Where and How to Invest in the US Property Market?

Based on the latest S&P/Case Shiller reports, prices in the US increased 5.4% over the last 12 months as of February. This increase is in line with what many experts believe to be a normal rate of growth.

Clearly, as an investor, it is important to look beyond this average number of price growth and determine where exactly one can find suitable investment properties in the US.

Strong Appreciation
Investors who are looking for strong appreciation have several choices. New York is a city that continues to do well from an appreciation perspective. Investors who bought property in New York in 1999 would have enjoyed an average annual gain of 9%. This number would take into account a price increase of 20% in the early 2000s and a price dip of 15% in 2009-2010 due to the financial crisis . Knowing that the financial crisis was the worst since the 1930’s, it would be reasonable to assume that 9% in the future can be expected. This is a good example of how investors can realize a good and stable capital gain by investing in the US.

San Francisco is another city that is a favorite for foreign investors. The technology startups that the Silicon Valley area continues to produce has generated a lot of interest from everyone to invest in this mecca of technology and innovation. Depending on which report you use, property prices increased a whopping 45-55% over the last two years alone. While the market seems to face now a slight pull back in prices, many believe that the long term growth in prices will remain strong in this city in California.

Strong Rental Income
Memphis has been ranked as the top city for rental income. Net rental yields easily achieve 10% per year which attracts many local Americans and foreign investors. Memphis is the distribution center of the United States; it has the second largest cargo airport in the world and it is home to FedEx.

Cities such as Atlanta, Jacksonville and Detroit are also ranked high for rental income. Obviously, these cities have challenges too so it is important to work with the right team to acquire and manage these properties.

How to Invest in the US?
Investors do understand the importance of leveraging. There are a few US based banks that allow financing for foreigners looking to invest in the US property market. While the rate might be around 4% or 5% for a 20 or 30 year fixed mortgage (which is higher than what local Americans can borrow for), this is still attractive for most investors.
Furthermore, while investing in the US property market is attractive, there are tax implications to consider. As a non-resident, you do have to file a federal tax return and often a state income tax (unless you invest in a state that does not have state income tax). While the returns are attractive, paying taxes is not a pleasant experience. As such, foreign investors can now consider certain legal structures that legally can avoid all the capital gain taxes as well as estate taxes. As a foreign resident, the investor does now have great opportunities to invest in the US property market for the long term and avoid the majority of these taxes. For example, investors buying a 1 mm USD apartment in Manhattan would realize a 9% average annual gain and be able to sell without paying capital gain taxes. While there is a setup cost to be considered, this structure would add significant value to long term investors looking for capital gains and long term rental income growth.