[ HTJ Podcast ] Introduction to US Property Investing with Jay Knight, Hanna Musidi & Derren Joseph

 

 

HANNA MUSIDI:

Hi my name is Hannah and today we have our US tax expert Derren we also have our U.S. real estate and legal expert Jay. We will be discussing 15 basic concepts that Asian investors need to understand before investing in US real estate.

VOICE-OVER:

This podcast channel it's about you, successful international entrepreneurs, successful ex-pats, successful investors. Sponsored by HTJ.tax

HANNA MUSIDI:

Hi, my name is Hannah I'm from Indonesia, and I'm currently working with a US tax firm. And today we will talk about US property investing for Asian buyers, real estate terminology with Jay Knight and Derren Joseph. So first let Jay Knight introduce himself, please.

JAY KNIGHT:

Yeah, thanks for having me. Yeah, my name is Jay Knight. I'm from San Francisco, California. I have a real estate background, a broker's license for the past 12 years. I graduated from UCLA and then I got my law degree from San Francisco law school. And I've been in Asia now for almost six years, real estate investing and also buying for myself. And today we want to really kind of dive in deeply to some general real estate terms that we hope will be beneficial to everyone to understand how to invest in real estate in the United States, a little bit easier. This is just going to be our first part of a several-part series. As we know that investing in real estate is a very complex transaction. And so today we're just going to go over some basic terms, but in later episodes, we will dive in more depth into more meat and bones of different parts of the transaction.

DERREN JOSEPH:

Thank you, Hannah. Thank you, Jay. My name is Derren. I do international tax general and US international in particular. And I guess over the course of the years in which you know, we've been in practice, I've found that many foreign buyers have challenges because they didn't approach it the right way, or they will let down an upon or a journey that wasn't the right fit for them. Now make no mistake, even though I am a qualified tax professional that you guys have professional, this is not about giving tax advice. There's no legal advice here. What we're doing is having a general conversation about general principles, which we hope would inform you. When you do sit with a qualified professional that you've retained, who understands your circumstances, understands your needs, and will guide you accordingly. So general compensation is not tax advice here. There is no legal advice. There is no real estate advice. So let's get into this claim. Thank you.

HANNA MUSIDI:

So right now we're going to talk about common real estate investing terms. You should know the first one is a rental property. So Jay, could you explain, please?

JAY KNIGHT:

Sure. Okay. So rental property typically is exactly what it says as a rental property, as a separate property that you buy specifically for the purpose of gaining rental income. So this isn't a property that you're going to live in this isn't a property that you are going to do anything other than, but rent it out to derive some supplementary income from the money that you receive based on tenants running out of that property. Derren you want to add anything to that?

 

DERREN JOSEPH:

No, it is what it says on the cab, right? Rental properties.

 

HANNA MUSIDI:

Number two is a short-term rental, our vacation rental.

 

JAY KNIGHT:

Well, I know a short-term rental or a vacation rental is similar to, a rental property. However, most of the time a short term is exactly what that means. It means that you're renting it out for people that are going to go on a vacation for a week or a weekend for a month, maybe even two months, but it's considered to be a short term as opposed to being like a year-long lease as would be no regular rental agreements. So short-term rental, you see them now very commonly on Airbnb. You could even see them on different websites, like a VRVO, which stands for vacation rentals or buyers only. So there are different websites where you can find these different types of properties. But yeah, normally anywhere between three days to typically, probably up to two weeks would be a short-term rental.

 

HANNA MUSIDI:

So number three is a long-term rental or traditional rental, Jay?

 

JAY KNIGHT:

So the traditional rental is like, what, say anybody would rent a house or a rental of property, or it could be a condo or whatever it might be typical for a year's lease or maybe even two years, depending on the circumstances. So a long-term rental is what we would find most of our investors are looking for that. They want to rent out the property for someone who wants to live in it for a year and sign a traditional lease, as opposed to renting it out for a short term, which would be about like I said, three days to two children's.

 

DERREN JOSEPH:

Yeah. Yeah. True. So, you know, within the last few years, at least within our practice, we had quite a number of investors who were actually looking on the short-term rental site, Airbnb because they, the opportunity, especially to manage prices on a day-to-day basis led to some pretty interesting returns for them, but going follow it, especially now, since you know that so many social distances, distancing rules and travel restrictions, I think it'll be, would return to that traditional long-term rental, which of course from both a legal and a task perspective would require a lot of thought because of the implications of it.

 

JAY KNIGHT

Yeah. I mean, I think that it really will depend on a couple of different factors. I mean, one of the factors will be location, obviously. So if you're investing in a place, say it's Santa Monica, California, which is a very high tourist area. And then, in that case, you'd probably want to rent out the property on a short term, rather than a long-term because the returns could be quite significant if you're maybe investing in another place that isn't so much of a high-end tourist place, but it's more of like a residential area then. Yeah. Maybe the long-term would be, make more sense. Cause there's not going to be a lot of tourist traffic. I've had several properties in California where I've rented them out on both either short-term or long-term I've had properties in Florida near the south beach where I've rented them out on the Airbnb kind of tip and saw some really, really phenomenal short-term rentals, which was great. And I've had some that in California, which I rented out on a year-to-year basis, which also worked out well. So it really just will depend on the different factors and also your strategy in terms of what you want to get out of your rental.

 

HANNA MUSIDI:

So no more, you have nothing else to add Derren. So number four is equity. Who's going to be first, your Derren or Jay?

 

JAY KNIGHT:

Okay. Sure. Well, well equity. Yeah, people do kind of confuse equity sometimes, and it can be a little bit tricky, but really, what equity means is the difference in the value between what you owe on the property and what the value of the property actually is appraised for. So let's just take an example, let's say in 2010, you bought a property for let's just use easy numbers, a hundred thousand us dollars. Okay. And let's say I'm out of that a hundred thousand us dollars. You got an alone for 80,000 and you put down 20,000. Okay. So now you still owe $80,000 on the property and you bought it for a hundred, but now that was 10 years ago. So now let's say 2020, we have somebody appraised a property. Not at least now let's stay that the property has been appraised for $150,000. Okay. So you bought it for a hundred now as praise for 150. And in the meantime, since you've had an $80,000 loan on that property in these 10 years, that says you've paid off 20,000 of that loan, right? So now when you own the property is $60,000, but the property has been appraised for $150,000. So the equity now becomes the difference between what the fair market value appraised is 150,000 and what's owed, which is 60,000. So the equity becomes that difference, which is going to be $90,000. So now equity, your equity is $90,000. And typically what that would mean is that you could qualify for getting a loan on the property to make some money out, and you can use that than to invest in other properties or to pay off other loans or buy a car or take a vacation or whatever it may be. So that's basically how equity works.

 

DERREN JOSEPH:

Yeah. And just add to what you said tomorrow for more sophisticated investors that presents a fantastic task planning opportunity because even though you may have the cash and you can buy like 100% without taking on any debt, sometimes, you know, depending on what your overall long-term strategy is, it may make sense to set up an entity which will provide financing and you get the benefit of the loan interest deduction. So again, even though you think, well, you know, I have a lot of cash, I can just go in and buy what I want. They are opportunities to think long-term in terms of tax planning, as well as to protect the asset using bureau structures. So I think the whole, the whole conversation around equity is something that deserves a lot of time and investigation because it's something that could benefit you in a long term.

 

JAY KNIGHT:

Yeah, absolutely. Yeah. And we could do all the episodes just on equity sometimes too. Cause there's a lot to cover in that.

 

 

HANNA MUSIDI:

Exactly. Probably the next episode will be equity right now. We were going to the most interesting part, which is rental income. So rental income, who's going to go first, Derren or Jay?

 

JAY KNIGHT:

I think Derren since that's a tax item.

 

DERREN JOSEPH:

Well, it's kinda like I see equity in that it's a term that is open to different interpretations in different contexts. Like even when we were talking about equity, there is debt-equity and owner's equity, but typically equity refers to what the original investor puts in as opposed to what they borrowed. Right. But, you know, depending on the context in which is being used, it kind of gets great. And similarly to the rental income, people say rental income. And again, it's very generic. Sometimes they mean gross or net. So with gross income rental income, and I'm hoping that this doesn't jump into what is further down the list. But anyway, so what gross rental income will be the amount that you receive from the tenants. So it is before you did that, any expenses now in the US with US tax rules, you're allowed to deduct anything that is ordinary and necessary. Those are the two tests they line up to that line of business to the rental property. So that would include stuff like maintenance, fees, insurance, property taxes, and whatever. And also a fantastic thing called depreciation, which I probably will touch on later. But the bottom line will be the net income, the net rental income. So you saw it for the gross rental income and you ended up with the net rental income. Then both of those are important metrics depending on what your strategy is. But of course, from a tax perspective, you're looking at the net rental income and the depreciation piece is from a needs, from a tax planning perspective is, is like magic because it potentially allows you to rent out your property and pay no tax because of this concept called appreciation, which we'll probably touch on later.

 

JAY KNIGHT:

Yeah. I think that pretty much sums it up. I mean, I think everybody that goes into real estate investing obviously wants to know about cash flow. So I think that, yeah, so I think that it's a perfectly good explanation and Darren has just given us and yeah. I mean, that's why we invest, right. I mean, we could be looking at long-term, but we also were looking at having some cash.

 

HANNA MUSIDI:

Exactly. Number six is cash flow. How much money every month or every year or every day.

 

VOICE-OVER:

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