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Property Investment for Expats in the United States Of America

Submitted: July 2013

The US Government imposes no foreign investment restrictions on property investment, as the US has a long tradition of welcoming foreign capital. As property rights are strongly protected, US property investment may be a very attractive option for many expatriates.

US round-trip property transaction costs are moderately low by international standards (around 9%), and the US has a very reliable system of housing statistics. These are available from the US Census Bureau and the Federal Housing Finance Agency (FHFA).

Don’t underestimate the potential for natural disasters though, and check the possible risks in your local area. It might be necessary to have a separate insurance policy if you live in a high risk area. See Insurance for Expats in the US.

US housing market generally

Although market conditions may vary dramatically from one state or city to another, the US housing market is much more uniform than it used to be decades ago. This is partly due to US domestic migration flows from expensive areas to cheaper areas. Property prices can go as high as $30,000 per sqm for prime property in New York.

Strong demographics and better housing standards have justified persistent rising rents in real terms since World War II. For so long as these fundamentals don’t really change, rents are supposed to keep going up over the long-term, along with home prices.

However, the US housing market is still subject to large medium-term fluctuations. For instance, high credit availability has contributed to a house price bubble from the 1980s to the early 2000s, followed by a sharp downturn in the late 2000s, which ended by a new upturn in 2013 (with double-digit rises back in).

Consequently, an assessment of the US housing market must include many macroeconomic factors, including:

  • Mortgage availability
  • Interest rate variations
  • Developments in connection with the chronic housing shortage
  • Demographic trends (e.g. migration flows between the Sun Belt and the Manufacturing Belt)
  • Tax policy, and
  • Psychological factors

Mortgaging

Get your documentation right before applying for a mortgage, and do it early to avoid disappointment.

From a financial point of view, remember that:

  • your net borrowing costs include not only interest but also additional mortgage-related fees and taxes
  • interest rates may go up in the future, but they have some room to shrink further as well
  • homeownership costs are not solely about financing costs (you may to plan for other costs, such as maintenance).

For more information on US mortgages, see ACCOMMODATION – Mortgages for Expats in the US.

Property taxes

Land value taxes may or may not be levied at state-level. Higher property taxes mechanically shrink property values and rental yields. Prior to purchasing property, it is essential that you check how much property taxes you can expect to pay.

Letting your property

Gross rental yields may vary strongly from one city or state to another. Typically, you may expect them to exceed 4%, even in Manhattan.  This may be much higher outside of major city centres (above 5%). Rents may rise further in the future. If the current long-term trend goes on, US rents should even rise above inflation.

Do check the applicable landlord and tenant law prior to leasing property. The rules may be different from one state to another, and some states may impose rent controls. Do not attempt to evict a tenant illegally, as illegal eviction may be a criminal offence.

Financial returns

From a financial point of view, the return on property investment comprises of:

  • net rental yields (or rent that you don’t pay), and
  • net capital gains

If rents are to rise (e.g. because of inflation), you are more likely to make capital gains over the long run, i.e. without taking into account medium-term fluctuations, such as mortgage availability.

Don’t be lured too much by expected capital gains. Remember that this attitude strongly contributed to the subprime crisis, and that many households lost a lot of money when the downturn came.

Taxation

Rental income received by an individual is generally taxed at the progressive rates of income tax.

Capital gains are taxed separately. Sales of principal residence are generally tax-exempt. Otherwise, the US tax system allows capital gains tax deferral if you sell your property through a like-kind transaction.

Mortgage interest is tax-deductible, subject to certain limitations.

For more information on tax in the US, see TAXATION – Investment Taxation for Expats in the US.

 

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