Real Estate in the U.S. — the Decision to Rent or Buy
Join us for a discussion on the decision to own or rent a residence in the U.S. for international professionals. In this video, Andrew Fisher, president of Worldview Wealth Advisors, will discuss this important topic and how it can affect your global wealth.
Key topics to be addressed:
• Reasons to own property
• Does it make sense for you to buy if you are globally mobile?
• Purchasing a home in the U.S.
• Leaving property behind in the U.S.
Hello and welcome to Worldview’s Cross-Border Wealth Series. My name is Andrew Fisher, president of Worldview Wealth Advisors. On today’s episode we’re going to discuss real estate in the US and the decision on whether to rent or buy while you’re here.
The agenda for today, first we’ll discuss reasons to own property generally, we’ll discuss purchasing a home in the US and how that works does it make sense to buy for a globally mobile person and leaving property behind in the US.
First, reasons to own property are pretty, fairly well understood and the majority of our clients do own their homes both here in the US and the vast majority owned homes abroad where they’re from as well. Real estate can be a wonderful long-term investment, but prices have been rising rapidly through the 90’s and 2000’s, probably not likely to rise at that same pace going forward.
Now it generally is a good idea to purchase a home in the US as long as it’s within your budget. Well-known advantages are rising values for homes which combined with the paying down of a mortgage, can really be a good way to accumulate wealth. Also there’s a tax deduction of mortgage interest and property taxes which is very nice, as well as the pride of ownership, owning the place where you live which really makes a lot of sense.
Purchasing a home in the US, let’s talk about that briefly. Typically homes in the US are purchased with a 20% down payment, most people use a 30 year fixed-rate mortgage which is fully amortizing. What that means is at the end of 30 years, the mortgage has been fully paid off. Now in the US, sellers typically pay the sales commission which usually ranges from around 5-6%, so the transaction cost to buy or sell a home a significantly lower than in many other parts of the world where transfer taxes can be anywhere from 10-15% the value of the home. Property taxes in the US generally range from around 1-1.25% of the value of the property and that’s payable annually.
So, does it make sense to buy or rent for a globally mobile family? This is something we’ve dealt with quite a lot for our clients who tend to be people who are moving all around the world for different opportunities. In many cases renting can make sense. In the past soaring home values really drove a lot of decisions about home ownership. It was just assumed when you move to a new place you would buy a home there because otherwise you’d be missing out on easy money. Well I don’t think we’re going to see that kind of price increase again or at least not for a while, so it’s kind of changing the decision making a little bit for a lot of cross-border or globally mobile families.
We’re getting back to a point with this sort of 1, 2, 3% annual appreciation where the old break-even rules now apply again, and those rules generally say you need to be in a home seven to ten years to ensure that when you sold it that you would at least get the money that you invested back. I think that’s really where we are again, today.
So the big question comes down to how long you intend to be in the location where you’re considering buying. Our clients, as I said, tend to be fairly mobile and so I think that they value the flexibility that renting can offer. In general we recommend to people that they purchase only if they plan to stay in that location for at least five to seven years.
Now, leaving behind a property in the US, this is an issue that we’ve seen quite a lot and there’s always that struggle with “do I sell the home or do I rent it out?” Well, we always ask people, do you really want to be a landlord to a home located in a country that you’re not even living in? We’ve seen a lot of clients struggle with the management of properties when it’s across the border. So really when you’re renting, when you choose to rent and not sell a property that you’re leaving behind, you’re really in many cases hoping to see some continued increase in the value of the home. Very often you’re dealing with what might be a negative cash flow situation, when the rents don’t quite offset the expenses to hold the home or if they do maybe it’s a very, very small amount of positive cash flow, and you end up having your equity tied up, whatever value having a home is locked into that home.
But one of the biggest downsides with renting is the maintenance and management headache. Of course there’s also an issue with US tax implications. When cross-border families leave and move away from the US, very often they give up the US residency. When they do that, they generally no longer have to report to the US. But if you leave a property here, typically you do have to continue to report, albeit only on the income or loss on that specific property.
One other issue with renting a property out is that if you move away and rent the property out for more than three out of the last five years, you lose the game exemption and this can be pretty important. I’ll give you an example. We had a client of ours; he’s actually an Indian fellow who lived for many years here in the US and ended up moving back to Europe. He owned a home and he was one of the lucky ones, he had a very large gain on the home right around half a million dollars. When he left, he thought it might go up further so he decided to hold it as a rental for about four year. When he did decide to sell that gain of 500,000 had fallen to about a gain of 250,000 dollars, so a pretty big drop in value. In addition because he held it too long he lost the ability to claim the personal exemption or the property gain exemption here in the US. So the 500,000 dollar gain, had he sold it right away, would have
been tax-free here in the US but when he finally got around to selling, that 250,000 was fully taxable and the tax he had to pay to the IRS was quite a surprise for him.
This has just been a broad overview of some of the issues around the rental verses purchase decision. I would hope it’s given you some good points to consider when making that decision. Just because interest rates are low does not necessarily mean that you should buy. It really does depend on your individual situation.
Thanks for your attention. For additional questions or to contact one of our advisors please email us or call us at 503.620.3600.