Houston, We Have A Problem

Comparing investment risks between here and abroad

Dear Sven,

What advice do you have for a Vietnamese/US dual citizen who wants to buy a house in the US instead of saving money in Vietnamese banks or investing in domestic assets in such unstable conditions? And what about renting the house while staying in Vietnam? I’m looking to buy a house in Houston because it seems to have the cheapest price range in the US. Also, my wife is a Vietnamese citizen and would like to know if it would be possible for her to purchase a house in her own name abroad.

Although interest rates on deposits in Vietnam might be relatively high compared to the US and Europe (which are almost zero), it is important to note that when all your savings are denominated in Vietnamese dong you open yourself up to risks relating to currency depreciation. The most important risk in terms of the long-term value of your dong is that the government and the economy as a whole would very much like the value of the dong to decrease over time to make Vietnam’s exports cheaper than neighboring competitors and thus allow the economy as a whole to grow. The fact that you would like to invest in the US and have your savings/assets valued in dollars means protecting your purchasing power over time.

Buying property in the US seems plausible because the country has universal property rights and one of the world’s oldest democracies, meaning you would be able to take legal action against any person or government entity that tries to lay claim on your property without proper cause.

Your US citizenship is key because solely as a Vietnamese citizen you would not be able to transfer money to the US for the purpose of investment and would only be able to do so if you could prove the transfer was to finance either: emigration, education, travel, supporting a family member or making payment for a good or service consumed in Vietnam, and concrete proof needs to be shown to your banker. Therefore, it would be easiest for your wife to have joint ownership of the property with you, which would be paid for from your accounts.

In terms of investing in US real estate specifically, there are various trends you should consider before settling on this option. Demographics and property purchasing trends have changed quite substantially in the US. Younger people are saddled with more student debt and wages have not increased much in the past 20 years, meaning more people are living with their parents for longer and the frequency of home purchases has decreased over time, which would be a dampener on your property investment in the future. In terms of timing, the best opportunity would have been in mid-2008, just after the real estate crash in the US, you would have found many bargains then. Generally, real estate prices have recovered substantially and are almost at pre-2007- 2008 levels as measured by the S&P/ Case-Shiller housing price index.

Looking more specifically at Houston, the obvious driver of the property market is the oil industry, which makes up more than 50 percent of the tenants in the metro area. Even though you say prices are still cheaper than some other cities, when looking at the All Transactions House-Price index measured by the Woodlands-Sugar Land, prices in Houston are currently at an all-time high. Relative prices paired with the bleak prospects within the city’s biggest employer, oil and gas, means there is not much room for growth in property prices and your investment. Try looking at other cities like Chicago, which has a more diversified tenant base and currently has lower relative prices compared to 2008.

In terms of taxation, you would be liable for: state property taxes, which in Texas are 1.93 percent of purchase value (one of the highest rates in the country), federal income taxes which you would pay on the rental you receive from your tenant based on your tax bracket and capital gains taxes equal to 20 percent that you would pay on the profit you make on the property once you sell it. It’s important to note that if you are living in Vietnam and have the rent you receive from your tenant remitted to your bank accounts in Vietnam or wherever they are held, that you will still be liable for the above taxes as the US, Philippines and Eritrea are the only countries that tax their citizens on income earned regardless of where they live. Perhaps consider securitized property investments such as Real Estate Investment Trusts (REITs) as these are far more liquid, give your assets to a diversified pool of property investments that are far more efficient from a tax reporting point-of-view.

BIO: Sven Roering is a Managing Partner at Tenzing Pacific Investment Management. He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.

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