If you are an international buyer looking for an investment property in the confusing Manhattan real estate market, there are many things to consider but here we have one simple tip. Consider buying in a new construction building that is tax abated.
A tax abated building will give you a higher rate of return of your investment due to the low monthly charges in comparison to a similar building without the abatement. A 20 year tax abatement will mean you pay probably around $100 or so per month instead of nearly $1500(at least). By year 12, the taxes begin to adjust upwards with each 2 year cycle the taxes going up as per the below.
Year 12 20% of fair market taxes
Year 14 40% of fair market taxes
Year 16 60% of fair market taxes
Year 18 80% of fair market taxes
Year 20 100% of fair market taxes
So for example a $3mm apartment with 2 bedrooms/2.5 bathrooms with common charges of about $1800 and 1300 sqft (120m2) of living space might rent for about $7000. With a tax abatement, your monthly return is about $5100 or $61,200 annually assuming taxes of $100 per month. Your rate of return is just above 2% on the $3mm investment. These would be the numbers for 50 Riverside boulevard aka One Riverside Park on Manhattan’s upper west side. Now if the building was not tax abated and you were paying $1500 per month in real estate taxes then your monthly return goes down to $3600 or $43,200 annual. The rate of return of approximately would be approximately 1.4%. Over the course of 10 years, the savings from a tax abatement would be approximately $170,000.
So if you are an international investor or even a local real estate investor purchasing new construction in Manhattan, take a look at tax abated buildings. Certainly, there are not a ton of them but they do exist and will increase your rate of return both now and long term.
Tip 3 in a word has to do with convenience. Assuming that you live overseas, you probably do not want to have phone calls and emails asking you to deal with a leaky sink or a flood due to a tenant above you. You will need management or maybe not…If you purchase in a building with a concierge, live-in-super and handyman you can probably get away with not having to pay a separate fee for management. Let your tenant know if there is an issue, that they should go to the front desk and put in a work order and email you so that you are informed. That’s it. In some cases, if you bought the property through a broker, and the same broker rents it for you whenever it becomes vacant, they may manage it for you for little or no fee. With direct deposit and your local broker dealing with vacancies, you can have a turnkey investment.
As a foreign investor looking for a Manhattan property to purchase and rent out, you need to find an international tax consultant who can help you navigate the complicated tax code here in the United States.
Here is a crash course but please consult an accountant or your attorney before making any purchase. Let’s say you buy an investment apartment for $2.75 million and you collect $9,000 per month in rent with $3,000 in condo charges including your common charges and taxes.
$9,000 per month income
$3,000 per month building charges
$6,000 profit per month or $72,000 per year
So you make $72,000 per year in profit and have to pay US taxes on that correct? Not so fast. In the US, you are required to take something called depreciation on your property which is based on 27.5 years. So the apt cost $2.75 million and you depreciate $100k each year. ($2,750,000 divided by 27.5 years is $100k)
So guess what? The $100k in depreciation wipes out the $72,000 gain from rental income and you do not owe anything in taxes here in the US. What’s the catch?
The catch is that when you sell in 10 years, your original cost was $2.75 million but in 10 years you depreciated the property a total of $1,000,000 so as a result your cost is actually only $1,750,000 not $2,750,000. So any amount above that will be taxable. End of the story? Not quite. Most investors who sell a property like this purchase another one and through a vehicle called 1031 exchange you can rollover(defer) the taxes to the next property!
So please make sure if you are purchasing an investment property in Manhattan as a foreign national, you find an experienced international tax consultant who can help you to minimize your tax liability. Usually, an experienced real estate broker can recommend someone to you.
According to The Epoch Times, a survey that was done by the Real Estate Board of New York(REBNY) of about 400 real estate brokers showed that about 10% of the brokers had concerns about a slowdown of Chinese buyers for Manhattan real estate. The survey was compiled prior to the stock market crash in China so that was not a factor. Some experts feel that options for Chinese investment became fewer with the market crash.
Since 2013, the Chinese government has been making it harder to get money out of the country. Additionally, EB-5 visas were delivering green cards in exchage for a $500k investment in about 1 year but due to demand, green cards are now being received in about 3 years.
According to some experts who deal with wealthy Chinese, some of the deals that are now being consummated for luxury residential Manhattan real estate are being purchased with money that was already taken out of the country in prior years.
One loophole is to purchase collectible items like art in China and then sell it overseas since there isn’t a limit on personal property being moved out of China.
What do you think the impact will be on Manhattan’s real estate market if any?