, town homes (etc.) within a single subdivision, when you go to sell even 1 of these properties, you will be subject to the rules governing public reporting. In other words, you have to provide the buyer a copy of a current and valid public report. Failure to do so may allow the buyer to recind their purchase contract for up to 3 years after the sale and get their money back. Read that last sentence again...slowly.

To bypass the issues around the last point, just buy 5 units or less within the subdivision and move on.

Last, but not as important as the above, keep in mind that returns of 20% on gross rent are not uncommon in Phoenix, AZ right now. Don't get excited when you see prices that are only 5x gross annual rent. There are a lot of these kinds of properties so take your time and find the one that suits you the best!

I hope this helps!

Best regards.

 

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[andviv]

wow, this is a very good thread. Thanks for sharing your experience and lessons learned.

I know you have mentioned buying condos. Just out of curiosity, how are you selecting the areas? If you don't mind sharing, what areas fall within your rules, and how did you go screening them?

I've had experience dealing with rentals while leaving hundreds or thousands of miles away from the properties. I know from this experience that your property manager becomes your life line in regards to your investments. How are you selecting your PMs? How are you managing them? Are you going with a single company/guy, or one different for each couple of properties?

Thanks in advance for the info you provide.

 

[Red]

And don't forget to allocate for FIRPTA (Foreign Investment Real Property Tax Act) on the back end when you decide to sell.

 

[Rickson9]

I know you have mentioned buying condos. Just out of curiosity, how are you selecting the areas? If you don't mind sharing, what areas fall within your rules, and how did you go screening them?

Good question! I went to the City of Phoenix web site and avoided areas that had property or violent crime.

I've had experience dealing with rentals while leaving hundreds or thousands of miles away from the properties. I know from this experience that your property manager becomes your life line in regards to your investments. How are you selecting your PMs? How are you managing them? Are you going with a single company/guy, or one different for each couple of properties?

I screened a few companies. I use CR Property Services. I was assigned a property manager. Amy. If she has a question she calls me. If I have a problem, I call her. I like the fact that they send out monthly statements that itemize everything. That's pretty much it!

I hope this helps!

Best regards.

 

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[biophase]

What areas of Phoenix are you purchasing your condos in?

 

[Rickson9]

I bought in Phoenix proper and Tolleson.

My last purchase closed in Nov 2011. It has become increasingly difficult to find rental property that makes sense as prices have rebounded strongly in the last few months.

 

[Illusion]

Have you bought mostly condos or multiplexes?

 

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[Rickson9]

Condos and SFH. I'm looking at multi-family, but haven't picked one up... yet.

 

[Leary]

I was looking at fourplexes in AZ recently (via websites) and it seems I'd clear $1k per week with zero down on a $140k mortgage at 100% occupancy. It's apparently a difficult entry point for an Australian to purchase in the States, but I'm investigating options...

 

[Illusion]

Ive been looking also. What sites do you guys use? ive tried zillow but there are too many details missing for multi family.

Any financing options for canadians?

 

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[Rickson9]

I work with an agent. I have access to the MLS so I see a new listing hit the market almost instantly.

Re: financing, I don't know. I'm buying with cash.

 

[andviv]

It has become increasingly difficult to find rental property that makes sense as prices have rebounded strongly in the last few months.

Rise in Phoenix Housing Shows Path for Other Cities - WSJ.com

 

[Rickson9]

Prices on my properties jumped approximately 25% in the last 3-4 months. I am looking more aggressively at multi-unit now as the herd hasn't focused there yet.

 

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[RealOG]

Hey Rickson9,

What do you mean by "aggressively looking at multi-unit"? Me and another guy on the forum are buying multi-families here in Phoenix and are running into a lot of Canadian investors bidding against us. You have to be very careful when buying here, as there are nuances some foreign investors aren't taking into account (like swamp coolers, zoning challenges, and mater metered properties). We have seen some of our bids lost specifically to Candadian investors paying much more than some of the RE is currently worth.

You'll want to be careful not to get bit.

 

[Rickson9]

Thanks for the tips! Could you help me understand some of the zoning challenges? Also, what is a mater metered property? Thanks for any help!

I'm in bidding wars now. Phoenix is quickly becoming unattractive for me. Suggestions of another RE depressed state appreciated.

 

[RealOG]

*Master Metered - my bad on the typo. Basically a lot of old properties in the phoenix area (and Scottsdale) can be on master meter, meaning one bill for the utilities. This can get VERY pricey for stuff like electricity especially during the Summer. You can include it in your rent, but you are not allowed to turn it off if the tenant doesnt pay rent. Complicates things and reduces the value of the property. We dont even touch master metered properties.

Zoning challenges - a lot of old properties were built or improved on before zoning came into play. This can lead to illegal units that have been grandfathered in. You run into issues if you ever decide to make serious improvements to those properties. Make sure whatever you buy meets zoning standards, or build the costs of permitting them into your bid.

 

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[Rickson9]

As a foreigner here are a couple more sites that I use:

City Data

Brainyzip

 

[H. Palmer]

Hi, I'm another foreigner interested in investing in the Phoenix area.

I'd like to know how you guys cope with the risk of renters that leave.

Rickson works with an agent. Does this agent also take care of attracting new renters? Or is this handled by another agent?

And did you inspect your properties on site before purchasing them?

 

[Rickson9]

Hi, I'm another foreigner interested in investing in the Phoenix area.

I'd like to know how you guys cope with the risk of renters that leave.

My property manager cleans up the unit and finds a new tenant.

Rickson works with an agent. Does this agent also take care of attracting new renters? Or is this handled by another agent?

As I mentioned above, I use CR Property Services; a property management company.

And did you inspect your properties on site before purchasing them?

I went to Phoenix, AZ a little over 2 years ago (winter of 2009/2010) before I started buying. I haven't been back since.

As an update, although I continue to scour the MLS for opportunity, the pickings are slim at the moment. Over the last 2 years I have never seen a feeding frenzy like this. I'm sure before the housing meltdown it was pretty frenetic, but for different reasons. Prices have come down hard since then.

I found a new listing one night around midnight my time (9pm Phoenix time) and I forwarded it to my agent. It was in Gilbert. Almost nothing reasonable comes up in Gilbert because, in general, Gilbert is a decent area and prices are higher to reflect this; and higher prices makes me less interested because it crushes rental yields and makes the property worthless form an investment standpoint.

I immediately told my agent to write up the offer for full price; cash. In the past, this would have won me the property easily. While I was signing the paperwork, my agent contacted me and told me that he contacted the Selling agent who informed him that 4 offers have already been submitted. Keep in mind that this was 9pm on the same day that the listing hit the MLS.

We rushed to get our offer in. The Selling agent said that she would be presenting all offers the next day at 5pm. She was a bit late, but nonetheless, she said there were over 10 offers on the table. My agent forwarded me her response:

"Ron,
Thank you for your offer for the property located at xxx in Gilbert.
Respectfully, the seller has accepted another offer.
Thank you for your time, consideration and professionalism.
I hope to work with you in the near future.
Best Regards,
Melissa Carpenter"

I don't do well in a bidding atmosphere and will likely not be able to purchase anything until this frenzy dies down. Foreigners are coming in with full cash offers far above what I'm willing to pay to make the property a decent investment. So, it's probably on to the "next thing" for me.

What is the "next thing"? Well I looked at multi-unit properties. I think a couple nights ago I looked at a couple hundred listings until 4am. I forwarded the 2 possible candidates (and 3 long shots) to my agent. You read that correctly - I found 2 possible candidates after looking at least a couple hundred listings. Investing is no joke. It requires a lot of time. But that ok that goes with the territory. My agent correctly mentioned some issues and I still needed to drop the prices on the 2 candidates to make my numbers work.

I spoke at length about this issue and my agent is having a rough time selling homes as well. Imagine trying to get your client's offer in front of a seller only to find out that, within a 12 hour period, you're competing with 10 others. The chances that my agent will close (and get paid) will be small. I asked him how he's managing this. Here is our conversation (keep in mind that I have been working with Ron for a little over 2 years now and he's found me some solid deals):

[continued after Seller's agent's response above]

Ron: "blahh..."

Me: "Wow 10 offers..."

Ron: "Welcome to my world."

Me: "You need to find a listing and get us first in line! lol"

Ron: "I have a listing - my rehab flip in Scottsdale. But it's priced at $400,000. Interested? lol"

Me: "Throw me some info. I'll shop it around. Can't hurt"

Ron: "I'll shoot you over the MLS for it. We're also remodeling another one right now on an acre lot in Scottsdale backing Orangetree golf course. Again, complete remodel. We will be listing that one for $475,000. Right on Shea blvd in the center of it all. great location. close to everything. Will be done in around 2 weeks."

Me: "Nice! I didn't know you were so handy lol"

Ron: "lol. I'm overseeing the operation in partnership with an investor I'm working with. Not doing it myself, thank God. I have access to excellent contractors and tradepeople having been in real estate development prior to the downturn."

Me: "How much would an investor need to front to flip one of these and what is the likely % return?"

Ron: "House like this, about $310,000 cash to purchase and remodel - that is if 100% cash is used. I have a line/source of hard money financing I intend to use in certain situations with my investor once we sell these 2 and prove up the returns that allows you to finance 80% of the purchase cost.

"At 100% cash investment to buy everything, the return is about 10-15% over a 4 month period for something this extensive or 30-45% annualized return.

"It is a bit risky in the purchasing because of how the properties are bought and now the inventory on even these deals is going way down so they are harder to find.

"If you'd interested in something like this or know anyone else who would be, let me know. My goal is to have 2-3 investor groups and be doing 1-2 of these size remodels per month while we can. My current investor has easily $1 - $2 million to throw at me for this once we complete the first 2 so I'm looking for up to a couple more smaller investors or one similar sized guy to fill my stable.

"As you can tell, it is almost impossible for me to make money selling investment homes anymore for a couple of simple reasons. This is much more profitable for fun for me.

"I actually wrote a blog about purchasing at foreclosure auction towards the end of last year and it explains the risks and rewards and why I don't recommend it for long-distance investors. You really have to be here with your nose on the ground to make it work, and it's STILL riskier than your simple investment property purchase - that's why the returns are much higher. The risk is in the condition of the property which is why you really have to buy them right and/or know the local market and what they'd be worth reconditioned.

"Once I have these first couple done, I will be posting a brief proforma about how they work on my developer website. Until then, I just go over it one-on-one with anyone interested."

Me: "Let me mull it over. This would be a departure from my normal buy-and-forget investing style so I would probably start quite small and likely be on the ground in Phoenix - even if it means eating up most of any potential profit."

"Perhaps losing out to a couple more 10 offer bidding wars will convince me...

"I need to find a new state..."

Ron: "hehehe...totally understand. It is a completely different type of investing for sure. Most important thing is you have someone on the ground that knows what they're doing and can run business efficiently.

"You also have to trust that person explicitly which is not an easy for most people to do. My other investor basically handed me a blank check for $700,000 for these 2 properties and told me to go have some fun. Of course, I've worked with this particular person both directly and indirectly for well over 12 years so he knows what I'm about and trusts me to act in his best interest. I also sold him an apartment building which I oversee on his behalf in Phoenix with plans to destroy it in a couple of years for a planned new condo development when the market turns.

"If you decide that you're interested, I ca send you the proforma of our Cactus home and explanation of how the investment would work.

"With the market on the rise, there really is no downside risk if we pick the properties properly - the risk is in the level of return we an achieve and now, in finding them since there are more players in the game and less properties."

Me: "Where's the sweet spot dollar-wise that has both a return on my money and where my money will actually be returned?"

Ron: "What I've found is that there are too many bidders at the lower price point because (a) it is less money to invest, (b) you are not only competing with rehabers, but also end users that are buying the properties to fix up and rent out and keep so the competition is much more fierce. When I am looking for a property, I was bidding on an average of 3-5 per DAY. That's how tough it is to get one. The sweet spot that I found was $150k-$250k requiring more extensive rehab because it not only requires more money, but also requires more expertise and market knowledge which drops many bidders out of the game.

"Min we'd probably be looking at is $200k-$250k and that's if I keep my target acquisition price below $150k to accommodate the possible repair and rehab expense.

"Of course, I'd keep trying on the smaller ones, but the likelihood of snagging one of those is almost nil so I have to be realistic."

Me: "Ok. Around a quarter mil. I'm interested in a proof of concept. Can you ask your other investor if I can speak with him. I would like to propose going in for 50% @ $250k with him for $500k total. In this case we both limit our risk capital and we both get the same return."

Ron: "I will see about getting you to speak to my investor/partner."

Me: "Thanks. Appreciate it."

The following is a link to the MLS listing of the Scottsdale home that he mentions in our dialog that he purchased and rehabed.

Scottsdale

I'm not sure if I'm going to do this or not. Ron has sent over more information and I'm reading it over. And thinking. I may find myself in Phoenix a lot more in the near future. Time will tell.

 

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[JEdwards]

Are you concerned at all that your agent is really in the rehab, let's find investors business, instead of the let's make the best deal for Rickson business?

And/or are you just giving him leads?

I don't do anything with real estate. Not my interest, but one of my employees dumped there mom's old house, it was on the market 3 days. I think things are heating up.

 

[InMotion]

Things are starting to turn in residential construction. New homes are starting to sprout up again and existing homes are still being cleared; hospital construction is booming currently; prices are still way down as well but climbing.

 

[Rickson9]

Are you concerned at all that your agent is really in the rehab, let's find investors business, instead of the let's make the best deal for Rickson business?

Good question, but I'm not concerned about that, no. It's been useful when I purchased property and needed them fixed up because the sellers were angry when they left.

Over the next couple months if I continue to lose out to bidding wars, I'm going to have to step back and think about what's the best deal for me. The market is transparent and blunt. I will flow with what the market gives me.

And/or are you just giving him leads?

It works both ways. I give him ideas and ask what he thinks, he gives me ideas and asks what I think.

I don't do anything with real estate. Not my interest, but one of my employees dumped there mom's old house, it was on the market 3 days. I think things are heating up.

I scour the MLS a lot and I noticed listings disappearing faster than normal and property where prices used to be $x, but are now $x + 25%.

Now I'm starting to lose out in bidding wars.

 

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[andviv]

Is Phoenix a "Sellers Market" in the $250K price range then?

Does it look like flipping is the right thing to do at this time in that price range?

 

[Rickson9]

Is Phoenix a "Sellers Market" in the $250K price range then?

Does it look like flipping is the right thing to do at this time in that price range?

I don't know. I'm going to follow what my agent is doing while doing what I'm doing and make that determination for myself this year. I've looked over the financial spreadsheet on his flip and told him that his return was wrong. It's closer to 10% over 6 months for the flip. That's not compelling for me at the moment.

I want to speak with his investor to see why the guy even bothers. In the meantime I'll keep fishing for rentals in Phoenix.

 

[Red]

Is Phoenix a "Sellers Market" in the $250K price range then?

Does it look like flipping is the right thing to do at this time in that price range?

Yes, it's absolutely a seller's market in the $250K price range.

Flipping is getting harder to make a profit like 'back in the day' -so many bidders at the auctions are squeezing the profit margins right out the door. It's still do-able, but it all depends on the margins you want to make & if the current margins are worth your time.

 

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[Rickson9]

Here are a few more tools that I've found useful:

Use Date Range to expand the dates (I think it defaults to 14d) and add "Property crime" and "drugs" (or whatever else you want) to the Incident Layer.
Crimereports.com

A more local version of the same thing. However, no dates as to when the incidents occurred.
My Neighborhood by AZCentral.com

I enter a zip into Search This Forum and read the posts.
City-data.com

If I'm not sure I cross references these sources with my agent and PM.

 

[Rickson9]

Just adding some more info.

As a general rule, in the U.S., the red states are pro-landlord and the blue states are pro-tenant. The most well-known of the pro-landlord states are Texas, Arizona, and Florida.* The most well-known of the pro-tenant states are California and New York.*

Red states and blue states - Wikipedia, the free encyclopedia

Eight Landlord-Friendly States

#4. Arizona
Arizona has strict laws regarding noncompliance with rental agreement and nonpayment of rent. For example, if a tenant provides false information on the rental application, Arizona landlords have the right to deliver a written notice to the tenant and terminate the rental agreement within 10 days.

8 Landlord-Friendly States – InvestRent

Arizona is becoming more landlord friendly with the following recent trifecta of rental laws:

1) The first allows landlords to enter a unit without the standard 2-day written notice in the event of a needed repair.

2) The second bill deals with abandoned property. A landlord will be able to enter a unit without giving legal notice if needed to determine if the tenant has moved out. If there is no personal property of “material value†left in the unit and a “reasonable person†could determine that the renter has moved out, then the landlord can take over the unit.* The landlord will not have to store any perishable items.

3) The third measure, which may be the most controversial, rolls back tenants’ legal rights regarding appeals of an eviction order or judgment for unpaid rent. This measure requires the posting of a much higher bond than what is required under current law.

The Arizona Tenants Advocates are warning tenants that making a repair request means giving up the right to notice of entry for the rest of the lease; if a tenant moves out, they could be excluded from renting somewhere else for the next 30 days; and, if a tenant legally terminate a lease early, they still forfeit their security deposit.

Landlord Forms | American Apartment Owners Association

In addition, I have had questions about Phoenix's "primary industry" or "underlying economy".*

Manufacturing. Major industrial products manufactured by companies located in the metropolitan area include aircraft parts, electronic equipment, agricultural chemicals, radios, air-conditioning equipment, and leather goods. Also financial services and banking. Regional headquarters of: American Express, Chase Bank, Bank of America, Discover Card Services, and Wells Fargo Bank. High technology and aerospace firms hold a considerable share of the manufacturing jobs.

Phoenix is currently home to seven Fortune 500 companies: Allied Waste, electronics corporation Avnet, Apollo Group (which operates the University of Phoenix), mining company Freeport-McMoRan, retailer PetSmart and energy supplier Pinnacle West. Honeywell's Aerospace division is headquartered in Phoenix, and the valley hosts many of their avionics and mechanical facilities. Intel has one of their largest sites here, employing about 10,000 employees and 7 chip manufacturing fabs, including the $3 billion state-of-the-art 300 mm and 45 nm Fab 32.

The city is also the 6th most populous city in the U.S. with over 4.2m Americans and growing. Phoenix is located at the center of market areas stretching along interstate highways from southern California to western Texas, Colorado, Utah, and Mexico. More than 50 companies provide motor freight service. Rail service is available from two transcontinental rail lines. The Phoenix metropolitan area economy benefits from air cargo service through Phoenix Sky Harbor International Airport, where American Airlines and American West provide wide-body freight service.

 

[andviv]

Thanks Rickson.

Have you found more deals recently? How's the market these days, in your opinion?

 

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[Rickson9]

Nothing. I've been bidding on the few I've found and getting outbid. Crushed really.

Here's an Aug market update.

https://docs.google.com/open?id=0Bwb1PD4476rPcWxKSHB0TjROVzQ

" In June 2012, bidding at these auctions has become far more competitive and 55% of these properties are now going to third party bidders and only 45% reverting to the lender. With the number of completed foreclosures also down 56%, this means far fewer foreclosed homes have been added to the REO inventory."

"...within Greater Phoenix over 37% of the active listings already have a signed contract, typically waiting for the lender’s short sale approval. The number of active single family homes without an existing contract was down to approximately 9,011 for the Greater Phoenix area as of July 1. However 78% of this supply is priced above the current median sales price and 23% is priced over $500,000, so the scarcity of homes for sale is most severe below the median sales price of $150,000."

"We can see that overall prices reached a low point in September 2011 and have risen sharply since then...The significant annual price increase over the last 12 months has now spread to the majority of Greater Phoenix. Examples include El Mirage (up 41% in average $/SF from June 2011 to June 2012), Mesa (up 26%), Peoria (up 20%), Maricopa (up 32%), San Tan Valley (up 36%), Tolleson (up 37%), Buckeye (up 26%), Laveen (up 24%), Litchfield Park (up 22%), Queen Creek (up 21%), Tempe (up 21%), Glendale (up 25%), Phoenix (up 34%), Carefree (up 40%), Avondale (up 25%), Florence (up 29%), Arizona City (up 30%) and Apache Junction (up 32%)."

"Most homes below $250,000 that are priced realistically are attracting a large number of offers within a short time, and offers will often exceed the asking price. It is still quieter in the luxury market and active adult sector where supply is adequate but now falling to levels that are below average."

"As prices increase, returns on investment for landlords diminish and at some point in the future we expect to see investor demand diminish also. This will accelerate if vacancy rates start to increase. However there is still no sign of any significant new supply of homes coming on to the market and those who anticipate a flood of bank owned “shadow inventory” are likely to be very disappointed."

 

[Rickson9]

Just an update. I stopped investing in Phoenix about 6 months after my last post in this thread.

Being a Canadian the unexpected bonus has been the USD becoming over 30% more than the CAD.

I still hold the U.S. properties. They have definitely doubled, maybe even tripled. Obviously I won't know for sure unless I mark them to market. But that's my estimate. Going forward, I expect prices to increase at the rate of inflation.

Back in 2010 a good property would comfortably generate $15k/month for every $1m invested. Unprecedented. Currently, a good find will be at $6k/mo per $1m invested.

I'm not doing much these days outside of meeting Canadian investors and hanging out. They're a very inspiring bunch. One older fellow is a private lender to developers looking to add service their lots before development. The fees he charges for these 1 year terms is fantastic cash flow. He either funds personally or syndicates. Another woman talked about getting her product into Target 2 years ago and she's now looking to expand in Canada. The expansion will be easier now that she's generating the majority of her revenue in USD and going forward, she is looking to fund a CAD expansion.