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Do your homework to reap rewards as US market rebounds

Chinese buyers are the second-largest investor group in America, but advance planning is critical. Patrick ONeill reports for South China Morning Post. January 18, 2012.

International investment in the United States surged to over US$82 billion last year, and Chinese investments in that country doubled in the past three years, according to the National Association of Realtors. Chinese now represent the second-largest investor group in the US, and Hong Kong investors place the US as the top country of interest, according to surveys. At a US property conference held last month in Hong Kong, experts discussed US property ownership including market trends, taxation, finance, immigration and investment structures. The following tips to buying in the US may help.

*Hire a buyer's agent. Most US property deals involve separate agents representing the buyer and seller. Buyer's agents coordinate all aspects of ownership including research, legal documents, finance, immigration issues and property management. Buyer's agents earn a 1 per cent fee and many require exclusive agency agreements.

*Plan the tax structure. The US encourages international property ownership with numerous tax advantages, but advance planning is critical to avoid paying higher foreign corporate tax rates. The long-term capital gains tax rate for real estate is 15 per cent, which is applied to the net profit of property sold after one year. Some states apply additional capital gains taxes. States with no additional capital gains tax include Texas, Nevada, and Florida. For investors buying and selling multiple properties, a tax deferred exchange will defer all capital gains taxes.

*Buy freehold property. Unlike Hong Kong, most homes in the US are freehold. (All of Hong Kong is leasehold except for two parcels owned by the Anglican Church and the University of Hong Kong). Investors are encouraged to buy freehold to avoid the potential pitfalls of limited financing, land- lease-rent increases, and decreased resale values.

*Obtain pre-approved financing. Investors requiring financing should obtain a pre-approval letter as the first step in the buying process. The letter will be required for any initial purchase or reservation agreement. Financing options for international investors are expanding, with several Hong Kong lenders offering floating rates starting at 5 per cent with loan amounts up to 60 per cent. Private banking departments may provide floating rates under 3 per cent, while US lenders offer fixed-rate loans starting at 6 per cent.

*Set realistic expectations. Investors need to have realistic expectations, depending on the investment criteria and location. Markets offering value discounts over 50 per cent are in oversupplied secondary areas such as Las Vegas, Phoenix and Florida. Realistic discounts in first-tier gateway cities such as New York, Los Angeles and on Hawaii are closer to 20 per cent.

*Look at new developments for deals. New developments offer the best buyer incentives and price discounts. Developers with unsold inventory have more flexibility for incentives compared with second-hand sellers. Developers are currently offering steep discounts, prepaid common charges, and rental leaseback guarantees. In New York, new developments provide discounts of over 30 per cent and second-hand market discounts are close to 20 per cent. Rental guarantee leaseback programmes are rare in the US due to regulations, but several developments are offering the guarantees to international purchasers.

The current discounted prices, historically low interest rates, and oversupply will not last. Property values in the US peaked in 2006 and began a steep 30 per cent correction in late 2009 according to the Standard & Poor's Case-Shiller Home Price Index. Prices have rebounded slightly in the past two years with an increase of 0.2 per cent in the most recent report. New York posted larger annual gains. Investors who take action now will reap the rewards as the US markets rebound.