United States: Overview

RENTAL YIELDS

Last Updated: Jul 28, 2009

Manhattan earnings moderate

The fundamental things apply, as time goes by – to make good money, do NOT buy the highest-quality properties. Smaller properties, in less prestigious areas, perform better. Less enjoyable maybe – but they earn more.

The most lucrative apartments in our Manhattan sample are 70 sq m.-sized Lower Manhattan apartments, which yield 5.48%. Apartments in Lower Manhattan have average yields of around 4.81%, while yields on apartments in Upper Manhattan average 4.09%. Apartments in Lower Manhattan are cheaper by no less than US$7,406 per square metre (sq. m)., compared to Upper Manhattan apartments.

In Miami things are a little better. Rental yields in gritty Aventura average 6.71%, better than in Miami’s more upscale areas, where yields average 5.07%. The cost of Aventura properties is, of course, much lower (at US$3,353 per sq. m.), than that of property in Miami’s upscale areas (US$7,050 per sq. m.).

Downmarket, cheaper – more profit. Play it again, Sam.

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TAXES AND COSTS

Last Updated: Dec 03, 2008

The complicated U.S. tax system

Rental Income: Rental income is categorized as either Effectively Connected Income, wherein it is taxed at the progressive federal tax rates, or Fixed Determinable Annual Periodical income, wherein it is taxed at 30% withheld by the tenant. States also levy income taxes at varying rates.

Capital Gains: Capital gains tax for properties held for more than a year is 5%; otherwise the tax is 15%.

Inheritance: Federal estate tax is progressive with rates at 18% to 45% and an exemption of up to US$2,000,000. A Generation-Skipping Transfer Tax is also being levied on transfers to beneficiaries who are more than one generation younger than the transferor.

Residents: Resident foreigners, like U.S. citizens, are taxed on their worldwide income.

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BUYING GUIDE

Last Updated: Jul 05, 2007

U.S. buying costs range from low to moderate

Roundtrip transaction cost is around 7.6% to 11.2%. Significant costs include the 6% real estate broker's fee and real estate transfer tax, at 0.1% to 2% of property value. Total costs for legal fees, title search and insurance, and registration fees range from 1.5% to 2.2%.

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LANDLORD AND TENANT

Last Updated: Feb 06, 2008

U.S. housing law is pro-tenant

Strong anti-discrimination laws make the US slightly pro-tenant.

Rent Control: There are subtle rent control laws in 5 states; however their laws also have provisions to give landlords a fair return of investment.

Tenant Security: It is advisable for landlords to write a report citing all the allowable reasons when declining a prospective tenant. Tenants can also charge landlords with intentional infliction of emotional distress to fend off eviction.

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ECONOMIC GROWTH

Last Updated: Aug 04, 2009

US economy is improving

As a result of the subprime mortgage crisis, the US has been in recession since December 2007, according to the National Bureau of Economic Research (NBER).

In the first quarter of 2009, the economic recession was abating.

Real GDP fell by an annualized 5.5% in Q1 2009 after shrinking 6.3% in Q4 2008. In 2008, the US economy had grown by just 1.4%, from an average of 3% per year from 1997 to 2007.

In the second half of 2009:

     • There will be a modest recovery in housing activity and car sales
     • The fiscal stimulus will have a positive impact
     • There will be a sharp upswing in inventory investment

All these should give the economy a boost, according to William Dudley, President of the Federal Reserve Bank of New York.

However, unemployment is projected to remain high. In June 2009, the unemployment rate soared to 9.5%, from 5.6% in June 2008 and 4.6% in June 2007, based on figures from the US Bureau of Labor Statistics (BLS). Fed policymakers expect unemployment to rise to 10% by the end of 2009.

In 2008, the inflation rate was 3.8%, down from 2.8% in 2007. In the face of collapsing demand, the US economy has experienced a drop in prices, with the consumer price index falling by 1.4% in June 2009 from the previous year. In 2009, inflation is expected to be 1.6%.

One thing holding the housing market back is that real-world mortgage rates have barely changed, despite cuts in the Fed funds rate.  The Fed rates were slashed five times in 2008 from 3.0% in January to just 0.13% in December 2008, and have been unchanged since.  Despite these rate cuts, mortgage rates barely moved down.

     • Interest rates for 30-year FRMs declined to 5.42% in June 2009, from 5.76% in         January 2008.
     • One year ARMs barely changed to 4.93% in June 2009, from 5.23% in January         2008.

Banks remain reluctant to lend to new home buyers.  This is still holding back the housing market’s recovery. Yet this too will pass. As unsold housing inventory drops, and price-falls become less probable, banks will become more eager to lend.