Investing In Real EstateLas Vegas, Nevada USAA guide for Foreign Investors

John A. Brassner, MBA, REALTOR___________________________________________________________________________________________________________

10777 West Twain Ave, Suite 333Las Vegas, NV 89135Cell: 702-808-9816Fax: 702-995-0488Email: john@john4realty.com NevadaRealEstateCenter.com ©2010 John A. Brassner

General InformationThis document is meant to be a general guide to buying real estate for investors who are not citizens or residents of the United States with specific information related to buying in the greater Las Vegas area (Southern Nevada). For immigration, tax, and legal issues it is most important to speak with an appropriate professional specializing in those areas of practice. This guide is not meant to cover all of the aspects of buying or selling real estate. For specifics on real estate please contact the Brassner-Martin Group at 1-702-808-9816 or john@john4realty.com. Www.NevadaRealEstateCenter.com

The good news about investing in the U.S. or Las Vegas, specifically, is that there are no laws prohibiting foreign ownership of real estate. In all 50 states, a foreign person can purchase property just like a citizen can—the process and requirements are nearly identical. There are tax implications, however, if you are deriving income from the property and when you sell the property. We will very generally discuss the tax implications in later sections of this guide. For specifics on taxes you will need to be in touch with a professional tax advisor in the U.S. or one in your home country familiar with U.S. tax law.

Types of Real EstateResidential

Single Family Residence or home (SFRs). These are structures meant for 1 to several people. The SFR is characterized by being a “stand-alone” structure: It is not attached to another house. And typically has a backyard and land around the home that is owned by the owner of the house. SFRs can be single-story (level), two-story, and rarely are more than three-

stories.

The owner is responsible for payment of all real estate taxes,

maintenance and repairs of the property. There may be other fees as well. See later sections.

Townhouse/Townhome. A townhouse is similar to a Single Family Home except that it will be attached to another townhouse by one or more common wall. There are often several townhouses in a row.

A special type of Townhouse is the Duplex. This is where there are exactly two unique units within one building. It is not very common in Las Vegas to find both units for sale at the same time.

The owner is responsible for payment of all real estate taxes, maintenance and repairs of the property except that repairs for common elements like roof, courtyards, driveways, etc may be shared with other townhouse owners. The owner of the townhouse also owns the land it sits on.

Condominium/Condo. A condominium is one of a group of housing units where each homeowner owns their individual unit space, and all the dwellings share ownership of areas of common use.The individual units normally share walls. The main difference in condos

and single family homes is that there is no individual ownership of the land.

Usually, the exterior maintenance is paid for out of homeowner dues. The exterior walls and roof are insured by the condominium association, while all

interior walls and items are insured by the homeowner. See HOA section later in this document.

Commercial

Multi-family Dwellings. These are 5 units or more within one building or development. A common type of Multi-family dwelling is an apartment building. Residents pay rent to the owner. Technically, a four-plex (or a three-plex) are Multi-family dwellings as well but lenders generally classify those as residential properties instead of commercial.

Office Building. One or more units designed for an office such as a Doctor, lawyer, or insurance agent may use. These could be owned by the occupant or rented from a landlord

Retail. One or stores designed for retail businesses such as a clothing shop, restaurant, or department store. These could be owned by the occupant or rented from a landlord. Most often they are not individually owned.

Industrial. One or more units designed for manufacturing. These could be owned by the occupant or rented from a landlord.

Homeowners Associations/ Common Interest Communities

Homeowners Associations (HOAs) are also called Common Interest Communities (CICs). HOAs govern many of the residential properties in Las Vegas. Properties that have HOAs share ownership of common areas, such as swimming pools, landscaping, and parking. In a development that has an HOA, a periodic fee, usually monthly, called “the dues” or HOA fee is assessed. HOA fees can range from as little $15/month on an SFR to well over $250 on some condos. High-rise luxury condos can have HOA fees in excess of $1000. All HOAs have codes, rules and regulations on how one can use their property.

In What Should I Invest?Most first-time foreign investors tend to invest in residential properties or apartment buildings because they are easy to purchase and rent out. And, since residential property prices have fallen so much the past few years (although it looks like prices are going up now) there is room for appreciation besides current cash flow.

Let’s talk about “cash flow” for a moment. For residential properties, this is simply the net profitability of your investment. Assuming you bought the property for all cash (no loan), your cash flow would simply be your monthly rent minus all of your expenses as an owner. In 2010, it turns out that there are many properties that provide positive cash flow. Even a single-family residence can often be cash flow positive. The more units you buy together in a single building or development (i.e., apartment building), generally, the more cash flow you will receive. You will also reduce your vacancy risk with more than one unit.

Typical Expenses for Operating a Residential Income Property

For SFRs and Townhouses here are some of the fees the owner could expect to pay:

Sewer fee. $55/quarter Property Taxes. Depends on the assessed value. A typical home might be

$1,800 per year. HOA fee, if applicable. Varies, see above. Homeowner’s Insurance. Varies. Expect $950/year Property management 8-11% of the monthly rent. Maintenance as needed.

Utilities, such as natural gas, trash pick-up, electricity, water, television cable, are usually the responsibility of the renter.

Buying: Cash vs. MortgageIn the past few years it has been very difficult for foreign investors to get Mortgages (loans) to purchase properties in the U.S. There are a few programs for Canadian citizens but for all others, traditional mortgages essentially don’t exist anymore. There are some “hard-money” (private) lenders that will loan to foreign investors and they usually require 40% cash down payment, charge some upfront fees and have a higher interest rate. For some investors, that may be okay. But most are buying all cash. Cash offers on properties are stronger than offers that require financing and are easier and shorter to complete.

Any buyer that plans to purchase property with a loan must have a letter from their lender indicating that they are pre-approved for the loan. This lets the seller know you are truly capable of making the purchase before they take their property off the market.

What is an Agent or REALTOR®?A real estate agent is a trained, licensed professional who represents clients to help sell or buy real estate. Most people who purchase or sell real property employ an agent. Agents have a high-duty know as a “fiduciary duty” to look out for the best interest of their clients. Buyer’s Agents help buyers locate properties, negotiate the purchase agreement, coordinate the escrow process (see below), and see the transaction all the way through until the property officially changes to the new ownership. Listing Agents represent sellers. They market the property for the owner, solicit offers, coordinate the escrow process, and see the transaction all the way through until the property officially changes to the new ownership. In Nevada, one agent can represent both parties, the seller and the buyer but

usually each party has their own agent. Except for a nominal fee collected at the transfer of the property, Buyer’s agents are usually compensated by a commission based on the sales price of the property BY THE SELLER.

A real estate agent is a REALTOR® when he or she becomes a member of the NATIONAL ASSOCIATION OF REALTORS®, the world's largest professional association. The term "REALTOR®" is a registered collective membership mark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION OF REALTORS® and abides by its strict Code of Ethics.

Escrow and TitleThis section is mostly from Equity Title’s Buyer/Seller Handbook publication:

An escrow is an independent "stakeholder" account and is the vehicle by which the interests of all parties to the transaction are protected. The escrow is created after you execute the contract for the sale of your home and becomes the depository for all monies, instructions and documents pertaining to the sale.

In Nevada, most real estate transactions are closed with a title insurance policy. Many homebuyers just assume that when they purchase a piece of property, possession of the deed to the property is all they need to prove ownership. This is not true. Hidden hazards may attach to real estate.

Title Insurance It is a contract of indemnity that guarantees that the title is as reported and, if not reported and the owner is damaged, the title policy covers the insured for their loss up to the amount of the policy.

Traditional, Short-Sales, ForeclosuresTraditionally, a real estate purchase is between a private seller and a buyer. But now Short-Sales and Foreclosures dominate the activity in the Las Vegas market.

In a simplified explanation, a short-sale is when the owner of the home is trying to sell their property for less than what they owe to their lender(s). In order for the sale to be successful, the lender(s) must agree to accept less than what they are owed. The lender is usually not involved in the short sale until after an offer has been made on the property. The negotiation and processing is a long difficult process. It can take from two weeks to 6 months to hear back from the seller’s lender on if they agree. However, there are often some very good deals that are short-sales.

Foreclosures, also known as REOs or Bank-owned properties, represent some good deals as well. Foreclosures are properties in which the previous owner’s lender (or other lien holder) has exercised their right to take the property if the loan wasn’t paid as agreed. The bank then turns around and sells the property via the normal channels. In Las Vegas, foreclosures are often priced very aggressively and usually end up selling for MORE THAN THE LISTED PRICE due to multiple offers being made. Even so, good investments can be made with foreclosures. The downside with bank-owned properties, the condition of the property could be poor, the banks will not provide any disclosures about the condition of the property, and they are fairly inflexible with negotiating the terms of the purchase.

The Offer and Purchase ProcessLet’s assume, for example, that you would like to purchase a Single-Family Residence with cash. Your agent finds you the perfect property and you would like to make an offer:

1. Agent prepares the purchase agreement and associated documents and they are signed by the buyer. This could be done in person, by fax, or email.

2. Buyer drafts a check from a U.S. Bank (cashier’s check is best for foreigners) for the Earnest Money Deposit. Most offers to buy a house are accompanied by a check. The basic reason for the deposit is to impress the seller that the buyer "earnestly" intends to purchase the property. The

check is not cashed until a fully executed purchase agreement is in place. That check gets deposited to the Escrow Company and is used as a credit towards the purchase when the purchase is complete. The earnest money can be wired into the escrow account as well but makes a less strong statement to the seller if they don’t see a check with the offer.

3. The purchase agreement and a copy of the earnest money check (if applicable) are then presented to the seller’s agent.

4. The seller could do three things with the offer:a. Accept it as is. You now have a deal!b. Counter offer. The Seller doesn’t accept your offer as is and instead

proposes some modifications to the terms. There can be multiple counter offers provided by each side until there is agreement.

c. Reject it. Provide notice that they are not interested in your offer at all.

5. Once both parties are in agreement and the purchase agreement and counter offers are completely signed, you are now “in contract.” You have deal.

6. Escrow is then opened—the purchase agreement/counter offers are transmitted to the escrow company along with your earnest money check.

7. Due diligence starts. This is a period usually specified in the purchase agreement where the buyer can perform the investigations necessary to confirm the property is appropriate for them. This period is usually 10 days or less. The most obvious due diligence item is to have the house inspected by a licensed home inspector. The buyer hires this home inspector (around $400) and his job is to report back what kind of repairs the property needs. Almost all properties will have at least one thing that needs repair. It will be up to the buyer at that time to decide to proceed with the sale, cancel the sale, or proceed with the sale with some additional negotiation with the seller to make repairs. However, banks very rarely agree to make repairs to their foreclosed properties. They are usually sold, “as is.”

If the sale is cancelled per an allowed reason in the agreement, such as a

negative home inspection report, the earnest money is refunded to the buyer.

8. After the due-diligence period has expired, both the buyer and seller separately will sign the necessary documents with the escrow company to affect the sale. For example, signing the property deed over.

9. The buyer will then electronically fund (“wire”) the remaining purchase amount plus necessary closing costs (see next section) to the escrow company.

10. Once escrow has received the buyer’s funds, escrow will then record the deed with the county assessor’s office. Only then does the property officially become the buyers. This is commonly referred to as the property has “closed” or recorded.

There is nothing particularly different in the process for a foreign buyer verses a U.S. citizen. It is important to have property identification, however, when you sign the closing papers at escrow. A passport and a driver’s license should suffice.

Closing CostsWhen you purchase a property, there are additional costs/fees associated with the transfer of the property. They include:

Government fees Prorations (the seller may have paid the entire year’s sewer fee in advance,

for example, so the buyer will need to reimburse him for the time the buyer takes over).

Escrow fees (usually split between buyer and seller) Loan fees (if cash, this doesn’t apply.) Insurance. This is often paid several months in advance Other fees.

If you are buying with cash, a general approximation is to plan on 1% of the purchase price for closing costs.

Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)

We have talked about how easy it is for foreign investors to purchase property in Las Vegas—essentially it is the same as a U.S. citizen. From a practical standpoint FIRPTA does not apply to purchases by foreigners (from a technical standpoint it applies but from a practical standpoint the escrow company takes care of the necessary procedures). It will apply however when you sell your property and have an impact on your profits from the sale.

Appendix A is the explanation of FIRPTA from its administrator, the Internal Revenue Service (IRS). Please refer to that or your tax advisor for specifics.

Essentially, FIRPTA ensures that you are taxed on the profits of your sale in a similar manner as U.S. citizens are. When you sell you your property the Escrow Company will withhold 10% of the sale price and remit that to the IRS. That amount could be way more or way less than you actually owe to the IRS. This is where you need to employ a qualified tax consultant/accountant to prepare your taxes and if necessary, file to get some of the tax paid returned.

It should be pointed out that although you don’t need a Taxpayer Identification Number (TIN but now known as EIN) to purchase a property (unless you are going to obtain a mortgage), you will need one when you sell and most likely should have one as soon as you derive income from your rental property. An EIN can be obtained from the IRS at www.IRS.gov.

Other tax issuesSee your tax professional. This guide is meant to discuss the purchase process of real estate mostly. But do ask your tax professional or attorney about reporting income for rental/income properties and related, how you should “take title” to the property you are going to purchase. The new owner of a property can

purchase property as an individual, husband and wife, through a corporation, etc. Each of these could severely affect how you are taxed and especially if there is a death of the owner.

Appendix A.

Content from the U.S. Internal Revenue Service Website.

(http://www.irs.gov/businesses/small/international/article/0,,id=105000,00.html)

FIRPTA Withholding

Withholding of Tax on Dispositions of United States Real Property Interests

The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. FIRPTA authorized the United

States to tax foreign persons on dispositions of U.S. real property interests. A disposition means “disposition” for any purpose of the Internal Revenue Code. This includes but is not limited to a sale or exchange, liquidation,

redemption, gift, transfers, etc. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations that are considered U.S. real property holding corporations.

Persons purchasing U.S. real property interests (transferee) from foreign persons, certain purchasers' agents, and settlement officers are required to withhold 10 percent of the amount realized (special rules for foreign

corporations). Withholding is intended to ensure U.S. taxation of gains realized on disposition of such interests. The transferee/buyer is the withholding agent. If you are the transferee/buyer you must find out if the transferor is a foreign person. If the transferor is a foreign person and you fail to withhold, you may be held liable for the tax. For

cases in which a U.S. business entity such as a corporation or partnership disposes of a U.S. real property interest, the business entity itself is the withholding agent.

The amount that must be withheld from the disposition of a U.S. real property interest can be adjusted pursuant to a withholding certificate issued by the IRS.

A disposition includes the sale of any U.S. real property interests in the United States or U.S. Virgin Islands.

Generally speaking, in reference to the disposition of a U.S. real property interest, the foreign person disposing of the US real property interest is referred to as the transferor.

The purchaser of the U.S. real property interest is referred to as the transferee.

Generally, the amount realized is the purchase/sales price of the U.S. real property interest but can also include any property received by the transferor and any liability relieved of by the transferor.

Generally, the buyer/transferee must determine if the seller is a foreign person. If so, the buyer/transferee is responsible for the withholding taxes.

The buyer/transfer may be held liable for the tax that should have been withheld on the purchase.

One of the most common exceptions to FIRPTA withholding is that the buyer/transferee is not required to withhold tax in a situation in which the buyer/transferee purchases real estate for use as his personal residence and the

purchase price is not more than $300,000.

Exceptions from FIRPTA withholding Reporting and Paying Tax on U.S. Real Property Interests

Withholding Certificates

Format for Applications

Road Map to Regulations

Definitions of terms and procedures unique to FIRPTA

For additional information on the withholding rules that apply to corporations, trusts, estates, and REITs, refer to section 1445 of the Internal Revenue Code and the related regulations. For additional information on the

withholding rules that apply to partnerships, refer to discussion under partnership withholding. Also consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, section U.S. Real Property

Interest.

Additional information may be obtained from:

Internal Revenue Service CenterP.O. Box 409101

Ogden, UT 84409.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of

those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States

Tax Court.