How can an Indian citizen buy real estae in US?

[Abeer Bagul]

Hi,

I am an Indian citizen living in Pune, India. Am looking to buy an investment house in US.

Have been to various parts of US a couple of times, especially South Bay, Silicon Valley and Baltimore.

My budget is $100k, and can do a downpayment of $50k. The property should be in a decent neighbourhood, and want to also give it on rent.

But generating income from rent is not the primary motive, the main motives are:
1. A long term investment with appreciation in the next 10 years.
2. Rent to offset the monthly payments, especially since I can do a 50% downpayment.
3. Decent neighbourhood so that I can have some bragging rights back here in Pune, Mumbai. So a small 2 BHK apartment in a nice University area would be great.

How should I go about this?

[Jon Holdman]

You don't need "lots of lawyers, agents, banks, tax consultants already familiar with FIRPTA for the Indian investor." You need A lawyer and AN agent and A CPA. Not lots, just one good person of each specialty you trust. Do you know anyone who's done this? Your best source for referrals is a personal reference.

The real estate business is full of people with their interest in mind. They range from out and out scammers to people who will sell you a deal that will cost you money. Its a lot like the first time I flew into Bangalore via Mumbai. Thirty hours on places, dead tired, know nothing about where to go and I fly into Mumbai international. Lots and lots of people there willing to "help me" get to the domestic airport. You'll need to watch out to avoid that sort of "help."

Read in the Rental Property forum about expenses, especially the "50% rule". That says the expenses (which do not include debt service, that is, the principle and interest payments on your loan) will be 50% of your gross scheduled rents. That 50% figure does include both vacancies and large capital items like roofs and heaters. As a long distance investor, this is really the very best you can do if things go right. Little items that would be 10 minutes to fix with $5 in parts will cost you $100 when your property manager calls a handyman. You'll have a hard time checking on the PM from that distance.

It sound like you want the remaining money left after expenses to just be break even. That is, the 50% left after the 50% for expenses would just cover your P&I payment. That means you're earning nothing for a return on the cash you have tied up. Personally, I would like to see some return, especially for as big as down payment as 50%.

What you're really doing is "speculating". You're speculating on appreciation on the property to generate a long term return. As the name suggest, that's very speculative. I seriously doubt we'll ever see the kind of appreciation we had from 2000 to 2007. Personally, I don't think we're totally done with the fallout from that bubble.

Long term (i.e., from the 1890's or so), appreciation has tracked inflation. There have been some major disruptions -- the great depression, the change in lending after WWII, and the recent bubble. Other than those, appreciation after inflation has been zero over the long term (10 years or longer). The source for those statements is the long term, inflation adjusted Case Shiller data. Over shorter periods, there are variations. For specific areas where something is happening, e.g., redevelopment, new employers, there can be huge variations.

I'd suggest you start your search by first finding an area where you think you want to invest. Most major cities are going to have agents, lawyers, CPAs, PMs, etc who can satisfy your needs. So I'd focus first on selecting an area then on finding the right people in that area.

You also hint you're going to use this property yourself. Do you mean you expect to move here at some point in the future and occupy the property? If so, I'd keep that aspect separate from the investment. Property you occupy is, IMHO, not an investment. Its an expensive toy little different than any other toy we buy. For some people, its their only form of "savings". They buy a house, live in it for 20-30 years, largely paying off the loan. They then sell it, saying "look at the money I made". Even 2% appreciation adds up nicely over 20-30 years. It also looks like a great return when you compare the sales price to the purchase price.

The real comparison, though, is more complex. At the least, you need to compare sales price to the total of the payments plus any down payment. All too often, that comparison shows a net loss because the appreciation has been less than the interest rate. If you add in all the money you've spent on taxes, insurance, maintenance, and improvements, the net is even worse. Nevertheless, for someone who doesn't have any savings, the lump of cash they get when they sell the house is a big deal. If you've managed to save up enough to put 50% down on a house, you're a saver already. So, if you're looking for a place to live, look at that from the perspective of where you want to live, what sort of place you want, and what you can personally afford.

With that out of the way, appreciation vs. rental income. While its hard to make a general rule, the most profitable rentals tend to be lower end. The price to rent ratio has to be pretty low to make the rental profitable. Those places tend not to appreciate as well as better neighborhoods. In a nice neighborhood, though, you'll tend to find situations where the rent doesn't even come close to covering the expenses and the debt service. To meet your criteria, you're going to have to be at the lower end of "nice neighborhoods" but at the upper end of "good rental areas".

So, I'd start your search by looking at some big cities where you'd like to live. Then, start looking at neighborhoods. Look for listed property prices, which are easy to find on realtor.com. Look for rents, which are easy to find on craigslist. Do the math on what you're seeing and find some neighborhoods that seem to work for you. Then, start making phone calls. If the people who talk to don't understand foreign investors, ask for referrals to someone who does.

I suspect in most areas this is going to take some work. But real estate investing is hard work. It takes a lot of time and effort to find the right people and to find good deals. Its easy to find bad deals, and there are plenty of them out there and people to sell them to you.