Foreign Direct Investment

By Hsiangyu Yang

REAE 5311 Blog Project

Real estate markets fluctuate all over the world, with high and low times. Running a real estate business in the United States requires the real estate professional to have a general grasp of the markets overseas in order to better conduct business here at home. As the United States is open to foreign investment, other countries may decide to invest in a piece of US soil, especially when exchange rates would favorably enhance the terms of the deal.

The United States is open to foreign investment. In Texas, “aliens have the same rights to real property as U.S citizens; also, alienage is also no bar to inheritance” (Richards 49). That is only one of several reasons that it is attractive to investors. Other reasons include the bundle of rights associated with real estate, low levels of corruption, transparent transactions, and a stable economic and political environment (Miles 33). There are also strictly monetary reasons for foreign investment. To find why a person from Taipei, Taiwan may be interested in purchasing real estate in the Dallas/Fort Worth, Texas area it is necessary to compare and contrast the monetary qualities of the transaction. Closing costs, cost of the real estate, property taxes, and the rate of appreciation are the main quantitative categories. By comparing and contrasting these categories the real estate professional will be able to more readily identify monetary reasons the Citizens of Taiwan will want to purchase real estate in Dallas/Fort Worth, Texas.

The need for the real estate professional to consider the reasons foreign investors act is an ongoing and increasing concern. “The National Association of Realtors indicates that foreign investment in U.S properties increased to $40.6 billion in 2002, up from 38.3 billion in 2001 ”(Miles 34). The access to foreign resources and wealth is also increasing as 27.8% of the U.S population increase was due to legal immigration from 1991 – 2000 (Miles 21). Anyone who ignores these statistics is missing out on a valuable segment of the market.

(http://static.flickr.com/174/418662140_f90864eee2.jpg).

Closing Costs

Closing costs include items such as title insurance, fees for recording documents, mortgage insurance, recording taxes, appraisal fees, and survey fees (Ling 403). This is an important consideration because it explicitly relates to the effective borrowing costs and the overall investor’s yield. These closing costs must be disclosed when in conjunction with a loan under Federal Reserve Regulation Z (Ling 404). This contributes to the U.S standard of transparency and would be seen as a positive attribute by an investor from Taiwan.

The main closing costs in Taiwan include the deed tax, land value increment tax, and real estate commission. The deed tax on a purchase of real estate is six percent of the purchase price (http://investintaiwan.nat.gov.tw/en/env/guide/tax/deed.html), the value increment tax is the increased value of the property which is computed by deducting the acquisition costs and improvement costs from the property’s market value at the time of the transfer. The taxable gain is adjusted to take account the changes in the consumer price index. The rates of the land value increment tax range from 20% to 40%, depending on the taxable gain. For owner-occupied residential land, this tax is levied at a flat rate of ten percent under certain conditions (http://www.globalpropertyguide.com/Asia/Taiwan/Taxes-and-Costs). Finally the last major closing cost is the real estate commission which is normally four percent for the seller and one percent for the buyer. All of these major closing costs add up to a significant percentage of the overall purchase price.

In the Dallas area the closing costs are quite different, but they are still high. According to Pedro Rodriguez of Metroplex City Mortgage, LCC, there is a transaction specific cost of approximately $350 for closing services. When looking at his website other costs such as: loan origination fee, points (optional), appraisal fee, credit report, interest payment, and escrow account may apply. However, it is very interesting that there are no transfer taxes on real estate sales in Texas. This amounts to a relatively low transfer cost when compared to Taiwan.

Cost of Real Estate

The cost of real estate (acquisition cost), when a foreign investor is considering, it is more of a comparison of investment value. Certainly the previously mentioned closing costs and property taxes that will be discussed later must be considered as part of the overall cost of real estate, however, the base purchase price, along with any property rights, is the main concern. When considering a property in a purely quantitative way many investors will be led to the simple equation: NOI/Cap Rate = Value.

In Taiwan, the cost of real estate is very high when considering the length of time it takes to own a property. Consider the chart below that includes various countries in the continent of Asia. Taiwan’s timeframe for property purchase is 35% higher than the next country in line, Hong Kong. This may entice Citizens of Taiwan to seek out opportunities to live where the timeframe to own a home is lower.

(http://www.globalpropertyguide.com/Asia/Taiwan/Price-History)

In the United States, an investor or buyer may enjoy a lower payback period than Taiwan. In the chart below it can be seen that the house values of Dallas, Texas have been steadily rising. However, they are relatively low compared to the local economic environment which allows many people in the DFW area to payback their mortgage sooner than the 20-30 stated timeframe on the mortgage amortization schedule.

(http://recenter.tamu.edu/data/datahs.html)

Property Taxes

“The public sector is always a partner” in any real estate investment or purchase (Miles 63). Property taxes pay tribute to infrastructure, water/sewer service, education (for children or future employees), and many other services that add value to a property. The portion of the taxes paid that directly affect the subject property may be subtracted from the whole to isolate the true economic leakage. This is complicated and not absolute. Therefore, the tax rate as a whole will be considered.

In Taiwan the property tax is delineated between the building and the land. “The building tax is levied based on the government assessed value of the building at applicable tax rates. The government assessed value is not the market value of the building. The value assessment factors are location, construction type and the total number of units in the building”(www.investintaiwan.nat.gov). For businesses this building tax is approximately 3% to 5%; for residential structures it is approximately 1.2% to 2% (if owner occupied)( www.investintaiwan.nat.gov).

The land is taxed separately. All lots within a certain tax municipality are based on the value of a seven acre section within that municipality. This section serves as the one and only comparison for tax value purposes. “Land value tax is levied at either the regular progressive rates or the special rates. Regular progressive rates are from 1% to 5.5%. Special privileged tax is applicable to land used for the following purposes: purpose, special use, privileged, tax rate, remarks, and rate of appreciation” ( www.investintaiwan.nat.gov).

Property taxes in the Dallas/Fort Worth area are different by nature and in their degree. As can be seen on the chart labeled DFW Taxes 2007 the rate is applied to the property as a whole (land and building). Also, the rate in Texas may be high within the U.S., however, it is considered very low when compared to the tax rate of Taiwan.

DFW Taxes 2007

	Total	City	School	County
Dallas	2.52%	0.75%	1.20%	0.57%
Fort worth	2.68%	0.86%	1.19%	0.64%
Arlington	2.56%	0.65%	1.28%	0.64%

(http://www.davedowns.com/propertytaxes.htm).

Rate of Appreciation

The rate of appreciation is an extension of the cost of real estate, as the above value equation only considers the capitalization rate. It is an added benefit (and an overall unique benefit of tangible items) of real estate ownership to experience growth in the initial value. The yield is the capitalization rate plus growth. Following the axiom of buy low and sell high, it seems like the Taiwanese may have another reason to purchase property within the U.S. Although exchange rates must be considered, the percent of house price change between Taiwan and the United States is polar.

(http://www.globalpropertyguide.com/Asia/Taiwan)

In the chart above it can be seen that the house price percent change is on an upward slope. Since two years ago the price has went up nine percent annually. This is very steep appreciation and the market is said to be in a boom. This boom was followed by an erratic pattern of up and down patters that may hint to volatility (risk involving the current peak).

(http://www.globalpropertyguide.com/real-estate-house-prices/U)

In the chart above describing the United States market it can be seen that now may be the time to buy because the United States real estate market is in a depression, falling six percent annually after a long gradual increase of value.

Conclusion

The United States is open to foreign investment, and the State of Texas has no alien restrictions regarding real property. In addition, the real estate market of the United States has low levels of corruption, transparent transactions, and a stable economic and political environment. (Miles 33) Therefore, foreigners can enjoy the investing environment of the United States. Nevertheless, foreigners will consider closing costs, cost of the real estate, property taxes, and the rate of appreciation and then make a decision. The Taiwanese have specific advantages when considering the aforesaid in an investment decision.

The United States real estate market is depressed now, however, the housing price in Taiwan, especially in Taipei, is very high. Besides, it takes the Taiwanese more than 30 years to afford one condominium normally. Therefore, it can be seen by comparing and contrasting these categories the real estate professional will be able to more readily identify monetary reasons the Citizens of Taiwan will want to purchase real estate in Dallas/Fort Worth, Texas.

On the other hand, real estate professional need to be familiar with the potential international demand and the general international conditions in order to provide the best service possible in the United States.

Works Cited

Ling, David and Archer, Wayne. Real Estate Principles, A Value Approach. New York: McGraw, 2008.

Miles, Mike and Berens, Gayle and Eppli, Mark and Weiss, Mark. Real Estate Development: Principles and Processes. Fourth Ed. Washington, D.C.: ULI, 2007.

Richards, Timothy. The Guide to Foreign Investment in United States Real Estate. New York: Van Nostrand, 1984.

Rodriguez, Pedro. Telephone interview. 17 November 2008

Ed. Invest In Taiwan. (2008). Invest In Taiwan. Retrieved November 14, 2008, from http://investintaiwan.nat.gov.tw/en/env/guide/tax/building.html

Ed. Global Property Guide. (2007). Global Property Guide. Retrieved November 14, 2008, from http://www.globalpropertyguide.com/real-estate-house-prices/U

Ed. Dave downs. (2008). Northwest Dallas suburb. Retrieved November 14, 2008, from http://www.davedowns.com/propertytaxes.htm

Ed. Real estate center. (2008). Real Estate Center at Texas A&M University. Retrieved November 14, 2008, from http://recenter.tamu.edu/data/datahs.html