The secret to earning a good rental return in the US is the local government housing subsidy scheme, in which rents are paid by the authorities on the 1st day of every month directly to the investor.
The USA presidential election is just over and Joe Biden has been pronounced to be the next President due to take office in January 2021. There is a huge collective sigh of relief now that the whole country can look forward to some measure of stability after about a whole year of bitter social divisions.
From an investor’s point of view, one can look forward to an economy that will settle down once the pandemic is brought under control and businesses brought back to normal. The US dollar has gone through a few bumps but has remained fairly stable, because it is still the world’s reserve currency and does not reflect the ups and downs of the domestic economy.
Which is why it is an attractive currency to hold and in this segment, I will espouse a strategy on how to own a freehold property with low entry cost, and earning high returns drawing on USA government rental subsidies.
Property ownership framework
There are absolutely no restrictions on foreigners owning any kind of real estate, be it condos, apartments, houses, commercial buildings or even land.
a) There are absolutely no restrictions on foreigners setting up a business in USA and fully owning and being in control of it.
b) There are no forex and foreign currency controls – one can send in money from foreign sources to purchase real estate.
c) There are no controls on repatriation of profits or exiting of investment, if required taxes have been paid.
d) Any foreigner can open a personal bank account or a business banking account in the US if he is personally present there with minimum hassle.
e) Ownership of property is transparent and can be monitored online.
f) The USA has a strong legal framework with easy to understand laws.
Where to invest?
Armed with the above framework, the next question to consider is where to invest. The US is a huge country and real estate market prices there are very different coast to coast. In addition, we need to find an investment solution where the net return is high and assured.
The geographical “sweet spot” is the American Midwest, in particular the city of Chicago. It is the third largest city in USA, has a balanced economy where no particular one industry dominates thus diminishing the risk of localized recession, and has no risk of natural disasters such as hurricanes or earthquakes.
Tax on rental income
In the US, you would need to pay both federal tax and state tax on property in most states. The state tax is 4.95% for Illinois state, which is where Chicago is located.
For federal tax, a 10% tax rate is imposed if the rental income is below $9,875. If it’s between $9,876 – $40,125, the tax rate is 12% after deducting allowable expenses.
Allowable expenses are expenses directly related to the property such as repairs and maintenance, property management fees, property taxes, and homeowners insurance.
If the property is held under an LLC, additional expenses are also deductible such as the LLC yearly fees, travelling, food and lodging for the members and managers of the LLC when traveling on company business. (Figure 1)
The strategy
a) In order to get a higher return, the investor must look for the lowest entry point for a property that is easy to rent out. In Chicago, some areas have properties for less than $100,000.
b) The property must be easy to rent out and should be near to amenities, schools and public transport. More than 50% of the households in Chicago are tenants and the average waiting time for new tenants is about two or three months.
c) In order to get assured returns, the property must be registered with the local government housing subsidy scheme, where the rents are paid by the authorities on the 1st day of every month directly to the investor.
d) For foreign investors, the critical point is to have a good agent and property management, which will determine whether the investment is performing well or not.
Matthew and his team in America.