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Money not spent or invested depreciates over time and compound interest is a thing of the past. Property is one of the few positive yielding,...
Understanding your investment
After purchasing a family home, the purchase of an investment property is the second most important financial decision in most peoples lives. When done correctly, it can be a highly satisfying and profitable experience. Making a wise investment decision now can both provide a stable source of income for the duration of your ownership and a significant capital gain upon disposal.
To ensure your experience is a positive one and to avoid the mistakes many people made during the recent past, it is vital that you have access to and understand the key factors affecting your investment.
Below we have provided explanations and supporting downloads for what we feel to be the most important issues. Feel free to email us on investments@torcana.com if you have further questions.
Net Yields
When considering any investment one of the important items to review is your net yield. This is your net income after all overheads expressed as a percentage of your purchase price.
In order to accurately calculate your net yield you must consider all costs (no matter how small) in the general running of the property. We do our best to provide clients with the details of all existing overheads (not everybody does).
The standard condo has four main running costs (a full explanation of each of these costs is below);
• HOA or Home Ownership Association (monthly)
• Property taxes (annually)
• Property management (monthly)
• Insurance (annually)
For ease of use, we split each of the four expenses above into monthly payments to enable us to calculate average monthly gross and net rental income or yields.
Home Owners Association (HOA)
Each community has a Home Owners Association who is responsible for looking after the community as a whole – i.e. common areas and facilities from the swimming pool down to the security gate and rubbish collection. They are also responsible for the structures of the buildings within the community and insuring all common areas. HOA fees range significantly from community to community and can be affected by many factors.
One of the main issues to be aware of when purchasing in a community is the HOA and how healthy they are. Important questions would include: How many foreclosures or delinquencies are in the development? (if people aren’t paying the HOA there may be a deficit to recoup). Is there a satisfactory sinking fund? (if the clubhouse roof needs to be replaced in two years we need to make sure the necessary funds are already there).
The answers to these questions can provide you with an insight as to how stable the HOA is and if there is likely to be an increase in the HOA due in the near future.
HOA dues are payable monthly, quarterly or sometimes every 6 months, depending on the particular association.
Property Taxes
For yield and income purposes we calculate property taxes on a monthly basis however they are payable annually in one instalment.
Property taxes are calculated by the County Tax Appraiser and are based on local services, amenities and average property values within the vicinity.
In October each year an estimate of the current years’ property taxes is published and you can view this estimate on the County Tax Appraisers website.
During November of each year the final property tax bills are issued and again these can be viewed on the Appraisers website. The tax year for 2010 runs from January 2010 through to December 2010 and the tax bill for that year will be released and published in November 2010.
Property owners must ensure their taxes are paid by the end of March of the following year (for the above example that would be March 2011) or interest may be applied. Discounts are applied the earlier the bill is paid; i.e. if paid in December a discount of 3% may be given, January a 2% discount and so on.
Property Management
A management company is one of the most important aspects to a well run, hassle free investment property. We work with several excellent management companies depending on the location of the property and we can (if you wish) introduce you to them.
Typical management costs are 10% of the gross rental income and this is standard throughout the State of Florida. A management company will charge for placing a tenant and for renewing a lease and these will be outlined in the property management agreement.
Amongst other things, your management company is responsible for liaising with your tenant, ensuring they pay on time, organising any repairs necessary, communicating with you on a regular basis, paying you the balance of your rent, providing income statements and placing new tenants. Some management companies will also arrange to pay your HOA for you however this does depend on individual companies. Speak to your manager if you would like to know if this can be arranged.
Many of our clients are based several thousand of miles away from their investments and your property manager is your eyes and ears on the ground. It is very important that you develop a good working relationship with this person. They work for you so please do not be afraid to ask questions and seek advice if needs be.
Your property manager will also have a good understanding of what it is to own a home in Florida so if you are unsure of anything from property taxes to Home Owners Associations and how they work; they will generally be able to help so again - don’t be afraid to ask!
Home Insurance
The usage of the property determines the type of insurance required. If it’s a long term rental investment, minimum contents cover is required. If it is short term, you will need additional cover for furniture. We would also recommend an element of liability and medical insurance be added, again based on the usage of the property.
Title Company
Title companies are independent legal firms who transact every property purchase within the United States. Instructed to represent both the seller and purchaser their role is to ensure that the title is transferred to the new party, completely free of all liens and encumbrances and that conditions signed up to within the purchase agreement are adhered to.
On individual purchases the title company can be instructed by the party paying the title Insurance (see below) however with developer owned products the title company is usually instructed by the seller as much of the work is repetitive, in an effort to reduce duplication.
All funds payable for the property are paid to the title company who hold the monies in escrow until such time as the transaction is complete. No payments should ever be made directly to the developer/seller or your Realtor/Agent and alarm bells should ring if you are ever asked to make such direct payments.
The title agent assigned to the purchase will prepare the closing package which will consist of several standard documents, one of the main items being the HUD Statement or Settlement Statement. This statement details all transactions relating to both the seller and purchaser up to the close date.
Everything is detailed on the settlement statement and items you can expect to see include;
• Credit for any deposit paid
• Credit for taxes for the period which the seller has owned the property during the current tax year
• Title insurance
• Legal and recording fees
• HOA fees including the pro-rata amount for the remainder of the current month and any working capital payment due at close
Click here to view a sample HUD Statement.
Title Insurance
Every property purchase in the United States must have ‘title insurance’.
Title insurance is an indemnity insurance policy, put in place by the title company and lasts the duration that the purchaser owns the property. Should there be any lien against the property that was not cleared at the time of purchase, this provides the purchaser recourse and the title insurance would be responsible for clearing the lien. This applies to all items with the exception of property taxes, which do in fact follow the property and not the owner. For this reason it’s very important to have good representation to ensure you are purchasing a property with a clear title.
Accounting requirements
Every property owner in the State of Florida with an income generating asset is required to submit a tax return each year detailing the income and expenditure of the property. In order to be able to do this, tax numbers must be applied for, one for each person on the title of the property.
The US fiscal year runs from January to December and tax returns are prepared at the beginning of the following year.
Florida is a particularly tax efficient State and although you are required to submit returns and disclose the income generated by the property, all expenses are deductable. Investors are also entitled to a basic allowance (income that can be earned below the tax threshold), and the property is even depreciated each year. Clients owning just a few condo’s should not break the tax threshold and for those looking to purchase in bulk a vehicle may be set up in order to own the properties in the most efficient manner.
We work with an excellent accounting firm in Florida which specialises in overseas and out of state investors and we are happy to recommend them. They are very well placed to complete all the necessary returns and advise on the best purchase vehicle (for bulk buyers).
As any property landlord will know, selecting and paying for the unit is only the first step to ensure that your asset is profitable and trouble free. Among other things, a successful landlord needs to
• Put a management company in place to source and manage your tenant(s)
• Get value for money with currency – using a specialist can literally save you thousands of dollars
• Get insurance for the property
• Open a bank account and obtain a tax number
• File tax returns
Our knowledge of these processes and the key people we have built close relationships means that many Torcana clients have:
• Peace of mind and a hassle free property
• Avoided unnecessary penalties
• Saved huge amounts of time and energy
• Saved thousands of dollars
Closing costs
You should budget approximately $1800 - $2500 to cover legal, title and agency fees. If you´d like to view a sample Purchase Agreement, please click here.
In the United States there are very few restrictions on international real estate investors, buyers, or sellers. The only exceptions concern national security, hostile countries, purchase or control of federal lands, and purchasing a business in a sensitive category.
If you´d like to learn a little more about these issues, please click here.
DISCLAIMER:
Information presented on this website and this page concerning real estate transactions has been gathered from various sources. It is deemed to be reliable but not guaranteed and should be verified by personal due diligence and research with the appropriate government officials, immigration and real estate attorneys (lawyers), and tax accountants (CPA's).
