New York real estate: safe haven or real profitability?
“The best investment on Earth is, land”… The New York real estate market surely remains a safe haven for European buyers in a rather gloomy and unstable economic situation and with the Euro which remains strong. Moreover, the Big Apple only arrives in 7th position worldwide in terms of the high price per square meter according to the Knight Frank Report on Fortune 2011.
But what profitability can we expect when investing in a pied-à-Terre in NYC? How much expense does such an investment entail and are there ways to pay less to cash in more? Here is what you need to know about the true profitability of a real estate investment in New York.
The first good news is that the vacancy rate is less than 2% in Manhattan, the second is that an empty apartment at the right price statistically finds a tenant within a month. Nyrentownsell offers rental apartments in Financial District NYC and the investment rental feels pretty good in Manhattan.
What will you Gain?
The acquisition of real estate is a happy act, here is the proof:
Who sets the price of the rent?
When it is not subject to specific regulations, the owner is free to set the price of the rent (within reason…). Conversely, some buildings respond to the ” Rent Guidelines Board “: then the rent can be increased every 2 years, if the owner fills out an application form, or if he makes a major improvement to the ” Major Capital ” residence. Improvement ”. An opportunity therefore to equip your studio with WC.
Earnings After Resale
1- Capital Gains
The “ Capital Gains Tax ” is a tax on the resale of its main residence (the equivalent of the French tax of 34.5% on capital gains); it rises to 15% at the federal level and rises to around 21% for owner-sellers in New York and New York City. Fortunately, it is possible from an accounting point of view to considerably reduce the base of this tax.
It is the Franco-American Convention of August 31, 1994, which regulates any tax question on the subject and in particular its article 24-1 which prohibits double taxation.
The calculation of the capital gain or loss
Here is the calculation to do … To your calculators! :
Selling price – resale expenses (6% agency fees) – purchase price + expenses incurred to improve it – “ adjusted basis ” (costs which have theoretically reduced its value). So, jackpot?
“Withholding Payment”: The price that is temporarily withheld
The 1980 FIRPTA ” The Foreign Investment in Real Property Tax Act” imposes withholding on gains related to the resale of real estate property to foreign owners (without Green Card or resident status), and the IRS withholds 10% of the purchase price as “ withholding payment ” at the federal level. New York State retains an additional 8.82%. Here again, it is possible to avoid this step for a foreign resident by being well accompanied by a local accountant.
What You Will Spend
Costs relating to the acquisition
Real estate agent or not?
Real estate in New York, and more particularly in Manhattan, obeys specific rules. In fact, the vast majority of transactions are carried out through a real estate agent. Buyers, reassure your banker, the agency fees (around 6% of the sale price) are the seller’s responsibility. So, do not deprive yourself of it!
Unless they have buried a cassette in their garden, the buyer is certainly borrowing from a bank in their country. You should also know that in New York City, a “ mortgage recording tax ” is levied when one acquires a condo, which is equivalent to 2% of the face value. This tax does not apply when buying a co-op or when the loan is taken out outside the USA.
You should know that it has now become possible to take out a loan from an American credit organization, often with a contribution of around 50%.
For a co-op, the following are deductible: property taxes and interest on the loan, as well as interest on its own loan.
For a condo, the following are deductible: the interest on their loan and their property taxes on their income tax returns.
By limiting your energy consumption not only contribute to saving polar bears and ice, but in addition, you can benefit from tax deductions ” tax credit ” if you make improvements to reduce this energy “spending energy-efficient home improvements”.
At Stake :
A 10% deduction of up to $ 500 spent on the purchase of windows, doors, and skylights, improvement of insulation, and installation of certain roofs.
A 30% deduction for installations on the property, such as solar water heaters, geothermal heat pumps or wind turbines (not easy to install…).
Be careful if you tend to confuse your bank account with that of your company; the IRS considers work and renovations to his home as a personal expense; it is therefore not possible to pass them on to professional expenses.
Co-Op or Condo?
It is often more expensive to buy a co-op than a condo, although the difference tends to diminish. Buying a co-op first requires approval from the building association, the Co-op Board, which can be problematic to obtain. You must also pay a deposit of 20 to 25% (ouch). Finally, foreign buyers often do not have a credit history, so appreciated by the Co-op Board.
Even if there are many more co-ops (75%) in Manhattan, the majority of real estate investments are made in condos, which are more flexible and more suited to foreign investors.
A condo is often easier to rent than a co-op, first of all, because most Board co-ops refuse the very principle of rental, then because the prior agreement of the “ Board ” is easier to obtain within condos than in co-ops.
The investor receives his rent monthly, from which he must deduct:
- Common charges.
- Monthly property tax.
- Insurance (for a two-room apartment in Manhattan, count between $ 50 and $ 100 per month).
- Accounting fees (count around $ 800 annually for a tax return).
You can also opt for a company specializing in property management, which ensures the collection/payment of rents and the maintenance of your property. Some real estate agencies also offer this service.
It can be seen that the net rental profitability of real estate in Manhattan is generally between 3 and 5%. All you have to do is close your Livret A…
The Different Taxes:
The happy owner of his pied-à-Terre must however pay this:
- The Rental Income Tax : it can reach 30%, but can be considerably reduced thanks to possible deductions (closing costs, works, loan interest and depreciation of the property over 27.5 years in the United States). In the end, the tax base is much reduced.
- The property tax (“ Property Taxes ”), of approximately 0.5% – 1% of the value of the property.
- The “Estate Tax” , or the tax on the transfer of a property on the death of the owner. It is possible and rather simple to appeal to different tax structures to reduce this taxation, which can go up to 50% for a non-American.
Of course, this list is not exhaustive and does not consider specific real estate investment schemes and programs.
Good to Know:
The International France – United States Tax Treaty of August 31, 1994
The Convention only applies to persons who are residents of a Contracting State or of both Contracting States, unless it provides otherwise.
Its Article 6 provides: “ Income from immovable property (including income from agricultural or forestry operations) situated in a Contracting State may be taxed in that State. “
It describes non-professional income as well as all income exempt from tax as a result of a tax treaty.
Obligations of the Owner:
You have the keys, you have a tenant, now here is what you need to do:
- Maintain the electrical systems, plumbing, sanitary facilities, heating, ventilation, and the facilities installed (fridge, oven).
- Protect against lead poisoning (lead poisoning: ” lead paint “).
- Install smoke and carbon monoxide detectors.
- Install locks for exterior and interior doors and a peephole.
- Protect your property against rodents and bedbugs.