Tag: real estate investments

Making a case for U.S. Residential Property Investment: “It’s not Apples to Apples”

Residential Real Estate Investment US

Making a case for U.S. Residential Property Investment

“It’s not Apples to Apples”

As you may recall, last week, we looked at the affordability between popular U.S. investment destinations compared to major cities in the world. We argued that the U.S. offered the best “entry price” for real estate investments on absolute terms and when adjusted for affordability.

This week in Part 2 of our Deep Dive Series, we look at the Relative Income Potential of the popular U.S. investment destinations compared to major cities in the world.

Investing in residential properties or buying-to-let is a form of a business, and as a business owner, making a profit is of priority. A common metric that we use to measure the profitability of a real estate investment is rental yield. Net rental yield measures the profit you generate each year from your investment as a percentage of its value.

Same as what we did last week, we shall compare data sets from 2 sample groups:

1. Major global cities:

TorontoVancouverLondonSydneyMelbourne
ShanghaiBeijingHong KongSingapore

2. Top U.S. residential real estate investment destinations:

New York, NYMiami, FLOrlando, FLFt Lauderdale, FLFt Worth, TX
San Antonio, TXAustin, TXDallas, TXHouston, TXSeattle, WA
Chicago, ILLos Angeles, CASan Fran, CASan Jose, CAAtlanta, GA
Portland, ORLas Vegas, NV

On average, the net rental yield of popular U.S. real estate investment destinations is 3.49%, much higher than that of other global cities – 1.39%. This means that on average, for a property that costs USD 500 000, you can earn approximately USD 17,450 if this property is in the U.S. and only USD 6,950 if this property is in other global cities. This is after accounting for property taxes. We see that investing in the U.S. can earn you 2.5 times the income you will earn in other cities!

In the following chart, you will see the disparity in the profit flow more clearly.

Net Rental Yield Chart

Now, if we look at the net rental yield that takes into account both local property and rental income tax as part of the costs, we can see that the results are similar. U.S. destinations, on average, have a much higher yield than other global cities (3.40% vs. 1.36%).

Note: Even after considering income tax, investing in the U.S. can still earn you 2.5 times the income you will earn in other cities.

Myth Buster – The common misconception that the U.S. tax regime makes investing difficult and not feasible is unfounded. Even adjusting for taxes, U.S. residential real estate is superior investment.

Net Rental Yield (After Property and Income Tax)

To further strengthen our point that the income potential of U.S. cities is much higher than other global cities, including your home cities, take a look at the table below. If you live in the cities stated in the row, you should definitely not buy-to-let in the cities highlighted in red as the income potential in those cities is worse than your home. Instead, it would be best to invest in the cities highlighted in yellow, where yield is much higher.

Net Rental Yield differences between Major Global Cities and U.S. Residential Real Estate Investment Destinations

Net Rental Yield Differences

Let someone else pay for your mortgage.

To make things better, in some U.S. cities, you can even pay off a sizeable portion of your mortgage loan with your post-tax rental income. Using the AM debt coverage ratio, we see that in cities such as Orlando and Fort Worth, without considering other maintenance costs of your home, your annual post-tax rental income can cover all of your annual mortgage payment (with some to spare). This is rare in other global cities. In Hong Kong, annual post-tax rental income can only cover 17% of the yearly mortgage payment.

The following diagram shows the debt coverage ratio comparison (the higher, the better).

Debt Coverage

Solely based on net rental yield, you should always consider Orlando, Fort Worth, San Antonio, and almost never San Francisco. It is interesting to see some overlap with last week’s affordability rankings, where Fort Worth and San Antonio were at the top and San Francisco at the bottom.

Just like affordability, rental yield is also just another aspect of property investment. It is important to consider other factors too – growth potential of the city, capital gains, and future price appreciations – which we will discuss in our next report.

To summarize, we see that U.S. real estate properties are outperforming other major global cities in terms of affordability and income potential.

Next week, we will get an even bigger picture by understanding the factors that drive property value growth and why these factors will affect U.S. real estate investments more than other major global cities. You won’t want to miss out!

Stay tuned for next week’s continuation of our Deep Dive series. Email Us

Reasons NOT To Buy In Cash.

advisor mortgage group

In today’s low-inventory housing market, real estate investors are looking for any way to get an advantage over the other buyers when putting in an offer on a property.

Part of that strategy is not to buy in cash. If you have the means, an all-cash offer is a great way to fast-track a deal. A seller, more often than not, will consider a cash deal over a mortgage. The deal’s success isn’t reliant on a lender’s approval following an appraisal, and you’ll own the home outright after the transaction with no mortgage.

“With two similar offers, all cash or financing, it’s likely that an all-cash offer would be the most attractive and less risky to the seller and seller’s agent.”

“For Non-U.S. citizens, cash transactions make up a majority of Real Estate investments due to what is perceived as the lack of access to consistent and affordable financing options. However, that is not true any longer. Our focus is being able to provide competitive, viable, and easy access to U.S. mortgage loans for non-U.S. citizens. And we’ve done it to perfection.”Donald Klip

BUT EVEN IF YOU HAVE ENOUGH LIQUID ASSETS TO PURCHASE A HOME WITHOUT A LOAN, IS IT ALWAYS A GOOD IDEA?

Here are several reasons not to buy a home with cash:

LIQUIDITY, LIQUIDITY, LIQUIDITY

You always hear the axiom in Real Estate – Location, location, location, and although that may be true, it’s not wise to purchase a home with cash if you have only just enough liquidity to pay for it. Liquidity issues at some point in time affect everyone.

The inability to move currency across borders to cover large expenses could also be a factor. It’s essential, especially as a non-U.S. citizen, to have access to available funds for any number of unexpected needs, from a new roof to other large repair expenses.
You may even want to have enough funds on stand-by to sustain the mortgage if the property goes un-rented.

ACCESS TO SOLID FOREIGN NATIONAL MORTGAGES ARE AVAILABLE

With a down payment of 30 percent or more for a foreign national mortgage loan, you don’t have to worry about additional mortgage insurance when it comes to a standard U.S. conventional loan. With a lower LTV (loan-to-value), a lower interest rate will normally be available due to the lower risk lenders perceive that you’ll default on the loan.

For the younger generations looking to invest in a market that doesn’t have a huge sticker shock, acceptable yields, and stable appreciation, obtaining a mortgage is a smart move.

“Unlike their parents and grandparents, Millennials in Asia are more comfortable with taking on a mortgage loan,” says Donald Klip. He notes the younger generations’ familiarity with the U.S. credit market from either extensive travel or schooling makes taking on debt an easier choice than for older generations that have built up Real Estate wealth over time but may not be accustomed to having mortgage loans.

Although interest rates may be on the rise, they remain low compared to previous decades. With 30% down, the rates are still favorable and fixed for periods of 5, 7, 10, or 30 years. America Mortgages is currently offering fixed-rate mortgages at slightly over 6% without verifying income, U.S. credit, or residency. Compare that to the 1980s, when a foreign national mortgage loan was almost impossible to obtain, and mortgage rates were at an all-time high of 18%, there is no question on why you should leverage up.

MORE BANG FOR YOUR BUCK

Even if you’re looking to buy an investment property outside a pricey metro area such as NYC, San Francisco, Washington DC, or L.A., and if you have enough funds to pay outright, you’re likely sitting on a sizeable amount of capital. However, the decision isn’t necessarily between buying a property outright or keeping money earning very little in the bank. Consider other forms of investment to grow your wealth. Use those funds and your cash to “leverage up” by purchasing more than one investment property, increasing your portfolio and holdings quicker.

YOU’LL MISS OUT ON POTENTIAL TAX BREAKS

Although we suggest discussing any potential tax benefits with your tax advisor, most homeowners with a mortgage receive a tax benefit on the interest paid to the lender. The larger the mortgage, the bigger the benefit, increasing the yield potential of your investment.

ALWAYS WEIGH THE PROS AND CONS

In an extremely competitive Real Estate market, an all-cash offer can provide the edge you need to get the seller to consider your offer more seriously than others. Often your offer may not be the highest, but the seller knows an all-cash off will make the closing process easier.

If you want to obtain financing, keep in mind that the seller may consider an offer that allows for easier financing. Often larger down payments and smaller mortgages will also be considered easier to close mortgages as it’s less risky for the lender.

“We do it all day, every day. It’s not difficult if you know the terrain and have the right relationships, and in most cases, we can find a U.S. mortgage loan for every non-U.S. Citizen or Expat client. Most U.S.-based mortgage lenders look at a borrower’s U.S. credit history to determine their ability to repay a mortgage loan.

However, at America Mortgages, we understand that as a non-U.S. citizen, you normally don’t have a U.S. credit, and often can’t show income in a manner in which the lender will approve.If a borrower was attempting to search this for themselves, be prepared. Finding a lender in the U.S. to understand your situation becomes time-consuming, frustrating and often unobtainable, not to mention staying up late at night in Asia to answer questions or provide documents. Our job is simple; to understand the complexity of analyzing risk, calculating foreign income, and alternative sources of acceptable credit verification to find our client the best possible loan.”Donald Klip

If you’re a non-U.S. citizen looking to invest in U.S. Real Estate, we recommend sending America Mortgages an enquiry. Who knows, you may be on your way to Real Estate investing before you know it.

For more information, please contact [email protected].