Overseas Properties As An Investment
Like purchasing property in Singapore, you will also need to decide the ‘Why’ for you to invest in property overseas.
Will the property act as your vacation home, or as a standby home should your children study in the United States, are you looking at it as an investment or your retirement home?
For seasoned investors in the local property scene, you might be thinking to invest in properties outside of this tiny red dot. According to a report by DTZ (SEA) Research, Singaporeans invested more than $1.2 BILLION in the United States.
Majority of these investors are already sufficiently exposed to the local property market and are looking for higher returns and to diversify in other countries.
Flipping houses for a quick profit is also one method where investors aim for short-term goals. Essentially, “house flipping” or “flipping houses” is a term that means you are buying an under-valued property and then turning around and selling it for a profit
The world is your oyster, so they say. And yes, it is certainly true in the case of property industry.
Singapore Investors Enter U.S. Property Market
Last year, 2017, Singapore based investors put in more than US$9 billion into the US property markets. In a global sense, Singapore ranks third in US property after Canada and France.
Another survey done by National Association of Realtors in US back in 2014, states that Singaporeans ranked 11th in terms of internet searches as compared to other locations.
Investing In The United States Market
But before you get too excited and fork out your hard-earned cash, there are some points to take note. It is important to note that different states in the United States has their own set of rules, type of contract used, method of how the transaction is done amongst other things.
It is also important, to ensure that the real estate advisor that you engaged is well qualified and adequately licensed and you will need to team up with someone who is qualified in United States real estate as well as someone who is qualified in international United States tax for non-Americans.
For us as foreigners, in the United States, when you invest in real estate there, you may assume some tax obligations. This is the reason why you would be safe with someone who is a United States qualified professional with the proper experience in international aspects of tax compliance.
By you being on the United States tax, if you are not aware or careful, your rental income can be considered as Fixed, Determinable, Annual, Periodic income (FDAP) or Foreign Account Tax Compliance Act (FATCA) which means that 30% of your rental income is automatically withheld as tax.
By engaging someone who knows the local tax system, he/she will work with you to ensure that you are able to get the most reasonable tax rates.
It is important to note that the returns on your sale of the U.S property may be subjected to tax at the same rate as a local U.S citizen.
On top of that, a non-U.S seller may also be subjected to Foreign Investment in Real Property Tax Act of 1980 or known as FIRPTA.
Under FIRPTA, you may be required to withhold up to 10% of the purchase price and submit this to United States Inland Revenue Service, and this can lead to overtaxing.
There are also other forms of taxes that you should be aware of, such as estate and gift taxes.
In case of your demise, your U.S property might be subjected to 40% estate tax in case your property is worth more than US$60,000.
Your property advisor should advise you on this implication before you decide to invest.
You might have heard of zero down payment schemes and sure there is one in the property market too. However, do be wary as the target for this is usually a bad property in a bad neighborhood.
What this means is basically, you will be borrowing 100% of the property price including the down payment to buy the property. This is especially bad for a foreign investor in the U.S market.
Before applying for United States mortgage, you need to earn a good credit score which in turn will make it easier for your loan to be approved.
You can commence building your credit score by opening accounts in a United States bank or applying of credit cards. The foreign banks will use this information and track record to determine how much loan will they want or can provide you with.
The types of property and how much would it cost? Generally, there are two primary areas:
In U.S terms, there are commonly known as single family home/duplex/triplex or 4-plexes. These can be compared to our local landed properties. However, there is a difference.
The main difference is the property valuation is based on the building structure itself and not on the land. Good quality single family homes in a good middle-class market ranges between USD$80,000 to USD$180,000.
And for condominiums, they are in the range of USD$60,000 to USD$100,000 for a two or three bedroom unit. Between these two type of properties, the single family home cluster is more popular and in demand due to their liquidity.
Their liquidity again very much depends on the type of property as well as the location of the property.
This is where it gets interesting. Depending on market location, the price can be as low as USD$500,000 to USD$2 million. And this is not a single unit that we are talking about here. This is you, owning 100 units or more of an apartment.
Which basically translates to you owning the entire building, which you can rent out the apartments to those who are looking for short term or long term residence. There is also large commercial building with either one or multiple business tenants with price range from USD$1 million onwards.
Location, location, location. No matter the demographics, location plays a vital part in determining the price of a property. Let’s take a look at the top five essential criteria of a good overseas property.
Since it is a big city, the economy is diversified and this ensures investment stability. Large cities with multi-employment sources helps to ensure profits when you rent out your property.
Good Rental Market
A good property will yield a reasonable cash flow. As a rule of thumb, it is normally 1% rental income per month against the purchase price for single family homes.
For example, if you purchase the property for USD$100,000, the income that you are looking at from this property will be USD$1,000 per month.
Not Booming Market
You would want to steer away from a booming market for overseas property. Why is this so? It is vital that you purchase property in a market where the property prices are steadily growing rather than properties where prices are escalating too rapidly.
Low Median Price
Look for good cities to invest in. Seasoned investors tend to not look at San Francisco, Los Angeles, New York, especially so for residential properties as the rental prices will be too low in comparison to the high monthly mortgage payments.
This region with its warm weather, growing employment rate and lower housing costs is the fastest growing region in the United States.
By purchasing property in this region, it helps to ensure that your investment will continue to grow in the long-term. So, which cities are in the Sun Belt, you might ask? Some of the cities in this region are
- Phoenix, Arizona
- Orlando, Florida
- Tampa, Florida
- San Antonio, Texas
When you invest in foreign markets, go with partners who understand the field well and do not simply invest overseas just because you think that the grass is greener on the other side.
Where is the Money?
Where do you turn to when it comes to mortgage? Is there financing for international buyers, you might ask? Well, truth be told, there is. Mortgage loan is available and can be either from a U.S or non U.S bank.
With the 2009 credit crisis, banks have tightened their credit criteria and will require more down payment, at times as high as 40% from a foreign buyer.
There a couple of ways to arrange for financing;
- Financing from U.S lender – This is relatively easy to arrange through a U.S bank in the United States. Normally, the bank requires a 40% down payment and you will need to show liquid assets that is normally based on multiple of monthly payments. As the financing is done in the United States, you would also have to pay mortgage tax of 2%.
- Financing from Singapore – This is getting an international mortgage from local banks and this the United States sees this as a cash transaction. The only difference is you saving on the mortgage tax and other bank fees, though there maybe other fees or taxes associated with the bank.
It is good for you to consider and have both options at hand, so you could do a comparison and make an informed decision by performing a cost benefit analysis on the type of loan that you will be going for.
So now that you have cleared the major hurdles in the property hunt as well as the paper works for the financing, another area of concern that you would need to look into would be the closing of the transaction.
It can be quite costly and draining for you to travel back and forth from Singapore to the United States to oversee and be involved in the entire step of the property purchase.
The good news is, it is possible for you to provide “Power of Attorney” to an agent in the United States who will make all the proper arrangements and also sign on the documents.
It can be quite complicated where tax is concerned as tax laws of more than one country can apply in this situation. In some cases, the laws may require some tax payment in the United States as well as a separate tax in Singapore and the rate of taxation rate also is different by country.
If you have placed 40% as down payment for your property overseas, you would usually be able to avoid paying income tax on rental income for the first decade or so in the States.
This is because, the United States government allow tax payers to deduct mortgage interest, common charges, property tax and depreciation from your income.
This will mean that no taxes need to be paid. However, the longer you own the property, some of the above mentioned deductions will run out and you will have to eventually pay taxes on the property.
Filing of taxes in a timely manner, will help you to avoid incurring a tax of up to 30% of the gross rental income that you have received from your property.
Should you be incurring losses in the initial years of your investment or you do not owe any taxes to the United States government, you should still file your income tax returns on time and avoid any financial penalties that might be imposed.
There is much to consider and research before you be an investor in foreign property. But it is possible and quite easy to purchase property in United States of America.
With good research, calculations and a good property advisor, you might be well on your way to owning properties outside of Singapore and you might also eventually decide to retire in one of your overseas owned property.
Remember your initial plan when you set out to invest in overseas market. Do your research well. Do up an extensive cost benefit analysis, SWOT analysis (if you have to) to determine that the property is the one that you want to have.
Partner up with a good property advisor both locally and overseas so that they could provide you with sound advice. Plan your finances and check up on different bank loans.
Read up on the property’s demographics. Talk to local residents in the neighbourhood.
Talk with your family members to ensure that everyone is comfortable that this is the way to move forward before you sign on that dotted line, as there is no turning back after that.