As stated in Part I of this series in which we discussed finding the right advisors for non-resident alien investors, the State of Florida is a wonderland of real estate investment opportunities. With hundreds of major cities and suburbs to choose from, commercial and residential properties waiting for the right investor abound. However, there are many pitfalls to avoid when investing in property in Florida – and these pitfalls are particularly risky if you are a non-resident alien.
In the second part of this series, we explore six areas where non-resident aliens should focus their attention when selecting properties for their investment portfolio.
#1 Include Property Taxes in your calculations
In Florida, as in many other US jurisdictions, you are required to pay an ad valorem property tax to your local county. In Florida, this tax is paid annually between August and September and can significantly affect the return on investment of your Florida property. A good real estate lawyer may be able to help you reduce the amount you are required to pay by appealing to the local county. The basis for the appeal could be that the county has assessed your property at a value that is higher than it is actually worth. In such a case, your lawyer can argue that based on property damage and the recent sales value of similar properties in the area your property tax liability should be lowered. Be sure to retain a real estate lawyer who includes property tax appeals within their scope of practice.
#2 Know that Americans are Extremely Data Driven
In many parts of the world, the gut feeling one has when walking into a property has an outsized effect on that property’s value. This is less the case in the US and Florida is no exception to the rule. In the US, including Florida, subjective valuation plays a smaller role in the way a property is valued. Instead, objective statistics such as location, the value of nearby properties and the age of the property are all significant influences on the price. Work with a real estate agent with experience in the geographic area in which your prospective property is based. Your real estate agent will be able to guide you to properties with good value-based data points on the local MLS (multi-listing service). The MLS is a database of properties listed for sale in your area.
“.. there are many pitfalls to avoid when investing in property in Florida – and these pitfalls are particularly risky if you are a non-resident alien.”
#3 Set up a Florida LLC
As mentioned earlier, there are many tax implications to being a non-resident alien property investor in the US and Florida. One of these includes a tax pitfall wherein a non-resident alien who owns property in his or her own name may be liable to pay a 30% withholding tax on all gross rental income, without any deductions allowed. However, to avoid this tax obligation a non-resident alien can open a Florida LLC and use the incorporated entity as an investment vehicle. Because ownership of a property via an LLC can be legally complex, it is highly recommended that you retain an experienced real estate lawyer to assist in both the LLC company formation and the real estate transaction itself.
#4 Understand the Role the Homeowner Associations (HOA) and Condo Associations
One idiosyncrasy of buying properties in planned communities in the US and Florida is that many of these houses and condos are managed by associations. If this is the case, know that the following factors which affect your ownership of the property:
- Periodic fees and fines that may erode the return on investment of the property
- Restrictions on upgrades made to the property
- Transactional requirements such as Resale Packages that can impact the ease and profitability of a future sale
- Maintenance requirements such as gardening and pressure washing are likely to incur regular costs that must be factored into your return on investment calculation
- The involvement of an association board that may restrict or influence what you are able to do with your property (eg: there may be a restriction on short term rentals via platforms like Airbnb)
Keep in mind that there is one main benefit to HOA and condo associations. This is the value-raising effect of enforced uniformity, conformity and upkeep throughout the community of properties under the remit of the association.
#5 Understand the Role of Public Schools
In the United States and no less in Florida’s many counties, education is highly decentralized. This means that the quality of local public education varies widely from one area to the next. For the most part, schools serve a certain catchment area wherein people from a certain geographic community are allowed to attend a specific publicly-funded (free) school. Because the alternative to finding a good public school is to place children in expensive private education, the presence of a decent public school can positively influence the value of nearby single-family residential properties.
The market places a premium on properties within the catchment area of local schools that are considered to be “good” or “exceptional”. Likewise, otherwise valuable properties often sell and rent for less money if they are near schools that are considered to be inferior.
Work with your local real estate agent to determine the effect of the school catchment area on the value of a given property.
#6 Use Your Foreign Corporation Strategically
Structuring your business enterprise in your home country can affect the way your Florida property would be treated for estate planning purposes. This means that in the case of your death or incapacitation, owning your property through a foreign entity can result in reduced estate taxes. The complexities, pros and cons of using a foreign corporation for this purpose depend on the individual case including the value of the property in question, how the ownership is specifically structured and how that property is used. Work closely with a real estate attorney with experience in dealing with non-resident alien investment matters to determine which ownership structure is right for you.
Closing Real Estate Transactions with South Florida Law PLLC
At South Florida Law, we are committed to helping our non-resident alien clients close real estate transactions in the state of Florida. We help businesses and individuals buy and sell residential and or commercial properties ranging from single-family homes to warehouses. In cases where it is necessary to navigate through obstacles in order to close a transaction, we have the big firm resources to dedicate the time and effort where it is needed. At the same time, we provide personalized service and attention to detail in your case at a price point that can only be achieved with a boutique firm of our size.
In addition to advising on real estate matters, forming corporations and drafting documentation, South Florida Law is also a full-service title agency and can conduct title search and secure title insurance for our real estate clients. We are fluent in English, Russian and Farsi and (subject to ISA restrictions and any relevant Executive Orders) can serve non-resident alien investors from the countries and territories where those languages are spoken.
Are you planning to buy or sell in Miami, the Keys, Broward or Palm Beach County? Are you looking for a closing attorney you can rely on? Call South Florida Law today on (954) 900-8885 or reach out to us via our contact form.