United States Investment Strategies
As a major world economy, the USA has long been an attractive property investment location. While many investors are now holding fire in the current economic downturn, others cannot resist the long term opportunity that today’s bargain properties now offer.
A new president arguably brings a new dawn to the USA investment climate. Buyers now look forward to improvements in the political and economic environment, and are regarding the USA property market with renewed faith.
Concrete evidence is now emerging to indicate that now is an opportune time to purchase property in the USA. In certain sought-after locations such as Florida, the property market is at its most competitive both in terms of sales and rentals, and tourism figures are reassuringly still rising. The weak dollar further fuels demand from overseas buyers and with prices having dropped by up to an amazing 50%, it is clear that overseas investors are able to buy a lot more for their money than ever before. Furthermore, some market estimates indicate that US housing prices will fall by a further 11% in 2009, totaling a huge decline of 33% from their peak in 2005.
Other signs of long term USA market optimism are demonstrated in the sales of new build homes, where the US Department of Housing and Urban Development figures for September revealed a 2.7% increase in new build sales August. Such news may be one of the first signs that property in the USA is beginning to recover. This comes in the wake of concerted action by the US and other countries to provide capital and liquidity to banks as well as cut interest rates.
According to many economists, reports the Vancouver Sun, the slump could be "closer to the end than the beginning". Greater credit flows, rising incomes and other economic improvements will eventually drive the USA market recovery. Many shrewd investors are identifying now as essentially the bottom of the USA market, while duly snapping up the bargains in order to reap substantial long term benefits.
Despite the global economic crisis, the USA boasts the largest economy in the world and has long been a stable economic environment in which to invest. A rise in interest rates and the subprime lending crisis have indeed put the brakes on the property market but, for many overseas investors, the USA still represents a strong market into which to make wise investments, particularly in buy-to-let options, in key locations.
The economic crisis has created an ideal opportunity to buy property at low prices. This is especially true in property hotspots such as Florida and Las Vegas, where, owing to climate and excellent leisure activities, the market is likely to remain more buoyant than in the rest of the country. There are many areas of the USA that offer excellent tourist facilities, collectively attracting the USA’s annual tourist figures of some 40 million visitors per year. Investors who purchase wisely in tourist destinations rely on a healthy resale market with strong capital growth to fuel their investments.
Predictions for property investment in the USA indicate that the strong Sterling and Euro against the Dollar make for a beneficial property investment choice. The cost of living in the USA is still generally lower than in many European countries and the extensive availability of a wide range of consumer goods makes the USA a retail paradise.
Barack Obama won a landslide Democrat victory as President of the USA on 4 November 2008. Although he now has the tall order ahead to rectify the state of the nation’s economy, politically, many citizens and investors in the USA now also hope for much improvement. Emphasis on political stability and world peace is high on the agenda, a concept that will bring with it refreshed confidence and investment potential for the USA.
In spite of its large population, there are many places where those who want to escape the crowds and civilisation can find nature “in the raw” and enjoy the simple pleasures of walking, cycling, camping or fishing. From skiing in the Rockies, to the vast wetlands of the Florida Keys there is an array of vegetation and enough scenic beauty to fulfil the dreams of any adventurer.
The climate throughout the USA differs according to region there is a type of weather to suit everyone. The temperate climate of the East Coast offers warm summers with spectacular autumn changes especially in the areas around the Vermont. Winters in this region can be very cold with heavy snowfalls. The Midwest has a lower rainfall and summers are often very hot, although winters, in contrast, are frequently very fierce. Heavy winter snow in several regions means there are many parts where skiing is good and this is a highly popular sport in the USA. Further south, around Florida and Louisiana the climate is tropical with hot, humid summers and dry, warm winters making the area popular with Northerners who go south to get away from the winter chill.
USA culture has been influenced by the many nations that have populated the country. Each region has something different to offer as can be seen from the differing styles of art there are. California is famously the home of movies, yet beneath the glitz there is the culture of the vineyards and the people who brought them to the States.
The wide availability of direct budget flights to the USA’s numerous international airports from Europe makes property purchase all the more attractive to foreigners. Meanwhile an “Open Skies” agreement is currently being considered to abolish the exclusivity that British Airways and Virgin Atlantic have enjoyed as carriers over the years. This will undoubtedly bring great benefits to consumers and encourage far more competitive pricing.
Virgin Atlantic flies direct to Las Vegas, Orlando, New York, Boston, Washington, Detroit, Miami. Los Angeles and San Francisco
Continental, American Airlines and
Delta Airlines fly direct to most cities in the USA.
Under the Visa Waiver Program, some foreigners are allowed to stay in the USA for 90 days without applying for a visa.
Currently, 27 countries participate in the Visa Waiver Program, as shown below:
Visa Waiver Program - Participating Countries
Andorra, Iceland, Norway, Australia, Ireland, Portugal, Austria, Italy, San Marino, Belgium, Japan, Singapore, Brunei, Liechtenstein, Slovenia, Denmark, Luxembourg, Spain, Finland, Monaco, Sweden, France, Netherlands, Switzerland, Germany, New Zealand and the United Kingdom.
If you wish to stay in the USA for longer or do not come from one of the above countries, you will need to find out about your particular visa application needs. You are advised to apply to the American Embassy or Consulate within the jurisdiction of your permanent residence.
Short Term Investment Strategy
Despite today’s difficult real estate investment climate, carefully selected off-plan property is still a viable option for some shrewd short-term investors in the USA.
Location has never been more important in the USA: in line with growing tourism figures, successful investors are selecting areas of high demand, such as Florida and Las Vegas where there are no off-seasons and resale potential is at its highest.
Despite the market slowdown, many buyers remain in the framework and USA property is still considered by many to be a lucrative form of investment. An advantage of the slower market is that prices are being held steady and give new investors the opportunity to buy into the market. The exceptional rate of exchange between the dollar and sterling, as well as the euro, makes the USA a really exciting investment opportunity, offering buyers great value for their outlay.
Short-term off-plan investment properties in carefully chosen locations in the USA can offer strong potential. As anywhere in the world, off-plan prices must always be a good deal lower than prices in comparable completed developments – a situation that is easy to find in today’s buyer’s market. This gives full power to “flip” investment strategies in which capital investors sell on the unit prior to project completion. It’s important to ensure that the reassignment of contracts is permitted in the off-plan project you are interested in and under what terms. Sometimes, though not always, investors may be charged a percentage of the purchase price in order to do so.
Highly beneficial finance structures are generally in place and, depending upon the development, investors need pay only around 10% of the purchase price in the form of a deposit over the first year, while the rest is payable when and if they complete. This makes purchase an affordable option for many first time investors. In the case of selling on their contract prior to completion, investors will have made a relatively small capital outlay.
IPIN often has access to interesting pre-release prices, allowing its members to take full advantage of below market prices as well as capital appreciation over the construction period.
Investors in USA off-plan developments factor in between 18 and 24 months for construction from reservation to completion stages. Short term investors normally look to profit from a carefully selected, promising market, selling on their unit to mid or long term investors approximately 14 to18 months after making their initial reservation, regardless of whether or not the project is yet completed.
Payment terms will vary; good projects will often offer terms of 10% deposit with the balance payable upon completion, allowing short term investors to operate their strategy with minimum capital outlay. Of course, the earlier the investment is made, the greater the investment returns. As importantly by entering the project at the earliest possible stage, investors get the best choice of units which will always be first to attract buyers in the future.
Level of Complexity
Short term strategies offer the lowest level of complexity as the purchase has not yet been officially made; therefore, no property taxes or maintenance or management charges are due.
This is a simple capital investment, often with no need to proceed to Purchase Contract, or make any mortgage finance arrangements. Remember to check with the developer if there are any charges made to “flip”, or reassign your contract, and at what stage you are permitted to do so, before you proceed.
All investors must carefully assess the particular project and units in which they wish to invest. In many cases a wide range of other projects will be under construction and a choice will need to be made. A decision will need to be based on how a particular development or project will outshine its competitors in terms of appearance, location, on-site facilities and the unit itself. Investors will also need to consider issues such as the number of other units available within the particular development, predicted demand as well as competition for the type of property they wish to invest in.
To curb risk, a short-term investor should normally seek to buy the best possible unit, ie. a corner unit, a penthouse or ground floor unit with a private garden, which will always sell in preference to a standard first floor unit.
Investors need to be clear how their exit strategy is to run. How will the unit be marketed and by whom? How much will the selling agents charge in commission? Should a buyer not be found prior to completion of the property, investors must be confident they can cover payment to completion of the unit and adapt their strategy if necessary. IPIN offers a substantial Investor Care package, which adds significantly to investors’ chances of a successful exit.
Short term “flip” investments are undoubtedly more risky than longer term strategies, but, with careful research and planning in place, off-plan purchase in well located USA projects offers a sound investment with lucrative returns.
Hindered by the economic crisis, short term return on investment for USA property today does not generally offer significant opportunity to profit from capital returns. In fact, the market favours the longer term investment strategy for capital appreciation over time, often boosted by rental income.
By reserving at pre-release stage, investors profit from discounted prices and, in many cases, these are subject to successful planning applications, allowing for additional pricing uplift. Reservations on this type of IPIN recommended project allow for full refunds if necessary and secure escrow accounts are in place to protect investors’ funds. An earlier than normal reservation of course affords the maximum possible returns on investment on any given project.
The short term investment strategy is purely based on capital outlay as mortgages cannot generally be raised against property that is not yet built. In order to cover all eventualities, investors MUST be confident they can complete the purchase if necessary, even if using a buy to flip strategy.
If necessary, IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.
Purchasing a property and then re-selling prior to completion is a tax-efficient way to invest as it allows buyers in the USA to avoid any property transfer taxes and side-steps capital gains tax, should they choose to sell on the contract prior to project completion.
IPIN always recommends research into any double taxation treaties in place between the USA and the investor’s country of residence.
Medium to Long Term Investment Strategy
In recent years USA property has become very popular amongst British buyers, after the French and the Spanish, with the added advantage of English as the main language. Many purchasers are buying homes in prudently selected locations of the USA that will give them valuable long term profits as well as a growing rental market for their investments. A home in the USA with all the facilities available fulfils the aspirations of many property buyers both from financial and lifestyle perspectives.
As explained above, prices are at their lowest levels for years, often having dropped some 50% since their peak in 2005. This translates into an ideal opportunity to invest at the lowest possible entry levels, with a view to benefitting from optimum returns in the mid to long term future. Many investors are encouraged by the arrival Barack Obama as the new US President: a new wave of optimism is hitting the country and dreams for a political and economic revival are set to soon become a reality.
The difficulty in raising finance, combined with poor short term growth performance are pushing many buyers away from purchasing USA property; however, this situation in turn creates longer term buy-to-let opportunities in high demand areas where people seek quality residential, tourism and commercial property to rent. The new homes market is currently performing best of all, in terms of sales as well as rentals, with prime locations such as Florida attracting the highest levels of interest.
Despite recent market uncertainty, for many, the USA still offers a reassuringly stable long term investment climate for those investors wishing to sit back and watch their money grow over the years. Property prices historically rise for those prepared to wait and the USA now offers a suitable market in which to expect longer-term growth. Bought in areas where demand is high, USA property can produce substantial returns on investment, composed of a combination of value locked in from current greatly reduced prices, capital appreciation and rental yields over time.
Average construction time on IPIN Global (IPIN) recommended USA off-plan developments, from project sales release to completion of construction, is approximately one year. Mid to long term investors look to hold onto their units after construction, normally for at least 18 months from initial reservation, either to rent it out and/or benefit from capital appreciation upon eventual resale.
Many long term investors use tourism locations in the USA’s major resorts to generate reliable rental income over a period of time. As rental yields alone will not generate fast profits, it is long term growth combined with rental yields that provide the main focus of their strategy.
IPIN strongly recommends consulting with an IPIN advisor to discuss your particular mid to long-term investment strategy in the USA in order to ensure your chosen location best suits your needs
Level of Complexity
In the case of off-plan purchase, full payment for the property needs to be completed at various stages of construction, prior to final completion of the purchase.
For mid to long term investors, all costs will be applicable, while ongoing costs such as maintenance, community fees and utility bills will also need to be factored into the strategy finance plan. Bear in mind it’s advisable to open a Dollar bank account in order to pay for the property’s utilities and other ongoing expenses.
Beneficial arrangements are often to be made with local property management and rental companies. These ensure that such ongoing costs are covered and that your unit is rented out regularly. Managed properly, maintaining a property abroad can become no more complex than an investment closer to home.
For off-plan purchases, typical reservation fees are around 1,000 GBP and between 3.0 – 5.0% deposit is then payable over the first six months (minus the reservation fee). The final balance is paid upon completion a year later.
A medium to long term investment strategy entails much lower financial risk than a short term plan which relies on finding a buyer within a very short time frame. Provided the right investment is made on a quality, well located project with multiple facilities, establishing a rental market and eventually a buyer for your investment should not be difficult. However, as with any investment, patience and money is sometimes required until the end user is found.
A high demand for accommodation in city centres is encouraging for buy-to-let investors. On the one hand this factor indicates a stable investment environment in which to buy or rent, but on the other it brings with it intensified competition. Investors need to be confident that their particular property is indeed likely to be in high demand in the future.
It is customary to carry out a structural survey prior to purchase of property in the USA. The depth of survey you contract of course depends on the age and type of property you are purchasing. It’s your responsibility as the buyer to be certain that the building is structurally sound as the seller has no legal obligation to declare or ensure that this is so.
Bank guarantees are commonly given by developers in the USA and IPIN approved projects will always be protected by local or overseas bank guarantees.
By appointing independent legal representation, the client can be sure that all the necessary paperwork is in place before signing the purchase contract. IPIN ensures recommended legal services are always offered independently from project developers, therefore exclusively representing the client’s interest at all times.
Property ownership in the USA is mostly sold freehold, leaving no room for ownership disputes.
Investors are facing the realities of dropping property prices (average 25 - 50% p.a.). However, they are happy to buy extremely low and ride the economic storm, in anticipation of a revival in the market, a situation which, according to many analysts, will inevitably start to take effect around late 2010. Wisely chosen real estate gives opportunity to obtain maximum capital growth in the long term, boosted by high rental yields over the investment period.
Spurred on by a strong tourist market, buy-to-let investment in holiday areas offers strong potential to the rental investor. These areas include coastal regions of the east and west, ski resorts of California or year-round Las Vegas and Florida where investors benefit from the absence of any off-peak seasons. Rental yields in key locations such as Orlando can reach some 12% per annum, to which investors can add eventual annual capital appreciation upon resale. In addition, internal migration from the north to the south also stimulates the need for long-term rental homes in certain regions such as Florida and Las Vegas.
Financing a property investment in the USA is an important decision and today, more than ever, could entail injecting your own cash resources or employing an equity release scheme.
Sadly the current subprime lending crisis has for now put an end to the wide availability of mortgage products available in the USA and with prices dropping by as much as 50% from 2005, many Americans are now sitting on negative equity while waiting for an eventual and inevitable revival in the market.
Lending criteria have of course tightened considerable and if you decide to try and raise bank finance today, you should be prepared for disappointment. In principle, bank requirements vary from state to state and therefore the information below must be considered solely as a guideline in principle.
Mortgages - terms such as ‘points’ need to be understood as well as the implications of repayment and application costs and as most agents and brokers agree that it is advantageous to consult a mortgage broker and pre-qualify before looking for your property. Pre-qualification will enhance your credibility in the eyes of agents and sellers as well as assisting in speeding up the purchase process.
Down Payments - The majority of USA mortgage companies require a down payment of 20% for non-USA residents with proof of employment or documentation to confirm proof of income for the self-employed. In general the higher the deposit, the easier the process and the fewer proof of income documents are needed. Proof of the source of income has become an additional requirement since September 11th.
The right type of mortgage for you depends on your existing financial circumstances, the length of time you wish to extend your investment and your choice in mortgage rate option. A fixed rate mortgage over a period of say 15 to 20 years could save many thousands of dollars over the period of the loan, but repayments will be higher. However, an adjustable rate mortgage may start with lower monthly payments, but these will fluctuate in accordance with prevailing interest rates.
Mortgage lenders often set up escrow accounts to cover payments of costs such as property taxes, local taxes and property insurance premiums. These will ensure that bills are paid without bother to the investor.
Off-Plan Financing - off-plan developments in the USA often offer installment plans over fixed periods. Charges applicable vary according to developer and repayments are usually index linked. The developer can often offer the most competitive finance options to investors and, while you should check all possibilities, these are certainly worth considering when looking at mortgage alternatives to finance your investment.
As always, before making a commitment, we recommend you discuss your investment strategy with a lawyer, a reputable property agent with experience in the area and even a financial advisor.
Bridging Loans - taking out a loan based on the value of a property that is either on the market or in the process of being sold is a popular strategy for many investors who do not want to let an unbeatable opportunity pass them by.
You should consult your mortgage advisor or speak to an IPIN advisor who has experience in mortgages and re-mortgaging in both your home country and the USA. Obviously, using a company who deals worldwide will be highly advantageous.
Equity Release - if you are in your mid-50s or older and own your own home, you may be able to get a cash lump sum, a regular income, or both, by using an equity release scheme based on the value of your property. These schemes can be helpful in certain circumstances to raise funds for a mortgage to finance your American property investment.
Equity release allows investors to release cash from an existing property without having to sell up. If you have property in your own country and would like to borrow against this in an equity release plan, we can introduce you to independent financial advisors who will help you raise the necessary finance for your investment in the USA.
Alternative Finance - not everybody falls into a category and some investors will need to raise finance in an alternative fashion to equity release or mortgage options. There are other borrowing facilities available to investors of USA property and IPIN advisors are ready to assist you with your enquiry.
When purchasing property in the USA the following taxes are likely to be charged within the state you are to purchase.
Sales Tax - this tax is not always imposed on the purchase of property. However in 36 US states a property transfer tax of between 1% and 5 % is charged on the assessed value of your property.
Stamp Duty - this tax is a charge made when a mortgage has been obtained for the purchase of the property and consists of documentary stamps calculated on the total of the loan. In states such as Florida, stamp duty is charged at a rate of 35 cents per $100 of mortgage. In addition to stamp duty, investors must pay an Intangible Tax at 0.002% on the mortgage amount.
Therefore, if you obtain a $100,000 mortgage,$350 in Documentary Stamps and $200 in Intangible Tax will need to be paid. It is important to note that neither of these taxes will be charged if you cash is used to finance the property purchase.
Capital Gains Tax - Capital Gains Tax also varies according to state, but if the property is owned for more than a year, the rate can amount to anything between 8% and 15%.
Inheritance Tax - these relate to gifts or transfer of ownership either while you are alive or upon your death. Both federal and state inheritance taxes will apply while there are great differences between the states relating to how your estate is taxed upon your death, so it pays to find out what your liabilities might be before committing to an investment.
Local Taxes - the local tax amount is on the assessed value of the property but is likely to be about 75% of the market value, depending on your state. The good news is that in 2006 ten US states decided to review local taxes in order to decrease them to more affordable levels.
Tax on Rental Income - all rental income is subject to USA tax. A standard withholding tax rate of 30% is applied to all rental income and is paid locally. In some states a double taxation agreement exists between the state and the UK, eg. Florida. Tax on rental income can be very low if handled correctly by your financial professionals, as generous allowances are in place, including mortgage interest relief as well as the cost of your inspection flights.
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