We are looking for real estate investment opportunities in the U.S. and are aware that costs and tax rates differ dramatically in different regions. Taking local tax rate and cost into consideration, which region can generate higher ROI in real estate investments?
Any tier 1 city in the United States can generate a healthy ROI. However, you need to first decide what sector of RE you are investing in, as the returns vary on different sectors (i.e., multi-residential, hospitality, office/retail, etc.). In some cases, investors are shifting from tier 1 cities to tier 2 due to the overall cost of a development or acquisition, which also may show improvements on the overall ROI.
I don't have a 50 percent and major city study. I think you have to look at asset classes to start and then focus on ancillary factors. Your tax picture can be helped by professional structuring, once you have decided on an asset class or a varied portfolio.
The mountain states (mid/central) typically have a higher return due to their population growth, economic growth, etc. However, we strongly recommend our investors to not only look at returns when making any investment decision, as the returns are typically associated directly with risk. It's best to contact a local specialist to understand the risk/reward for each state, region, city or submarket. In terms of the local tax rate, it depends on where you want to set up the company, as some states have a very favorable tax rate.
Most investors do not look at tax issues to determine ROI, but at markets. Generally, Gateway markets generate lower cash-on-cash returns going in due to their perceived lower risk profile and greater demand in the marketplace, driving up prices. Secondary markets and tertiary markets allow you to invest with higher going-in returns, but are viewed as having more market risks. Currently, many investors are going into secondary markets because of the high prices and limited availability of product in the Gateway markets, so the spread in returns between secondary and tertiary markets has increased over the last year or two. As for taxes, in general, you pay income taxes on the state where the investment is located and then get a credit against that payment on your local income taxes. For example, I live in Connecticut, a high tax state (about 7 percent marginal state income tax rate). If I invest in a partnership that owns property in Florida, there would be no income tax there but I would still pay in my home state. If I invest in a property in New York, I would pay the very high New York state income tax, but get a credit against my income taxes in Connecticut since New York tax rates are higher, so I pay nothing more in Connecticut.
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