Foreign Investor New York Property

1.0 Overview for the foreign investor

1.1 Why New York

1.2 Can foreigners buy property in Manhattan, New York?

1.3  What type pf properties are popular amongst foreign / international buyers?

1.4  What are expenses associated with owning a property in Manhattan?

1.5  Financing for foreign / international buyers

1.6  Cash buyers

1.7  Transaction costs

1.8 Taxes, taxes, taxes

1.9  How does the agent / broker fee work when buying or selling?

1.10.  How does the agent fee work when renting?

1.11  Should I use more than one agent?

1.12 What are the best areas in Manhattan for investment?

1.13  Does buyer have to be in New York for the closing?

2.0 How we add value

2.1  Niche focus on high net worth Asian buyers

2.2  Financial background

2.3  We are also property investors

2.4  Market experts

2.5  One stop solution

2.6  Oh yes, we are nice to our clients.

3.0 Buying Process For Foreign / Overseas investors

4.0 Managing the property

5.0 Selling the property

1.0 Overview for the foreign investor

1.1 Why New York

Manhattan New York  is the most expensive, most stable and most recognized market in the US.  The recent Knight Frank Wealth Report 2011 ranks Manhattan as the #1 real estate market in the world based on factors including economic environment, political climate, knowledge and quality of life.  Globally, Manhattan is a bargain when compared to cities like London, Paris and Hong Kong. 

1.2 Can foreigners buy property in Manhattan, New York?

Yes. Our foreign clients buy property in Manhattan because of brand value and appreciation potential. They often purchase as a pied-a-terre (vacation home), or as an investment property.

1.3  What type pf properties are popular amongst foreign / international buyers?

There are two categories of apartments - condos and co-ops. We recommend condos because of the higher appreciation and investment values. Co-op buildings often restrict ability to rent and perform renovations.  This reduces their attractiveness as an investment property. The process of buying a co-op is subject to board approval which prolongs the buying process.   Further, a co-op board may even reject a buyer.

The value of a condo, on a per-square-foot basis, is about 20 to 30 percent higher than that of a co-op. However, the appreciation potential and demand for condos are higher as well. 

Besides apartments, our clients also purchase commercial mixed use and multifamily buildings.  Apartments are more popular because they are easier to manage and simple to understand. 

1.4  What are expenses associated with owning a property in Manhattan?

For apartments, the main monthly expenses are taxes, common charges, insurance and depending on whether financing was used, mortgage principal and interest.

New development apartment buildings often have a tax abatement which reduces the monthly tax bill. Without abatement, annual taxes are between 0.5 to 1 percent of property value.  Common charges average $1 per square foot per month and goes up or down depending on number of units and amenities.  Insurance is about $500 per year.

Expenses for mixed use or multifamily buildings are higher and include taxes, insurance, maintenance, repairs, property management and others. 

1.5  Financing for foreign / international buyers

Mortgage loan financing is available and can be obtained either through a US or non-US bank.  Since the credit crisis, lenders have tightened credit criteria and will require about 40 percent as downpayment from a foreign buyer.  

Financing allows the ability to leverage funds, thereby magnifying returns.  For example, if  an investor buys one condo at $1 million in cash, he gets the appreciation benefit of  only one  apartment.  But if the investor obtains mortgagae financing and only puts 50% down payment, he can actually buy two apartments, effectively benefiting from the appreciation of two properties with the same (theoretical) equity investment.

The two ways of arranging financing are:

(i) Financing from US lender:  This option is easily arranged through a bank in the US.   The requirement is usually a 40 percent down payment (60% Loan to Value).  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 about 2% mortgage tax.

(ii) Financing from home country:  This refers to getting an international mortgage from the home country of the investor.   Hence from the US's perspective, a cash transaction.  The main difference is saving on the mortgage tax and various bank fees.  But of course, there may be other fees associated with the financing bank.  

We would refer our foreign clients to contacts for both options.  Ultimately, the international investor needs to do a cost benefit analysis.  It's a matter of comparing loan terms, amortization period, interest rate, costs etc. 

1.6  Cash buyers

Foreign investors purchasing in cash saves on the New York mortgage tax, about 2% of the loan amount.  In addition, the cash buyer saves various bank related fees.  

1.7  Transaction costs

For the buyer,  transaction costs are about 3 to 5 percent of the loan amount. This includes mortgage tax, title insurance,  transfer taxes if purchasing a new development, attorney fees, recording taxes and other administrative expenses.  The broker's commission is paid from the seller's proceeds

For the seller, transaction costs are about 8% of the selling price and this is driven by the broker commission and various administrative fees.

1.8 Taxes, taxes, taxes

The categories of taxes are:

(i) Capital Gains Tax, which is about 25% - 30%

(ii) Annual Operating tax

This refers to annual taxes on profits assuming the property is rented out.  The US government allows depreciation of property every year.  In Manhattan, 40 percent down payment is typically required for rental income to offset carrying costs including financing.  Hence, assuming breakeven cash flow, the depreciation allowance would create a NEGATIVE taxable income.  This means no operating taxes for the owner.  However, depreciation would have to be recaptured at time of sale.

(iii) Estate tax:

The largest tax exposure to a foreign property owner (compared to a US owner) is the estate tax.  US law is such that if a foreign owner passes, estate taxes could be as high as 46%.  The good news is that there are tax structures that can be set up to remove this risk.  

We have tax attorneys and accountants in our network that are qualified to advise our clients on all the above tax matters. 

1.9  How does the agent / broker fee work when buying or selling?

In New York, agent fees are paid by the seller. When the seller’s agent agrees to list a property for sale, a certain percentage is agreed upon as commission.  If the buyer is represented by an agent, this pre-negotiated commission will be split with the buyer’s agent.  If the buyer does not have an agent, then the seller’s agent keeps the entire pre-negotiated commission.  Hence, it is in the best interest of the buyer to have agent representation to help identify the right property and negotiate the best price.

The fiduciary responsibility of the buyer's agent is to the buyer while the fiduciary responsibility of the seller's agent is to the seller - regardless of the fact that the commissions for both coming from the seller's side.   This is just the way the brokerage trade agreement works in New York. 

1.10.  How does the agent fee work when renting?

For rentals, the agent fees  for both landlord's and tenant's agents are paid by the tenant. 

1.11  Should I use more than one agent?

All agents in New York, through the real estate trade agreement, have access to the same listings.  For example, if there are 10,000 units for sale in Manhattan, every agent will have access to the 10,000 listings.   As such, the brokerage community strongly discourages the buyer on using multiple agents as this would create confusion.

We recommend that a potential client interview several agents and then decide on one.  As we will be 100% focused on helping our investor client identify the right property, we in turn expect client loyalty.  This expectation is consistent amongst all good brokers.

1.12 What are the best areas in Manhattan for investment?

It would be foolish to recommend a "best area" without first discussing the buyer's objectives.  The risk/reward model applies to Manhattan property which is probably the most efficient property market in the world.  An emerging area may have higher expected returns but also comes with higher  financial risk such as higher vacancy rate.  An established area would have lower return but would likely be faster to rent out and prices would not be as dependent on  external factors.  

1.13  Does buyer have to be in New York for the closing?

This depends on the bank that is providing the mortgage.  Generally, the buyer can assign Power of Attorney (POA) to a representative in New York and hence does not have to be in New York for the closing.  The individual assigned the POA can be a lawyer who would be given authority to execute contracts specific to the transaction.  

2.0 How we add value

2.1  Niche focus on high net worth Asian buyers

We are the top New York agents serving high net worth Asian investors of Manhattan New York property.  Our clients come from countries including Hong Kong, China, Korea, Singapore, Malaysia, Taiwan and Indonesia.

2.2  Financial background

Leveraging prior careers at top Fortune 500 companies, we have a strong financial background which allows us to explain in terms of ROI, yield and appreciation potential vs other investment options faced by the investor (stocks, bonds, hedge funds).  This differentiates us from the "typical" agent whose focus is to stress the granite countertop or marble bathroom.

2.3  We are also property investors

We were property investors before becoming property agents.  Our clients will benefit from our insights as landlords.

2.4  Market experts

We are market experts as evidenced by extensive media appearances and interviews in publications such as the Wall Street Journal, New York Times, Bloomberg, NBC, CBS, TheStreet, Fidelity.

2.5  One stop solution

We provide a one-stop solution to foreign buyers.  This includes identifying the right property, negotiating price, bringing the team together (closing attorney, tax attorney, accountant, financing), finding tenant, dealing with tenant, eventually marketing property for  sale.  The cycle typically starts all over as our clients often want to redeploy capital to buy another property.  

2.6  Oh yes, we are nice to our clients.  We don't pressure, create false urgency etc. 

3.0 Buying Process For Foreign / Overseas investors

Below is the process for buying a condo in Manhattan, New York.  The process is similar for those buying the condo as an investment property or as a vacation home.  Main difference is that for investment property buyers, down payment required by the lender is higher.  

Estimated Time to closing after identifying property:

With Financing:  10 to 12 weeks

All Cash:  2 to 3 weeks

1.  Obtain pre-approval from lender (1-5 days)

Lender can be a US bank or overseas bank at buyer's home country with an international mortgage program.  

2.  Identify Property (2 days - several months)

Property viewing can be a pleasurable or tiring experience.  Our value is in filtering properties based on the client's objective to maximize productivity of the client's time.  

3.  Make offer and negotiate price (1 week)

Negotiation skills are critical.   Experienced negotiators could obtain many favorable financial and non-financial terms for the buyer.

4.  Execute contract (1-2 weeks)

The agreed upon terms are provided to both parties' attorneys who will prepare the contract.  The buyer's attorney will perform due diligence on the property prior to actual contract execution.  Once all is agreed upon, the contract is executed.  At this time, a 10% deposit will be required from the buyer to be held in escrow by the attorney.

5.  Apply For Mortgage and Obtain Commitment Letter (6-9 weeks)

The buyer formally applies for a mortgage after which the lender will perform due diligence, including appraisals etc.  Consequently, the lender will issue a commitment letter.  

6.  Submit condo package to condo board for approval (1 to 4 weeks)

This occurs concurrently with Step 5 above.

7.  Schedule Closing

At closing, all parties - buyer, seller, bank, attorneys, brokers, will come together at a table.  A lot of paperwork is signed and funds will be provided to the seller in exchange for the buyer getting legal title to the property.  The deal will be completed at the table and usually no future follow-ups are necessary.

4.0 Managing the property

After our investor client buys an investment property in New York, the next step is to market to potential renters.  Here are the steps we perform:

1.  Market to potential tenants using various marketing channels

2.  Screen potential tenants (credit score, references, salary, work history)

3.  Arrange for tenant move in

4.  Set up automatic transactions for tenant to automatically deposit monthly rent checks into owner's account.  

The system above removes the need for owner to pay monthly property management fees.  Property management fees are anywhere from 3% to 10% of gross rent.  Since Manhattan tenants are usually high income and good credit quality individuals, there is usually very little management necessary.

As the need arises where the tenant requires attention, we will be the point of contact to help resolve the issue at hand.

5.0 Selling the property

At time of sale, we will represent the owner as seller's agent.  Marketing the property for sale include the following activities.

• Pricing property based on market drivers and financials 
• Market property using multiple channels to both domestic and international buyers 
• Leverage our media popularity to gain exposure for the property
• Refer to 1031 exchange sources for owners who wish to defer tax payments by exchanging to a like-kind investment property.  This is an effective portfolio building strategy.
• Seller would pay broker fee to market the property.  This fee will be split between brokers from both sides.

Visit us at Castle Avenue Partners - Manhattan investment properties 

Wei Min Tan is a Manhattan, New York buyer's broker focused on investors and foreign buyers.  He often appears in the media including CNN, Wall Street Journal/MarketWatch, CNBC and New York Times discussing Manhattan property.  Weimin can be reached at tan@castle-avenue.com