Real Estate in the US – Real Estate Investments in the United States
In recent years, Israeli investors have been expressing increasing interest in real estate investments in the United States. A major reason for this is the attempt to find profitable real estate transactions outside Israel that can be carried out with lower equity than is required here in Israel and with the potential for a higher return, while taking advantage of the economic crisis that broke out in 2008, which led to a decline in real estate prices in the United States and created investment opportunities, many of which are still available today.
For the foreign investor, investments abroad in general, and in the United States in particular, require in-depth research and prior knowledge that will prevent him from putting his money on the back burner and risking losing his fortune.
In the following lines, we will present you with a comprehensive overview that touches on the 9 most important issues that every real estate investor in the United States must be familiar with before making a transaction. The information is relevant to both beginner and advanced investors. Let’s dive in…
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The North American real estate market offers a wide range of investments thanks to differences in population, culture, and consumption characteristics in its various areas. To understand the size of the market – approximately 329 million people currently live in the United States.
There are quite a few factors that may affect the viability and characteristics of the investment, including the level of crime in the property area, the socioeconomic status of the population living in the area, the presence of positive or negative migration in the area, the demand for rental housing in the area, and more.
- Property prices – The cost of apartments and houses in the US is significantly cheaper than the prices of apartments and houses in Israel. To illustrate this, you can find a spacious house in the US for an amount equivalent to the price of a 3-room apartment in one of the peripheral cities in Israel.
- Land value – The price of land in the US does not have as much weight as in Israel and construction costs there are cheaper. Due to the frequent earthquakes and storms that strike the US, it is often necessary to provide quick housing solutions, and therefore it is customary to build residential houses in prefabricated construction or using wooden construction methods. As a result, the cost of the buildings is cheaper, but maintenance costs may sometimes be higher. Overall, this greatly reduces real estate prices in the country compared to Israel.
- Transparency – In the US, there is complete administrative transparency, and the entire real estate purchase process is regulated legally and legally, which makes the process much more convenient and simple, when compared to the process in Israel.
The subprime crisis that broke out in 2007 led to a global financial crisis a year later. The name of the crisis was born from the reason for its outbreak, subprime loans with high interest rates for the purchase of properties, which were given to people who could not meet the repayments due to unstable income, for example, and led to the foreclosure and sale of many properties.
What led to the outbreak of the crisis?
Before the outbreak of the crisis, the United States enjoyed a gradual growth in the real estate market, which caused the government to grant loans for housing needs on very favorable terms, such as low interest rates and without the need for a down payment or additional guarantee. This approach quickly led to an increase in demand for real estate, and created a situation where it was not profitable to rent an apartment, since it was easy to get a mortgage that was fully financed by the bank (without the buyer having to bring any equity with them).
As mentioned, the increase in demand for real estate led to a significant increase in prices and an increase in demand for non-residential real estate. At the same time, banks and lending institutions believed that borrowers would be able to meet their loan repayments and made subprime loans available to them without sufficient control, with the mortgages being financed through the issuance of high-interest bonds.
The (monetary) decision at that time to raise interest rates made it difficult for borrowers to meet their loan repayments, and a situation was created in which many borrowers were forced to hand over their homes to lenders, who were unable to sell the properties because the real estate market moderated and demand fell sharply. As a result, the real estate stocks that were traded also collapsed and the crisis gave its signals in the US and spread throughout the entire world.
The last straw was the decline in the value of apartments in the US, which led to a situation where the mortgage amounts they took out were higher than the values of the apartments they owned (Under Water) and caused additional borrowers to give up their properties, which exacerbated the effects of the crisis.
Ultimately, banks and lenders were left with a huge amount of unclaimed assets, which they had to quickly get rid of to cover their debts, and thus real estate prices in the country reached an unprecedented low.
“The Opportunity” – Low Prices and a Huge Supply of Real Estate Investments in the US
Following the crisis, sharp-eyed investors quickly recognized the opportunity before them and began to express interest in real estate in the US. With the tightening of mortgage conditions set by banks and lenders, Americans found it difficult to take advantage of the opportunity, which left the market open to outside investors and increased the demand for rental housing.
Although quite a few years have passed since then and real estate prices have recovered and begun to gradually rise, they are still low compared to many places in the world, especially in Israel.
Does the Corona crisis threaten the real estate market in the US?
These days we are experiencing a global crisis, which is affecting the health systems and the economy in ways we have not yet known, but contrary to expectations, home sales in the US increased by 43% during the last quarter compared to the same period last year. The home price index increased by 4.29% compared to 3.25 last year, and home prices increased by 2.17%.
Here is the price trend recorded in the 20 largest cities in the country as of 2022:
Phoenix shows the highest increase, standing at 32.41%, followed by San Diego (27.79%), Seattle (25.5%), Tampa (24.41%), Dallas (23.66%), Las Vegas (22.45%), Miami (22.23%), San Francisco (21.98%), Denver (21.31%), Charlotte (20.89%), Portland (19.54%), Los Angeles (19.12%), Boston (18.73%), Atlanta (18.48%), New York (17.86%), Cleveland (16.23%), Detroit (16.12%), Washington (15.84%), Minneapolis (14.56%), and Chicago (13.32%).
The median price of a new property in the US has increased by 20.1% in the past year and currently stands at around $390,000.
The median price of existing properties (second-hand) stands at around $356,000.
Demand for home purchases continues to rise, but the number of construction starts and relatively low supply are failing to meet the high demand. Some believe that this imbalance is expected to benefit investors even more.
The unemployment rate, which dropped to 5.2% at the end of 2021, is also encouraging.
✔️ Purchase a Private Home – Single Family
Purchasing a private single-family home in the United States gives its owner exclusive ownership of the property and the land on which it stands, along with its rights and obligations. Although the price of a single-family home is higher, it is easier to get a mortgage for it and you can accurately predict the expected income and expenses. Also, although these homes are usually far from city centers, and finding tenants can be a bit challenging, data shows that most Americans prefer to live in single-family homes.
✔️ Purchasing an apartment in a building or complex
Purchasing an apartment in a building or complex gives its owner ownership of the apartment only, and unlike Israel, apartment buildings in the US, known as condominiums, can contain hundreds of apartments, belonging to different owners. All apartment owners are required to pay a Condo (“house committee”) for the management and maintenance of the building.
These apartments are relatively cheap, and most of these buildings contain additions such as a gym and a pool, but it is important to take into account that there are hundreds to thousands of additional tenants, building regulations and a body that manages the building, and that house committee payments may be relatively high, especially if the building is upgraded with additions that improve the quality of life of the residents. In addition, the increase in the value of these apartments is slower, and it is more difficult to obtain a mortgage for the investment in them.
✔️ Group investment in multi-family
Investing as part of a group of people is done through a management company or brokerage agency, through which they jointly purchase an apartment complex or building Pay in the US. This type of investment requires lower equity, but the risk is higher, because the investment is similar to purchasing a share and a proportional share depending on the investment amount.
Although group investment in the multi-family model is also suitable for those with a lower investment amount, it requires coordination and agreement between all investors, who depend to a large extent on the body managing the investment. Although the investor in this track is not a partner in managing the property and is hardly involved in it, for this reason he is required to pay more for management costs. In cases where the properties are not rented, these expenses may be particularly high.
✔️ Investing in commercial real estate in the US
Investing in commercial real estate includes the purchase of offices, stores, industrial buildings, logistics centers, hotels, public buildings, and the like, which are not intended for residence but for rental to business or public entities.
In most cases, commercial property can be rented at a higher price than residential real estate, but the expenses it requires from its owners are higher. However, one of the advantages of commercial real estate is that the tenant can be a government or public entity, in which case the risk of problems with rent payments is much smaller. Beyond that, there are not many differences between commercial real estate and residential real estate, and the same inspections should be performed on both types.
A significant portion of homes for sale in the United States are properties that were foreclosed on after their owners failed to pay their mortgages. Often, these properties need significant renovation, and it is not surprising to discover that they have been vacant for a long time or have suffered from burglaries or takeovers by homeless residents.
This is where the opportunity for investors comes in: Investors have the option of purchasing these types of properties, renovating and improving them, and then selling them at a higher price while making a profit. In fact, some real estate companies make their profits this way.
Some choose to improve the property they have purchased in order to charge higher rent for it and ensure a renovated and renewed property that will not require much maintenance, at least for several years to come. Properties can also be improved by expanding them by adding an additional floor or room, etc.
Who is suitable for “Flipping” transactions – This type of investment is made for the short term and is especially suitable for investors who are interested in making a profit within a few months to a year. It is suitable for people who do not want to deal with rentals, as well as for those who understand renovation and construction work. This type of investment actually offers higher profits along with higher risk, as it requires more financial and operational investment.
* Property location – The differences and gaps between different areas across the US will usually be significant and will largely determine the profitability of the deal, so choosing the location where the investment will be made must take into account the following parameters:
* Rental demand in the area – A property that is not rented will require its owners to pay property taxes, house council, taxes and other expenses, which could lead to a loss. Although there is no index that accurately indicates the demand for rentals in a particular area, it is possible to examine the occupancy level of the properties in the area. In addition, the presence of educational institutions and employment centers such as hospitals and universities will attract a high-quality population to the residential area. As a general rule, it is always better to locate a place where development processes are taking place and which is located close to major roads, major transportation hubs or shopping centers.
* The nature of the population living in the neighborhood – Socio-economic status will affect both the attraction of people to the area and the ability to actually rent the property. It is important to check what the income is The average per family and the unemployment rate in the area, which will also help determine the real rent level and the chance of getting into trouble with tenants who do not pay. It is advisable to thoroughly examine the crime level in the area, the quality of educational institutions and the population level. Often, a property that is priced too low may indicate an area with high crime or high unemployment.
* Real estate prices and average rents – Examining market prices will largely determine the investment area. Examining the average rent level will help calculate the return.
* Census – Negative migration may indicate problems in the area, and will usually indicate difficulty in renting or selling the property, while positive migration will indicate an increase in the value of real estate in the area. It is recommended to check the number of residents in the area over the years.
* Average return – This figure is important not only for examining the feasibility of the investment, but will also indicate additional data. In general, the higher the risk in the area, the higher the return should be, in order to justify the investment in that area.
* Laws and taxes – Every state in the US has different laws and taxes related to real estate. It is important to check, for example, what the law states regarding a tenant who does not pay, what municipal taxes exist and whether there are special laws regarding real estate, such as a ban on purchasing real estate other than through a local real estate company, etc.
* Property Condition – As we mentioned earlier, following the 2008 crisis, there is a large inventory of apartments in the US held by real estate collectors. These apartments can often be purchased at a low price and profit from their improvements. Those who prefer apartments that do not require renovation can choose to invest in a property in better condition, suitable for living, from the outset.
* Property Tenants – One of the most important things is to choose the right tenants, whether they already live in the property and “come with it” or whether you are the one bringing them in. Every landlord would strive to rent it to tenants who pay on time and try to maintain the property. For this reason, it is important to examine the tenants’ earning capacity and how stable it is, as well as their history with regard to debts and violations of the law. In addition, if they are also nice and kind, that is a bonus.
Buying a home in the US is done through a Title Company, which is an independent, neutral legal entity, including insurance agents and lawyers, who are authorized to register ownership of homes in the US.
By virtue of its role, the company examines the property and its legal status, making sure that there are no previous debts or liens, etc. registered on it. This examination takes several days. It is worth noting that a debt, if any, is not registered on the previous owners of the property, but on the property itself, and anyone who purchases a property that has not been paid in full must pay the debt themselves.
In addition, the Title Company is responsible for the entire process of selling the property, including transferring funds between the buyer and the seller and registering the property in the Land Registry. Upon completion of the sales process, the company transfers ownership and provides insurance, so that it will bear the expenses if in the future an unresolved debt is found for the property.
An investor, or group of investors, who are interested in purchasing property in the United States are required to register as partners in an LLC, which is a company registration method used in the United States, through which commercial activity for real estate investments in the United States is carried out. Registration is done in any state that allows this in the United States, and depending on the state in which the company is registered, different rules apply.
Establishing an LLC is a fairly simple procedure that takes a few days and does not require holding a green card or American citizenship. The reasons for purchasing properties through an LLC lie in the fact that this way the investor’s assets and private capital are protected and only the company can absorb claims.
In addition, taxes on LLCs are lower than in private investment when it comes to taxes on profits from future sales of the property, as well as taxation of income from the property (more on the real estate taxation system in the United States below).
In the first stage of the process, the investor meets with representatives of real estate companies operating throughout the United States. The purpose of the meeting is to identify the client’s various needs in order to find him a property that will provide an optimal response to his investment goals and meet his requirements and needs in the best possible way. To this end, the representatives will seek to understand what budget the investor is interested in investing in, in what location he is interested in locating an investment property, what type of property he wants to purchase, and so on. After identifying the client’s needs and requirements, he is given offers for various properties.
The client can also locate properties independently. The real estate companies will assist him in this, and will even accompany him through the application process to purchase the property.
How is the property purchase process carried out?
1. In order to actually purchase the property, the investor is required to provide a document, known as POF (Proof of Fund). The document, which is drafted and issued by the bank where the investor has an account, constitutes evidence that the investor has the financial resources to purchase the property. When the investor has the full amount to make the purchase (and the renovation, if required), a photocopy or copy of the account balance must be submitted. If the investor took out a mortgage to make the investment, he must present a document from the lending body along with the amount of the mortgage he took out.
2. In the second stage, the offer must be submitted to the seller of the property along with the document confirming the investor’s financial ability to purchase the property. At this stage, the investor may be required to pay a down payment. The seller is obliged to return it within a limited time, which is detailed in the offer.
3. In parallel with the second stage, the property must be verified for its soundness and a defect report, known as POS, must be submitted, which details what repairs are required to be made in order to approve it for residence. The inspection is carried out by an inspector from the local municipality.
4. At this stage, the investor may refer contractors to the property in order to receive price quotes to repair the defects found in it, and to assess based on these quotes whether it is worthwhile and profitable for him to make the investment.
5. In the next stage, an agreement is reached with the seller on the purchase price, and the seller signs the offer submitted by the buyer. From this point on, the parties have three days in which they can challenge the contract, usually through a lawyer. After signing the contract, the property is inspected by the Title Company.
6. At the end of the purchase process, in order to close the deal, the investor is required to take care of all the documents and funds related to the purchase. At this stage, all parties sign all the required forms, the money for the property is transferred to the Title Company’s trust account, which transfers it to the seller, and then the transfer of ownership of the property takes place.
7. Near the closing stage, a final inspection of the property is performed to ensure that its condition has not changed since the signing of the purchase contract. In addition, in accordance with US law, care must be taken to purchase a home insurance policy and to arrange the mortgage if one has been taken out. After that, the renovation process can begin (if necessary).
Due to the great distance between Israel and the US, it is customary to use a management company after the purchase, which takes care of the ongoing care of the property. The company’s role is to oversee the property, maintain it, and take care of everything related to its rental, from finding tenants to dealing with problems that may arise with them. The management fees to the company are paid from the rent.
Real estate company and the matter works in collaboration with leading companies in the field, which provide unique services to the community at great prices. All services are monitored by the site staff and their reliability is checked at all times.
Our transaction site uploads transactions directly from sellers on a daily basis. We also have a database of companies marketing properties in the US at your disposal.
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* Property tax payment – In the United States, the owner of the apartment pays the property tax, and is required to pay it even if the property is not occupied. Property tax is paid to the municipality once every 3 months, and its amount depends on the value of the property and the regional taxation system.
* Property insurance cost – paid once a year or in monthly payments. The cost depends on the scope of the policy, the value of the property, etc., and may range on average from $30 to $100 per month.
* Housing committee – When buying an apartment in a building or apartment complex, you are required to pay for maintenance expenses on the house, repairs, etc.
* Management fees – paid to the management company from the rent it collects from the tenants. Typically, the cost ranges from 8% to 10% of the rent.
* Rental income tax and capital gains tax – Israelis who own real estate in the United States are taxed in both the United States and Israel. The tax is levied on the current income from the rental, and in the future when the property is sold from the expected profit from the sale, investors will be required to pay capital gains tax. The tax treaty signed between Israel and the US, which gives priority to the latter in all matters concerning Israeli investors who own property, guarantees investors to avoid double taxation.
* Inheritance tax – In the US, there is an inheritance tax on properties located in the United States, even if the owner is not a US resident or citizen. This tax means that if, God forbid, the owner of the property dies, his heirs will have to pay tax on the value of the property up to a maximum rate of 35%. There are various ways to circumvent this tax, such as establishing a foreign company in whose name the property will be registered, but when the property is sold, such a company will be charged a higher capital gains tax than a property registered to an individual at a rate of 35% instead of 15%. Another option that is worth considering, for example if the investor is elderly or has health problems, is to register the property in advance in the name of the future heirs.
Expenses incurred for apartments, such as insurance, ongoing maintenance, etc., are recognized in the US for tax purposes, and therefore anyone who has established an LLC in his own name is required to file a US tax return every year, which presents all of his profits and losses. In cases where several names are registered in the company’s name, the tax payment will be collected in proportion to their ownership in the company.
The tax rate used in the US ranges from 10% to 35% depending on the tax brackets, and for filing the reports the investor will be required to pay several hundred dollars.
Nadlan Group provides the entire umbrella of solutions to the USA Real Estate investors – locals, or foreign nationals. We are lending brokers with hundred of lenders – we are doing an auction between all of the lenders to get you the best mortgage in the US – and all of our banks also works with Foreign Nationals. We have a Real Estate school and we are teaching Buy & Hold, Fix & Flip, Multi Family, Wholesaling, Land. AirBNB and more, we have a strong community of tens of thousands of people, a networking website and app, we run large Real Estate conventions & Expo’s, we provide marketing for Real Estate companies, and we are also builders for New Construction properties & run Multi family syndications. In Our financing company we also open Bank Accounts remotely without the need to fly to the US, open LLC’s & with our mortgage company we provide financing solutions for foreign nationals and Americans investing in the US real estate market. We offer personal guidance and an advanced auction platform to help clients secure the best financing offers from multiple entities. Our company also provides ongoing support until funding is received.
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