Best Citizenships

How to Invest in US Real Estate, If You’re Not a Citizen

While just about everyone has considered real estate as an investment at some point in time, many people pass it over.

The number 1 reason people don’t invest in real estate is the perceived risk of it. That could come from a number of factors, but often it’s because you don’t live geographically near the property you want to buy.

Another reason might be that you aren’t a citizen of the country you want to make the purchase in. This is incredibly common for people who want to invest in the US but live abroad or are citizens of other countries.

But, did you know that it’s not hard to invest in US real estate even if you live abroad and are a citizen of another country?

Sure, there are some considerations you have to make and hoops to jump through, but it’s totally doable.

Why US Real Estate?

So, you want to become a real estate investor, but why invest in the U.S. and not Europe or Asia?

Recently, US real estate has separate itself from other investment sectors in the US as well as real estate abroad.

The US has recovered entirely from the financial crisis and is fueled by strong job and business growth. It has a very stable and mature real estate market and compares very well against other places such as Europe which moves from one economic turmoil to another.

Most recently of them being the Brexit, but others including the political instability in France and Germany, economic instability in Italy and Greece, and others.

From a more micro perspective, US real estate offers higher returns than in many other cities around the world such as London or Tokyo.

Additionally, the U.S. market is absolutely massive and amazingly liquid compared to other real estate markets around the world. So, it’s easy to exit and reinvest your capital elsewhere.

While there are a lot of great reasons to invest in the US, there are a lot of hurdles as well.

Hurdles You’ll Face as a Foreign Buyer of US Real Estate

U.S. Citizens and permanent residents obviously have the most options and easiest ability to purchase US real estate. So, let’s talk about all the drawbacks you will face as a foreign buyer of US real estate.

No Fannie and Freddie

In the residential mortgage space (1-4 units), Fannie Mae and Freddie Mac are the home loan giants. They purchase or guarantee the vast majority of home loans in the United States. Unfortunately, they do not purchase loans from non-US citizens.

Instead, lenders have to keep these loans on their own books.

Secondly, these loans are harder to sell on the secondary market due to a higher risk of default and because it’s so much harder to track down delinquent mortgagees when they reside overseas.

Your Mortgages Have Higher Fees and Interest

There are a lot of banks that will lend to foreign nationals who live outside of the U.S., but they offer non-conforming loans that they have to keep on their own books. So, they use their own underwriting guidelines and often they have higher interest rates.

Additionally, they will require a bigger down payment to have the added cushion should you default. Often they will require 30% or more as a down payment.

Tougher Approval Process

It’s a lot more difficult for banks to verify your income and expenses along with any sort of credit history.

So, they’ll ask for tax returns, bank statements, and any credit history available in your home country. They may require several months worth of credit statements and a variety of other documents in order to make them feel more comfortable extending the credit.

Additionally, it takes a lot longer to have the loan go through. You can speed this up by applying for a loan at a bank in your home country that also has a presence in the US.

Green Cards or Work Visas are a Plus

If you happen to be working in the US, even temporarily, you can qualify for Fannie or FHA loans. There may be additional documentation or requirements, but it will help you get an easier approval process along with lower interest and down payments.

How to Invest in U.S. Real Estate

Now that we’ve covered all of the hurdles, let’s get into the actual ‘how to’.

The first thing you should consider is if you want to buy residential or commercial real estate

Residential vs Commercial Real Estate

In the U.S., residential property is considered anything that has 1-4 living units. This is for residential occupancy only as even a single unit office space is considered commercial.

5 units and above multifamily is considered commercial, even though it’s residential living space.

Additionally, residential properties are priced based on comparable sales and in no way is related to the actual income or expenses on the property. Conversely, commercial property is based entirely on the net operating income and capitalization rates in that market.

While there are a variety of pros and cons in each sector, you need to decide which is a better fit for you.

Creating an Entity

The next thing you’ll need to consider is how you will take ownership of the property. Will it be¬†owned in your own name or in some sort of entity, such as an LLC?

If it’s a residential property with a personal mortgage, you’ll most likely take ownership in your own name. On the other hand, if it’s a commercial property or if you are getting some sort of commercial financing, you will almost definitely want to set up an LLC.

Fortunately, foreigners can set up an LLC and the process is very simple.

Building Your Team

Before you start looking for property, you will want to build your team. This will consist of your mortgage broker/lender, property manager, a real estate broker, insurance agent, and inspectors.

Each one of these will be needed at some point in the process and it’s good to talk to them and build relationships¬†before you actually need them. This way you won’t be scrambling around at the last minute.

Searching For a Property

This will depend on what sort of property you have decided to buy.

For residential property, it’s simple enough to use any MLS listing site such as Realtor.com or Zillow.com.

Commercial property is a bit more difficult as larger commercial properties are rarely listed online. Some brokers do use LoopNet, but in general, you have to call the commercial brokerages in the city and ask to be put on their email list (once they’ve asked a few questions and qualified you as a buyer).

Making Offers

You’ll want to make sure you get accurate financial information before making an offer. Make sure you ask for tax schedules or a formal trailing 12 P&L statement.

Input your numbers into a real estate calculator to make sure your overall returns are what you want.

Once you’re comfortable with the returns you’ll get, go ahead and contact the broker and make an offer.

Doing Diligence

When you’re making an offer, you’ll make a ton of assumptions about the property and area. Once you have an accepted offer, it’s important to verify those assumptions and turn them into facts. If your assumptions turn out to be wrong, you need to adjust the numbers and see if the deal still works for you.

Don’t be afraid to back out if the numbers don’t work anymore. At a minimum, you will want to verify the:

  • Income
  • Expenses
  • Property condition
  • The cost to make necessary repairs
  • Insurance price
  • Taxes
  • Property management costs
  • Current rents and potential market rents

…and that’s where your team comes in. Each person on your team can help you verify a piece of information to help you make a good buying decision.

A Bit About Banking

The United States has a “know your client” banking law which generally requires you to go to a bank in-person at some point.

There are some online banks which allow you to do everything electronically and may require you to fax or email copies of your ID or talk to them on the phone.

You also might be able to create a bank account with a US bank if it has a partnership with a major bank in your area. You might be able to go to that bank to establish your identity to meet the legal requirements.

Additionally, you might be able to avoid the need to have a US bank if you use a property manager. They can collect your rents and wire it to you quarterly or semi-annually.

Note About Taxes

Only two things in life are certainties – death and taxes. Unfortunately, Uncle Sam sure knows how to collect taxes.

This is especially true with land transactions involving foreign nationals given the tax laws of more than one country might apply.

The fact is different nations have different tax treaties with the U.S., so it’s really important to consult with a tax expert in your country and perhaps in the U.S. as well to understand all of the tax implications.

Some treaties may require you to pay taxes in the U.S. while others may require you to pay taxes in your home country and the U.S. (I don’t believe any treaty allows you to avoid US taxes).

Tax rates may also vary by country.

Tax Benefits to Real Estate

On a related note, if you can finance around 50% of your deal or more, you can usually avoid paying income taxes on your rental income for at least 10-15 years.

This is because the U.S. tax code allows deductions for mortgage interest, depreciation, all repairs and maintenance, property taxes, and more.

In many situations, you can have a ‘negative income’ situation and carry forward losses to the following year.

But, all deferred taxes will be recaptured upon sale and foreign sellers will always be subject to U.S. capital gains taxes. As a result, the foreign seller will have an automatic 10% of the sale price withheld by the IRS until taxes are filed. If you overpay, they will refund you the difference.

But, if the withholding is too little, you will be required to make further payment to the IRS.

Alternatives to Direct Investment

If purchasing your own property is a bit daunting or overwhelming, there are some alternatives.

The first, and most obvious, is to buy a real estate ETF on a US stock exchange. You can trade them just like stocks and get exposure to real estate through them.

Another option that is very new (just started around 2014) is real estate crowdfunding. Crowdfunding is where you can pool smaller amounts of funds together with other investors to purchase real estate.

This particular option will definitely require a US-based entity with a local bank account.

A third option is to become a private lender to real estate investors. There are few regulations with business to business loans, but the difficulty will be with finding investors rather than with finding property.

There Are Hurdles, But It’s Doable

Investing in real estate is a huge undertaking, regardless of where you live. It’s even more daunting when you want to buy in a foreign country.

But, if you cover your bases, understand the risks, and build the right team, it is very feasible and not even that difficult to do.