After a closer look, the most known forms of saving up extra money happen to be not very profitable. They barely produce any real increase of value. After all, only the banks or the insurance companies are the ones making big profits from accounts of the savers. A well-known example is the savings account. One should believe it has become obsolete by now, however, many savers rest content with the average of 2 - 4 interest points on their savings.

When taxes and inflation are deducted, there is mostly a real loss instead of an expected yield.

There are much more efficient ways to invest money, and they are secure as well as tax friendly.

2.2. Commercial Real Estate

Commercial R. E. in the United States comprise property like office buildings, shopping centers, and warehouses.

With investing in commercial property, normally the gains can be considerable higher than from residential real estate, however, it also bears a higher risk. Entering into commercial real estate can be recommended for investment capital of $500,000 and higher.

Like with any real estate investment at all, the location of a residential property is one of the most important criteria. Residential real estate differs considerably between homes, condominiums, and apartments.

For investment purposes, most homes achieve better gains than condominiums or apartments. Latter ones are generally operated at higher costs, e. g. for maintenance of common elements, pool service, landscaping, thus generating a lower cash flow.

All residential real estate properties distinguish between their usage:

Someone who is looking for a property in Florida for his own usage, should actually look at the property and buy that property which matches his personal criteria. Everyone has a different taste! If desired, OVERSEAS REALTY Inc. can locate a suitable lot for you and build a home on it - customized to your needs.

On the other hand, in the resale market, i. e. the local market of pre-owned real estate properties, OVERSEAS REALTY Inc. offers to represent you and your interests as your Buyer’s (or Seller’s) Agent in a purchase (or sale) of real estate. This professional representation of you as a buyer is free of charge because the brokerage fee is usually paid by the seller and is split between the Seller’s Broker and the Buyer’s Broker.

It is not recommended to put a "property-designated-for-own-use" up for rent since the gain is mostly modest. Effort and annoyance are often higher than the anticipated benefit. Therefore, a real estate property should either be determined for "own use", or serve as an investment for the highest possible yield.

Real estate investments are supposed to generate high yields from leasing and appreciation. Such properties distinguish in use as follows:

Short-term leasing or vacational leasing can, subject to high occupancy, generate high yields, however, it also bears high vacancy risks. To be attractive to vacationers, the short-term lease property must have a prime location, e. g. on or near the beach. It should be considered that such properties are more expensive to purchase.

Furthermore, such properties require a high effort to accomplish and maintain a high occupancy rate, whereas reality often proves to be different: Fully rented during season, they suffer long vacancies during off-season.

Additionally, these properties must be turnkey-furnished. If damages occur, it is especially annoying when the precious personal property is affected, e. g. when the property is periodically used by the owner as well (thus mixture of usage). Many properties along the beaches may only be rented two or three times per year, which is intended to restrict short-term leasing to a minimum.

Therefore, a Florida property either for "owner’s use", or for "sole leasing" (investment).

The most secure and profitable use of a Florida property as an investment is its long-term leasing. Also, a property which is being leased for several years, and then being owner-occupied is an attractive investment alternative.

Therefore, OVERSEAS PROPERTY MANAGEMENT Inc. has specialized in long-term leasing.

"The Yield of a Real Estate Investment has to become a top topic again...", quoted from Real Estate Manager 11/97 (Germany). Actually, after many tax-saving patterns failed in Germany, this trend can be observed more frequently, but the yields from U. S. real estate investments are still considerably higher than those from comparables in many other countries. An analysis conducted on residential investment homes in Sarasota, Florida (within the compass of this dissertation) over a period from 1989 through 1996 resulted in the following capitalization rates:

Average cap rate on EGI: 9.52 %

The average cap rate on NOI reflects deductions for vacancy losses, leasing management, real estate tax, insurance, and repairs.

According to a 1988 market research published in the local newspaper, residential real estate in Sarasota experienced a 15.8 % appreciation in 1987. In August 1996 the Sarasota Herald Tribune reported a 6.1 % value increase of real estate in Sarasota County, whereas the Lake Sarasota area ranked second with 6.84 %. OVERSEAS REALTY Inc. has sold and sells numerous investment homes in the Lake Sarasota area.

Money Online ranked Sarasota number 14 in the "TOP 300" of important U.S. metropoles. It reports the annual appreciation since 1995 of average residential homes with 7.9 %.

Generally, an appreciation is not to be anticipated for new homes within the first 1-3 years, since newly built homes experience a value decrease in this period. In the second or third year after construction the appreciation is often absorbed by expenses to be considered for selling the property, since in America the seller pays the broker commission of approx. 7 % for homes. In addition, in the event of a sale the documentary stamp tax is to be paid, which is a kind of real estate sales tax and amounts to 0.7 % of the sales price. From the second up to the fourth year, depending on demand and inflation, the U.S. real estate investment property develops its anticipated appreciation.

A home was purchased in 1959 for US$ 10,000. Today, this home (in Sarasota) has a market value of US $75,000.

Thus the average annual appreciation comes to US$ 1,756.76 or 17.57 % of the purchase price. If this home would have been leased and the cash flow been reinvested, the present value of the home would be US$ 234,000 based on an average NOI of 7.5 %, to be seen in the following diagram:

Long-term Appreciation of Real Estate

The average appreciation over the last 40 years has been more than 6 %, in a single year even up to 18 %. This allows to expect a prospective long-distance overall capitalization rate of 10 - 14 % (yield+appreciation).

3.3 Low Taxes

The taxation on a Florida real estate investment adds another advantage for Foreign investors. Pursuant to the taxation convention between the United States and many countries (i.e. Germany), Foreign investors are not subject to taxes in their home country on current income or gains from a real estate sale, earned in the U. S.. Such investors will profit from U. S. tax allowances unless they receive other taxable income in the United States. These allowances are usually only exceeded when the investor(s) owns more than 2-3 properties, depending on size of the homes, amount of rental income, and whether the properties are owned by individuals, couples or a partnership. There is no joint assessment for couples in the U. S., thus allowing each spouse to using his undivided tax allowances. Income exceeding these allowances is subject to relatively low taxation rates. Thus, considerable tax advantages may be gained versus a high taxation on investment income in many countries (i.e. Germany).

For German Investors: Any income (profit or loss) realized in the United States is only used in Germany for determining the applicable tax (progression) rate (so-called "subject-to" clause). The "subject-to" clause becomes effective only if the income in Germany is not subject to the highest (peak) tax rate. In this case the U. S. income will be added to the income in Germany to determine the tax rate. This may result in a higher tax rate on the income realized in Germany, however, the investor’s U. S. income may not be taxed in Germany.

OVERSEAS PROPERTY MANAGEMENT Inc. (OPM) offers to provide all necessary data for filing a tax return in their service package, and will forward them to the respective tax consultant. This keeps the charges for filing a tax return and for the tax consultant as low as possible.

Due to the practiced levying principle for pensions in many foreign countries (also Germany), all those in employment have to pay their quotas towards the pension plan to assure sufficient funds for the today’s retirees. In the 70’s one retiree could be paid by four working individuals. In 1990 the ratio was 1 : 3, and it is to be expected that in 30 years there will be only one working individual per one retiree. This explains that Germany and many other countries is facing essential pension plan problems.

It is about time to think about one’s future. Owning real estate property can be a retirement alternative in addition to the government’s pension plan.

Under the retirement aspect, real estate property produces higher yields than insurances can. Furthermore, the appreciated real estate property can be passed on to the heirs.

Everyone should provide for a secured lifestyle in age.

In view of the upcoming EURO (new European currency), the high governmental budget deficits in Europe, and the bumper unemployment rate with all its negative economic impact, it is complicated for the investor to choose the right investment for the future.

The US Dollar is acknowledged to be the leading currency in the world and will certainly remain as such even after the implementation of the EURO.

In the United States a Dollar bill, printed 150 years ago, is still legal tender.

Therefore, many investment consultants advise to invest in real value. A Florida real estate property comes with the dual effect:

Real value and security of the US Dollar.

Sarasota County attracts many new residents with desirable living quality. This area has everything that is sought by modern leisure oriented individuals: A sub-tropic climate, a prosperous economy, and a high standard of living.

Map of Sarasota, source:"1996-1997 guid to greater Sarasota", p.7

Sarasota County is located on the west coast of Florida on the Gulf of Mexico. It consists of 473 square miles (approx. 1,211 square kilometers) and comprises the cities of Sarasota, Longboat Key, Englewood, Venice, and North Port. The average annual daytime temperature (high) is 73 F (approx. 24 C).

Residents of Sarasota are benefiting from a vast variety of entertainment and leisure activities, e. g.

• 13 public beaches on 37 miles of Gulf coast in Sarasota County

• Sarasota is known for all kinds of watersport activities

• Approx. 50 golf courses in and around Sarasota

• Numerous nature reserve parks in Sarasota County, e. g. "Myakka River State

Park"

• Sarasota is the home of various cultural institutions, e. g. the Ringling Museum,

• Numerous attractive and advantageous shopping centers.

According to estimates, Sarasota had 301,202 residents in 1995. Computations for the year 2000 are prognosticating a prospective population of 375,000. This indicates clearly the continuing demand for housing.

The breakdown of Sarasota’s population at a glance:

- 94 % White

- 4 % Black

- 2 % Hispanic

Education and infra-structure are two of the most important conditions for a community’s prosperous economy.

Sarasota attracts with an excellent school system, numerous high-profile educational institutions and the University of South Florida, and the International Airport, the Interstate 75 and a masterplan of well-developed municipal highways provide a smooth and quick flow of the in- and outbound traffic.

In the past, Sarasota’s economy has been affected by seasonal unsteadiness triggered by its dependence on tourism and retirement policy. Since a few years more and more companies with environmental awareness are seeking to settle down in Sarasota, providing secure and well-paid workplaces.

Between 1980 and 1995 a total of 52,000 new workplaces have been created. From all cities in the U. S. with the best growth in workplaces in the private industry the Economist Magazine ranked Sarasota number seven.

DRI/McGraw-Hill, the world’s leading provider of forecasts of economic development, places Sarasota-Bradenton on number eleven of all U. S. metropolis areas with respect to growth of workplace. Their forecast relates to 1997 through 2002.

47 % of the Sarasota population have a job, i. e. approx. 143,000 individuals are in employment.

Pursuant to the following graph demonstrating the composition of employment 38% are employed in services, and 25 % are working in retail

businesses.

Illustration: Diagram of Employment Composition

While many foreign countries suffer from a record unemployment, the Sarasota County unemployment rate is sinking to its lowest level since 17 years. On March 26, 1997 The Sarasota Herald Tribune, a local Sarasota newspaper, published an article reporting the local unemployment rate being on record low, as shown in the following Illustration. Therein, Sarasota passed best in comparison with the State of Florida and the entire U. S.. The Sarasota County rate dropped from 3.1 % in Feb. 1996 to 2.4 % in Feb. 1997. Countrywide the unemployment rate averaged at 5.7 % in Feb. 1997.

Illustration: Diagram of Unemployment

While Germany still experienced 11.2 % being without a job, Sarasota’s unemployment rate as of September 1997 was at 3.3 %. The per capita income rose from US$18,248 in 1985 to US$28,807 in 1993 which is a 42 % increase over nine years. The ACCRA Cost of Living Index of the first quarter of 1996 ranked Sarasota County’s costs of living below the average of many major cities in the U.S..

The real estate firm OVERSEAS REALTY INC. was founded in 1982 by Fritz Mayr. His activities quickly expanded into lots, condominiums, houses and commercial properties.

Today, Overseas Realty Inc. specializes in residential investment homes, however, still rendering excellent service in the general real estate market as buyers’ or sellers’ agents, or as transaction broker, e. g. for new or pre-residential owned residential or commercial properties, including lots.

OVERSEAS HOMES INC., the builder, provides highest quality customized or standard-type homes. Those designed for investment are constantly advanced to comply with the latest building codes and the demands of the marketplace to enable lasting and profitable leasing. Solid homes, built according to the latest Hurricane Protection Code, guarantee high quality construction.

Professional leasing and management of the investment properties in Sarasota are the core activities of OVERSEAS PROPERTY MANAGEMENT INC. (OPM). With the investor being absent, it is highly recommended that the property is professionally managed on-site, to be profitable.

Today, OPM is entrusted by more than 115 content investor clients with the management of more than 215 investment properties. In an average each investor owns almost two properties - this demonstrates the quality of this investment.

To assist clients with their travel and reservation needs out of Sarasota, Fritz Mayr established OVERSEAS TRAVEL of Sarasota, INC. in 1985. If you have any questions or travel arrangement to be made, e. g. booking a hotel in Sarasota, feel free to call the travel agency at (941) 366-3661.

President and Owner of these four entities is Fritz Mayr. He is a licensed Florida real estate broker. The membership in both, Sarasota County and Manatee County Board of Realtors, allows access to and supplying almost any kind of real estate property currently offered in the local market.

The spread between "good" and "bad" real estate properties in Florida is far more extended than in many foreign countries as Germany, for example. In the past, there have been unscrupulous or unprofessional individuals and organizations in Florida selling inferior real estate way overpriced mainly to foreign investors. This has caused considerable damages to the reputation of Florida real estate. Besides excellent real estate opportunities, there are still those of minor value which are mostly enticingly advertised in foreign markets. Whereas the Florida real estate property in a good location and at a price, that would be paid by an American also, remains to be an interesting subject, especially for foreign investors.

On the long run, an investment in real estate is one of the most secure form of investing.

Today, OVERSEAS REALTY INC. has mainly three standard-types of investment homes, buildable in Sarasota or Manatee County, to offer: JACARANDA, SHERWOOD, and HIBISCUS model. In the past, different home-models have been built, e. g. OAK and PINE. In the past these models were also sold quite often.

New investment homes carry a number of advantages versus "pre-owned" ones. First, new homes are less susceptible to repairs. Second, these homes are located in areas with high leasing demand. Furthermore, these homes are, while under construction, already adjusted to being leased, e. g. equipped with wear-resistant carpets and reliable brand appliances, which pays in regard of susceptibility to repairs later. Another benefit should be mentioned: For the year of completion and first occupation of a new home real estate taxes apply only for the lot, not for the improvement. Therefore, the gain is even higher in the first year.

By experience, the after-tax cap rate of residential homes amounts to 6 to 7 %. This is almost 100 % higher than usually accomplished in Europe.

When financing the Florida property in Germany (or many other foreign countries) the investor may certainly benefit from presently low mortgage interest rates there. The currency risks are low as long as the US Dollar is undervalued versus the foreign currency. However, Foreign lenders will require surety(ies) in that country, where the money is borrowed. If there is/are no surety(ies) available in that country the property may be financed in the U. S..

Financing an investment in the U.S. means minimizing the monetary risks, and may be feasible for up to 80 % of the investment. Due to the complicated bureaucratic procedure of a loan application it is recommended not to apply for more than 50 %, because otherwise American lenders tend to require current evidence of creditability of the foreign borrower, even back to sources in Germany. Loans in the U.S. of up to 50 % of a real estate investment property can be obtained even by foreign individuals without extensive bureaucracy.

The following example could apply for financing a property in the U. S.:

Purchase of an investment home at US$137,900, with 50 % financing in Florida:

Purchase price: US$137,900.00

Loan amount: US$ 68,950.00

Interest rate: 7.9 %

Period: 15 years

Monthly gross rent from home: US$950.00

Monthly net rent (after costs deducted) US$705.00

Monthly interest and principal (PI) on loan US$654.95

Monthly cash flow US$50.05

In this case the investor may finance up to 50 % without subsidizing the loan from other income sources.

The incoming net rent, after deduction of all costs e. g. 10 % leasing management, real estate taxes, and insurance, is compensating the dept service (PI). And there is still a positive monthly cash flow of US$50.05. After 15 years the loan is paid off, and the investor may use the incoming net rent as additional retirement income. Furthermore, the property appreciates and the rent increases continuously.

There are basically no restrictions to foreigners acquiring real estate in Florida. The law and corresponding rules and regulations pertaining to acquisition and transaction of real estate titles aim to protect the rights of the buyer. Usually a written sale and purchase contract, signed by the parties involved, serves for the transaction of real estate property. It covers the material information of the property, the rights and duties of both seller and buyer, and it contains the determined day of closing.

During the time between seller’s acceptance of buyer’s offer (contract) and closing, the buyer may inspect the property and check the legal condition of both the property and the title. If material defects are discovered before closing the buyer in most cases may withdraw from the contract unconditionally. On the day of closing the purchase amount is disbursed to the seller and the buyer acquires title to the property.

Usually the conveyance of title is executed by a title insurance or an attorney to protect the buyer. (There is no notary public involved since they don’t have the same skills and authorization in Florida as they have in Germany).

Common practice in Sarasota requires the buyer retaining a title insurance or attorney to protect him against defects of title. They provide protection against potential demands of third parties towards the right of ownership or against potential obligations from an uncleared title.

The ownership is conveyed by means of a warranty deed which is then recorded in the public records of the county. This ensures the buyer of the undivided right of ownership of the property in the U. S..

The list prices of new investment homes published by OVERSEAS REALTY INC. for foreign investors (only) do already comprise all of the closing costs. Thus a flat price, and no annoying surprises at closing.

An important criteria when considering to purchase a Florida real estate investment property is the management afterward. There is an increasing demand for professional property management service. An investment property owned in a foreign country should be leased and managed by local professionals to ensure its most possible success. They know the local marketplace, and they use to react to any change immediately thus avoiding unnecessary vacancies. The investment properties should be located within half of a driving hour from the operational base of the management company to enable them to lease and supervise the properties efficiently.

The property management firm OPM conducts long-term leasing only (as referred to in 2.3.2).

OPM offers the following services:

• Leasing of residential or commercial property located in Sarasota
• Collecting rents and depositing them into the bank account of the property owner
• If desired, opening bank accounts and managing them
• Providing quarterly statements for the property owner
• If desired, mailing the statements to the property owner’s home address in his/her home country
• Consulting and servicing clients in Germany and other foreign countries

For providing these services OPM claims a management fee of 10 % of the actually received rents, and not like many other companies 10 - 15 % of the potential rents. The client has worldwide availability of his/her rental proceeds by means of personal checks or, if desired, VISA debit card. Cash disbursements from the bank account are only provided in the U. S. by means of a bank card, but are to be extended to Europe, too.

Long-term leasing in the U. S. usually requires a one-month rent in advance as security deposit. Due to the experience of some lessees not paying the last month’s rent and thus using the security deposit OPM is now claiming the first and last month’s rent plus a one-month rent security deposit. This policy usually ensures to avoid unnecessary expenses for the investor.

The rights of ownership and their enforcement are much more visible in the U. S. than in Europe and many foreign countries. This is positive for the investor regarding the leasing of his/her property. A lessee who is in default on the rent will be evicted within six weeks the latest. This also contributes to high yields of residential real estate investment properties.

Within the compass of a recent treatise (dissertation), all of the real estate investment properties managed by OVERSEAS PROPERTY MANAGEMENT Inc. during the period 1989 through 1996 have been analyzed.

The following will distinguish between three levels of cash flow:

• Gross Cap Rate:Cash flow from effective rental proceeds (EGI)
• Net Cap Rate:Before-tax-cash flow (NOI)
• Overall Cap Rate:Before-tax-cash flow plus appreciation

All of the 211 properties having been managed during the said period were subject to an evaluation. They comprised 153 homes and 58 condominiums, owned by 112 investors, and serviced by OPM.

Frequency of Types (1996 only)

Number of Properties by Type in 1996:

Frequency of Types (1996 only)

For the purpose of information and comparison with other real estate investment properties the following spreadsheet contains effective gross cap rates i. e. cash flow from actually received rent proceeds.

Gross Cap Rate over Entire Period:

Mean Gross Cap Rate

The figures reflect the actual profitability. The Net Cap Rate is based on NOI, i. e. vacancies and actual operating costs have been deducted. The study’s mean Net Cap Rate, as shown hereafter, is also published in "Homes for Investment", a corporate brochure of OVERSEAS REALTY INC.. In particular for the analyzed investment homes, the mean annual net cap rate from net operating income amounts to 6.96 %, as shown in the following table.

Net Cap Rates by Types of Homes:

Mean net cap rate by types of homes from rent proceeds after vacancies and operating .

Illustration: Mean net cap rate by home types

Net Cap Rates, Summarized over Period of Study:

Mean net cap rate, over period of study

Hereafter, a brief summary of the most essential results and conclusions of the analysis of this treatise (dissertation) will be presented. The following numbers are computed mean figures obtained from actual proceeds and expenses of investment homes in Sarasota, managed by OPM.

The investment homes achieved a mean annual gross capitalization (EGI) rate of 9.52 % over a period of eight years (1989-1996). After subtraction of all operating expenses, this results in a mean annual net capitalization rate of 6.96 % over the same period of time.

The average vacancy was found at 2.68 %. Usually, rental agencies in Florida are considering vacancy rates of 5 - 10 % being realistic, for commercial properties even up to 15 %.

The mean repair expenses for the homes amounted to 3.88 % of the actually received rents.

The real estate taxes made approx. 1.2 % of the purchase price of a home, or 11.83 % of the actually received rents.

Insurance made about 0.2 - 0.3 % of the purchase price of a home, or a mean 1.84 % of the actually received rents.

The rental proceeds rose 3.46 % in the average versus the year before. This constitutes an additional gain which by far exceeds (approx. triple of) later repair expenses.

Editor: Chris Mayr

Translator: Eike Schroeder

For further information, or if a personal consultation is requested, please feel free to contact

Fritz Mayr, Lic. Real Estate Broker,

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