In Manhattan, New York, many foreign and international investment property buyers purchase in cash. Buying property in cash in Manhattan will save the buyer the mortgage tax, which is about 2% of the loan amount. In addition, the cash buyer saves various bank related fees.
Financing allows the ability to leverage funds, thereby being able to buy more property. For example, if you buy one condo at $1 million in cash, you only get the appreciation benefit of 1 condo. Buy if you finance at 50%, you actually get to buy 2 condos and hence benefit from appreciation (or price decrease) of two investment properties.
The two ways of arranging financing are:
(i) Financing from US lender: This option is easily arranged through a mortgage broker or a bank that STILL lends to foreigners. We have connections to both. The requirement is usually a 40 percent downpayment (60% LTV). Also, the buyer needs to show liquid assets that is usually based on a multiple of the monthly payments. Since financing is in the US, the buyer would have to pay ~ 2% mortgage tax.
(ii) Financing from home country: This refers to getting financing loan from the home country. Hence from the US's perspective, it's a cash transaction. The main difference is saving the mortgage tax and various bank fees. But of course, there may be other fees associated with the financing bank.
Ultimately, the foreign or international investor needs to do a cost benefit analysis. It's a matter of comparing loan terms, amortization period, interest rate, costs etc. Many buyers don't really understand things like amortization period and just take whatever the bank offers. I find many offer adjustable rate products.... Big mistake.
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Wei Min Tan is a real estate broker and investor focused on investment property in Manhattan. Formerly, he was a Vice President at Citigroup and managed a $500 million portfolio. He can be reached at email@example.com
Disclaimer: The above is not meant to be financial advice. Always consult your CPA, banker or attorney on financing matters as individual situations may differ.