USA Property Investment:Understanding the purchase & ownership process

By Colin Murphy, Torcana Ltd

Identifying the best location, property

type and specific unit that suits your

budget and needs is only the first of

many steps a successful buyer must take.

Getting through the purchase process,

keeping on top of your running costs and

understanding your tax obligations are all

just as important in the long term. In this

short report we explore each of these

three issues in more detail.

The Role of Title CompaniesTitle companies are independent licensed firms who transact every property purchase within the United States. Instructed to represent both the seller and purchaser their role is to ensure that the title is transferred to the new party, completely free of all liens and encumbrances and that conditions signed up to within the purchase agreement are adhered to. They also hold the buyers funds in escrow and disburse all funds to the relevant parties once the transaction has been completed.

Once initial paperwork has been submitted, the title company will complete many searches on the property to obtain all information required to deliver the title. Any discrepancies will be discussed at this time. Towards the close date the title company will prepare the closing package which consists of several standard documents. The most important one is the HUD-1 Statement or Settlement Statement. This statement details all transactions relating to both the seller and

purchaser up to and including the close date. Items you can expect to see include;

• Full legal description of buyer, seller and property

• Purchase price

• Credit for any deposit paid

Credit for taxes for the period during the year which you did not own the property (or a debit for taxes for the remainder of the year depending on the time of year you close)

• Title insurance (see below)

• Legal and recording fees

• HOA fees including the pro-rata amount for the remainder of the current month

• If the property is tenanted you may see the remainder of that month’s rent and security deposit

Note: Sometimes sellers request that funds are sent to an attorney instead of a title company, this is acceptable as long as funds are held in escrow under pre agreed conditions. A buyer should never transfer funds to a seller directly.

The purchase process

1.

Buyers should never transfer funds directly to a seller

Purchase process for pre construction properties1. Once a unit has been selected, a

purchase agreement will be sent to you via email which should be signed and faxed back to the brokerage office.

2. A $2500/$5000 deposit is wired to the relevant Title Company and confirmation of transfer supplied.

3. For cash purchases, the remainder of the purchase price is generally paid in pre agreed stage payments, often using escrow account services. For example: a 30% deposit, followed by 20% on completion of foundations and main structure and 50% on full completion.

4. For purchases with finance, a 20-30% deposit is usually paid with the remainder on completion. Before paying the deposits, buyers usually submit preliminary details to the lending institution regarding their income, assets and liabilities to establish if they are likely to be approved for a mortgage. The purchase contracts generally have clauses specifying that the seller must refund the initial deposit in the event the buyer does not receive finance with the remaining balance.

5. Once the relevant building certificates are in place and any issues identified in the inspection/snag reports have been addressed, buyers proceed to closing and pay the balance of the purchase price to the sellers title company or attorney.

Closing CostsDepending on the price of the property and services used, you should budget approximately $1500 - $2000 to cover legal, title and agency fees.

Purchase process for completed properties1. Once a unit has been selected, a

purchase agreement will be sent to you via email which should be signed and faxed back to the brokerage office.

2. A $2500/$5000 deposit is wired to the relevant Title Company and confirmation of transfer supplied.

3. Once the deposit and contracts are received the property is then officially under reservation. You will have a 15 day inspection period to complete a professional home inspection and/or a personal site visit. You can rescind your contract at any stage during this 15 day period and receive a full refund of your deposit.

4. After the inspection period has passed and you are satisfied with everything, the official closing will be within 15 to 20 days and the full purchase price must be paid to the Title Company before the agreed Closing Date.

5. Closing costs will depend on the unit but generally range from $1500 - $2000

Keeping on top of your running costs

2.• Home Ownership Association /

Maintenance Fees (monthly or quarterly)

• Property taxes (annually)

• Property management (monthly)

• Insurance (annually)

For ease of use, we split each of the four expenses above into monthly payments to enable us to calculate average monthly gross and net rental income or yields.

Calculating Net YieldsWhen considering any investment one of the important items to review is your net yield. This is your net income after all overheads expressed as a percentage of your purchase price.

In order to accurately calculate your net yield you must consider all costs (no matter how small) in the general running of the property.

The standard property within a community has four main running costs (a full explanation of each of these costs is in the next page);

Yield calculator

Purchase Price $89,900Bedrooms/Bathrooms Two/TwoSize 1314 sq ft.

Gross Monthly Rental Income $1,218Gross Rental Yield 16%

Monthly Running Costs

Management $122Property Tax $130HOA Fees $203

Insurance $45

Monthly Net Cash Flow $719

Estimated Net Rental Yield 10%

Home Insurance The usage of the property determines the type of insurance required. If it’s a long term rental investment, minimum contents cover is required. If it is short term, you will need additional cover for furniture.

Ownership & Visa IssuesIn the United States there are very few restrictions on international real estate investors, buyers, or sellers. The only exceptions concern national security, hostile countries, purchase or control of federal lands, and purchasing a business in a sensitive category.

As a foreign national you may take title to real estate in your own name, in the name of a domestic corporation, foreign corporation, a limited partnership, a limited liability company, a joint venture, a real estate investment trust (REIT), or a foreign pension plan. You can also acquire, transfer, or be involved in a real estate transaction without the permission or approval from any federal, state, or local governmental entity.

It is very important to realise that owning a property in the United States does not provide any automatic rights to visit, live or work there. There are some special “investment” visas which provide residency entitlements (such as the EB5 Program), but generally this should be treated as a separate issue to purchasing a property.

Home Owners Association (HOA)Each community has a Home Owners Association who is responsible for looking after the community as a whole – i.e. common areas and facilities from the swimming pool down to the security gate and rubbish collection. They are also responsible for the structures of the buildings within the community and insuring all common areas. HOA fees range significantly from community to community and can be affected by many factors.

Property Management A management company is one of the most important aspects to a well run, hassle free property. Typical management costs are 10% of the gross rental income with extra fees for placing a tenant and for renewing a lease (be sure to read the small print in your agreement).

Amongst other things, your management company is responsible for liaising with your tenant, ensuring they pay on time, organising any repairs necessary, communicating with you on a regular basis, paying you the balance of your rent, providing income statements and placing new tenants. Some management companies will also arrange to pay your HOA for.

Your property manager will also have a good understanding of what it is to own a home in their local area so if you are unsure of anything from property taxes to Home Owners Associations and how they work; they will generally be able to help so don’t be afraid to ask!

Official United States Government information about visiting, immigration, visas, transferring money, and taxation can be found at the following sites:

www.uscis.gov/portal/site/uscis

www.irs.gov/

Property TaxJust about every type building in the USA is subject to property taxes. They are usually payable annually in one installment during the first quarter of each year. These local taxes are calculated by the County Tax Appraiser and are based on local services, amenities and average property values within the vicinity.

In October each year an estimate of the current years’ property taxes is published on the County Tax Appraisers website. They must be paid by the following March.

Every property owner in the USA with an income generating asset is required to submit a tax return each year detailing the income and expenditure of the property. The US fiscal year runs from January to December and tax returns are prepared at the beginning of the following year.

Non US residents filing returns for the first time will need to apply for a tax number, which is a very straightforward process. We work with excellent accounting firms which specialize in overseas investors and they are well placed to complete all the necessary returns on your behalf for a modest fee.

Florida´s tax system is one of the most competitive in the United States. During the early years of your property ownership, the expenses, depreciation and allowances are significant and can mitigate tax on rental income substantially (see next page).

Income Tax Florida is one of just seven states that do not charge a state income tax in addition to the federal income tax. Federal income tax rates are as follows:

• Up to $8,925 10%

• $8,925 - $36,250 15%

• $36,250 - $87,850 25%

• $87,850 - $183,250 28%

• $183,250 - $398,350 33%

• $398,350 - $400,000 35%

• Above $400,000 39.6%

Tax rates are slightly different for married couples filing joint returns. For example, the 10% rate can apply up to $17,850 and the 15% rate up to $72,500.

Under-standing your tax obligations

3.Florida does not charge a state

income tax

Depreciation: Since the house (not including the land), furniture and some large repairs have a useful life greater than one year, they must be depreciated. Under the current laws, the cost of the house is ‘capitalized’ and deducted over a period of 27.5 years. Furniture, equipment and land improvements usually have a useful life of 5 to 15 years, depending on the specific item.

Capital Gains TaxGenerally, gain from the sale of long-term capital assets held for more than one year is subject to a maximum capital gains tax rate of 15%. This tax rate can increase to 20% for those earning more than $400000 in the USA per year.

The tax payable on short term gains is higher and will be taxed as ordinary income (10-35%).

Expenses that can be offset against rental income from your propertyDeductions include, but are not limited to: advertising, cleaning, maintenance, insurance, tax return preparation fees, mortgage interest, repairs, supplies, property taxes, depreciation and utilities. Most expenses that are ordinary and necessary in the operation of a rental property are deductible. If larger expenditures are required (i.e. new air conditioner), these items are capitalized and depreciated over future years.

Airfare and certain related travel expenses to visit the property are deductible. These expenses might include car rental, local transportation to and from a meeting with your property manager and a meal over which a business discussion took place. The expenses must be allocated between business and time spent for pleasure.

Most expenses that are ordinaryand necessary in the operationof a rental property are

deductible

Torcana Ltd is an award winning investment specialist which promotes a variety of real estate products worldwide. Our primary goal is to find ways of putting both our own funds and those of trusted clients to productive use without taking unnecessary risks. Through rigorous due diligence and a long term “on the ground” approach, we help people to grow their net worth by taking ownership of assets that are stable and offer genuine long term value.

We have found that one of the best ways of building relationships with like minded people is to write about the market from the point of view of a long term investor. For that reason, in addition to our monthly newsletters, weekly blogs and daily news and twitter updates, we also publish a range of quarterly e-books such as this one which are completely free to download.

Our focus is on established and affluent areas with strong domestic rental and resale demand. We only deal with cash flow positive properties which have all of the fundamentals in place (location, price, unit size, build quality, interior fittings, amenities, transport links & management).

Our knowledgeable and experienced team provide a wide range of sourcing, marketing, sales and aftersales services.

If you wish to learn more about our USA and other international real estate products, please visit our website (www.torcana.com) or get in touch with us directly:

USA: +1 321 806 1195

UK: +44 207 193 4024

Ireland: +353 1 4433 991

Skype: torcanaltd / torcana-colin

Email: investments@torcana.com

This document contains general information relating to the purchase of property and its contents should not be construed as legal or other professional advice. This is not an investment offering. While all reasonable care has been taken in the compilation and publication of this information, Torcana Ltd make no representations or warranties, whether expressed or implied, as to its accuracy or completeness and the content is provided for information purposes only.

Furthermore, Torcana Ltd shall not be liable, directly or indirectly, to the user or any other third party for any damage resulting from the use of the information contained or implied in this document. Buyers should always seek appropriate legal, tax & financial advice from suitably qualified professionals before taking, or refraining from taking, any action

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