For those new to U.S. real estate, you may wonder what the holding costs of U.S. property are and what purpose they serve. Today, let's follow our editor to find out! What exactly are the holding costs of U.S. real estate?
It is mainly divided into two parts:
a. When holding property in the U.S., there are two common expenses: property tax and mortgage.
b. What are the differences in expenses generated by different types of housing?
1. What expenses will you face as a landlord in the U.S.?
U.S. property tax is collected by the county government, and the tax rate varies by county. Each county has specialized property tax assessors who evaluate housing prices in different areas every year, and then levy property tax based on a certain price.
The base for property tax collection is not any of the prices mentioned above; it is a specific taxable value determined annually by specialized county staff based on an assessment of similar properties in the vicinity.
It is important to know that U.S. property tax is collected annually. If not paid on time, administrative fees, penalties, interest, etc., may be incurred, which will increase your holding costs. If you do not pay for a certain period, the government will take further action, placing a lien on your property until the house is eventually auctioned to pay off the debt. Specific operating regulations and procedures vary significantly from state to state.
Property tax is actually easy to calculate: Property Tax = (Assessed Value / 1000) * Property Tax Rate. The assessed value of the house can be checked specifically on the county government office's website. The assessed value is an evaluation specifically for the collection of property tax. Please note that this is not linked to your market price or any other value; the assessed value cannot be considered as any other type of value; it is merely a base for property tax collection.
Now let's look at the second expense: mortgage. In China, mortgage repayment consists only of principal and interest. In the U.S., mortgage patterns are very diverse. Some loans are like those in China, where you pay back both principal and interest, while others may only require interest payments at the beginning, with the principal paid at the end. In that case, the final principal to be repaid is quite high, which is why it is called a balloon mortgage in English, as it has a structure like a balloon.
Generally speaking, in the U.S., a mortgage is not just principal plus interest; for example, there is also mortgage insurance. This is actually a measure to protect the lender; if you cannot pay, the lender can receive a certain amount of compensation. The monthly payment mentioned here depends on your loan structure and the term of the loan.
The third expense that will definitely arise is homeowner's insurance. This insurance is generally divided into two parts: physical and liability. Physical coverage includes, for example, fire, hurricane, storm, smoke, hail, vandalism, and theft of personal property. Liability refers to situations such as a friend breaking their leg at your home, your dog biting a guest, or a nanny twisting her ankle while running downstairs to open the door, and so on.
There are six common types of insurance in the U.S., the most common of which is called HO-3. It covers the house itself as well as the property inside the house. However, please note that for HO-3, earthquakes, floods, war, or nuclear accidents are generally not covered by the insurance, and for floods, you need to purchase separate insurance.
The above is the first part shared with you, which covers these common expenses. In the second part, let's look at what different expenses are involved for different types of housing.
2. What are the differences in ownership and holding costs for different types of housing?
The most common types of housing in the U.S. are single-family homes or two-family homes, which are single family home or duo-plex. Generally, we consider one to four units as residential types. In addition, you will encounter several other types of houses in the U.S.: one is a condominium, abbreviated as condo; one is an apartment; and one is a cooperative.
The three have some commonalities: they are exactly the same in terms of architectural structure, and the difference between the three lies only in their form of ownership. For a condo, you own the space inside the four walls, ceiling, and floor, excluding, of course, some common areas.
An apartment is held as a whole by a company, and you rent one of the units; you are a tenant, not a landlord. Therefore, we can simply understand that a condo is sold by unit, while an apartment is rented by unit.
The third type, a cooperative, is where you purchase a share; you own a share, and what you purchase is not a deed, but a long-term lease with an expiration date.
Looking specifically at some of the expenses they generate, for a condo owner, the expenses include maintenance fees, daily operational management fees, insurance for common areas, etc. All these expenses are collected uniformly by the homeowners association. This homeowners association is the HOA. If you look at these listings online, you will often see an HOA fee, which is this expense. This is similar to property management fees in China. This fee is usually around three hundred dollars.
Cooperative expenses: actual operating expenses, principal and interest on the co-op's mortgage, property tax, insurance, and a reserve fund. The amount of these expenses is calculated based on the number of shares held. For example, the mortgage principal and interest do not refer to your personal loan, but to the loan that may exist for the entire project, which is required to be borne in a certain proportion. The so-called reserve fund can be understood as a savings account, which is a capital account used for emergency repairs and major renovations.
In addition to what is mentioned above, there may be some special charges. For example, local governments may levy special fees for public construction in addition to normal property taxes. This situation is not uncommon, and the apportioned fee is not very high and is also collected annually.
Although there are many miscellaneous expenses, there are currently some tax relief policies for property tax. The specific tax policies and collection/exemption rules in the U.S. are relatively complex. Regarding the issue of how to collect or exempt taxes, it is best to consult a certified public accountant. Depending on your specific personal situation and the situation of the house, see if you meet any conditions for relief.