The increase in real estate prices in Israel, along with the decline in real estate prices in the United States and the high growth expectations, triggered the interest of many Israeli real estate investors. Thus, many Israelis, whether they have experience in real estate investments or not, have diverted their resources to this investment channel.
However, in order to ensure the viability of such investments, there are a number of important aspects, including tax aspects, that must be considered. The same is true of any real estate investment, but it is especially important when it comes to real estate investment in remote locations like in the case of real estate investment in the United States.
In the article here, we will review the main stages of investment, while addressing the important aspects that every real estate investor in the United States must understand.
Set goals
There are almost unlimited investment options, but each good investment starts with a home inspection and accurately setting targets according to the specific needs of the investor.
Funding and its origins
The investor must define the amount of fluid cash available to him, and whether it is appropriate to use external financing. The amount available is significant when choosing the property and predetermining it will help reduce further unnecessary risks. As mentioned above, it is possible to use the loan to make the purchase, but it will increase the amount spent.
The investor must take into account that for foreign investors it is almost impossible to get a mortgage in the United States. A mortgage taken out in Israel to finance investment abroad is a good option but sometimes will require additional securities besides the property itself.
The purpose of the investment
In order to choose the specific type of investment and asset, the investor must define the purpose of the investment. This means the investor must decide whether he wishes to purchase a rental property that will generate a monthly rental income for him, or whether he wishes to improve an asset and sell it with a profit.
Types of investments
There are several main types of investment: a private home, an apartment in a building, and a commercial area. As far as a private home is considered, the costs are higher, but there are no additional considerations such ad as the condition of the building and management fee payments. On the other hand, when considering an apartment, the costs are lower and the ownership only refers to the apartment.
In addition, the state of the building should be taken into account alongside the costs of management fees and a house committee that should also be considered. In spite of these, due to the low costs, this may be a worthwhile investment for some investors. As far as commercial space is concerned, the yield is usually higher, the tenants are more affluent, but accordingly, the expenses are higher.
How to invest
In terms of how to invest, the question is whether you want to invest independently or use a real estate marketing company. An independent investor may reduce costs that would have been paid to the marketing company and prevent the hassle of dealing with unprofessional companies.
On the other hand, receiving help from a specialized company may facilitate processes, reduce tinkering and allow you to enjoy the professionalism offered by such a company.
Whether you choose to use a marketing company or to invest independently, consider whether to invest in a group. Investing in a group requires a smaller investment but increases dependence on the rest of the group and the governing body.
Investment structure
This is an issue of critical importance that will likely determine whether your investment is worthwhile or a total economic failure. In addition, this decision will determine the different tax regimes that will be imposed on each investment structure.
Investing as an individual, investing as an American corporation, investing as a limited collateral company, or investing as a foreign company – the income (whether current and capital gains) of each of the aforementioned investment structures will be taxed differently and will be exposed to other tax burdens.
We’ll take rental income, for example. Rental income received for the investment of a private person who is not a U.S. citizen may be taxed at a uniform tax rate of 30%, without the option of deducting expenses. However, proper use of income classification options may reduce the tax to the marginal tax rate that applies to the taxpayer, between 10-37%, and allow expense deductions.
Notably, it should be remembered that when an investment made by a private individual is concerned, the liability on the investment is not limited to the amount invested in the first place, and it will be possible to charge the applicable person without any restriction.
In contrast, the rental income of a local corporation will be taxed at a tax rate of 21%, allowing the taxpayer to enjoy limited liability, meaning up to the amount of his initial investment. Additionally, the rental income of a limited collateral company may, in certain circumstances, allow the use of a 20% tax deduction benefit, while the taxpayer will also enjoy limited liability.
Foreign companies’ revenues will also be taxed at a corporate tax rate of 21% and will enjoy limited liability. In addition, compared to the other options, a foreign company will not be exposed to the applicability of an estate tax (but it may be subject to a branch tax).
It should be noted that in some U.S. states there is a duty to invest through a guaranteed company, and this too should be considered when planning the investments.
Since the investment options are numerous and have advantages and disadvantages, a skilled, experienced, and well-versed professional should be consulted. Such a professional will compose an investment structure that considers the investor’s needs and ensures a minimum tax burden.
Select the asset
The asset selected another significant consideration in the viability of the investment. In this context, a number of matters should be considered when formulating a sensible business plan.
The Status of the asset
The status of the property must be confirmed, whether or not the property requires renovations, and if so, to what extent.
Real estate value in the specific area
The value of real estate should be checked in the area of the asset and in the neighborhood of the asset. The value differences between some neighborhoods can be significate.
Demand for rent, average rent rate, and average return
As with any deal, demand is important. In this context, academic and commercial centers should be considered, as well as internal migration in the region. It is also necessary to know what the rent rate is and what are the average returns.
Socioeconomic status and the essence of renters
The investor must examine the socioeconomic status of the residents: average income, unemployment level, crime level, and quality of education. These will affect both the value of the property, the demand, the rent rate, and the risk of trouble with renters who do not pay.
Taxation
Many ignore this point, but it is the difference between prosperous investment and economic failure. Each investment must be accompanied by preliminary tax planning, both in terms of the investment structure as listed above, but also in terms of its location.
Besides the federal tax, each of the states has a different state and municipal tax regime. In some states, there is a heavy tax burden, and in others, you enjoy exemptions and the like. The differences are significant. Choosing the ultimate tax location will do half the work on the way to success. Since the rules and instructions are complicated, we will recommend receiving preliminary professional advice in this regard as well.
Execute the transaction
Here are the important steps in executing the transaction:
Open a U.S. bank account
Opening a U.S. bank account to which the income will be transferred and the establishment of the chosen legal structure for investment purposes.
POF Form
Submitting a purchase offer that includes a proof of purchase form – POF (an acronym for Proof of Fund).
POS Form
Examining the property and submitting form POS by a supervisor on behalf of the municipality (approval of the residential property and necessary repairs).
Signing a contract and submitting it to the Title Company
After reaching an agreement on the purchase price, a contract is received by both parties. After signing it, the contract is transferred to a title company. These are independent legal entities authorized to engage in the registration of assets.
After examining the legal status of the property to find any debts and liens of the sellers (that may pass with the property), the company will register the property in the name of its new owners.
Closing – the last stage
This includes the final examination of the property, signing additional documents, and transferring the money to the sellers.
Investing in real estate may yield respectable profits, but success requires knowledge and skill in the choice of assets and in the manner of investment. The brilliant and professional team of MasAmerica has extensive experience and will be happy to advise and accompany you on the path to success.
