Attractive US Real Estate Market
The US is a stable housing market that has outperformed the stock market; from 1970-2016, the S&P 500 Index had an annual return of 10.31%, whereas real estate had an annual return of 11.42% over the same period. Many US housing markets have already reached pre-crisis levels again, and housing is again viewed as a safe place for investments.
This has attracted investment from other countries, with China and Canada battling it out for the most foreign dollars invested in the US real estate market. One report says Chinese investors will spend $1 trillion on real estate in the next decade.
Buying Real Estate Abroad
The US is an open market; just about anyone can buy real estate, citizen or not. In other countries, this isn’t always possible. In the Philippines, foreigners can’t own land but can buy condos as long as they own <50 percent of the units in a building. In China, even citizens only possess land for 70 years, and that comes with still fewer rights.
However, there are some considerations when considering a US purchase as a foreigner.
Without US citizenship or a green card, financing becomes more restrictive. US citizens or green card holders can typically finance 80% of a purchase without any form of government security, although there are many exceptions and programs that will allow up to 95% or even 100%+ for veterans. However, foreigners are restricted to around 40-50%, generally speaking, with slightly higher interest rates.
There are ways around it. Canadians trying to invest in US real estate can try contacting Canadian banks they have relationships with that have US operations.
Chinese citizens that previously were ok with higher down payments but have recently been unable to move large sums of money out of China due to more restrictive capital controls have a few choices too. There are smaller banks in NYC, and likely in other places such as California that will finance 60% or even 65% of a purchase.
Of course, there is always hard money financing, but the interest rates are much higher. This could be an option for commercial real estate, but not likely a good option for residential. Expect the lender to ask for an enforceability lender from a lawyer in your home country – this basically states it’s legal for the US lender to sue you in your home country, should you default on your US loan.
Condos, Coops, and Homeowner’s Associations can be extremely restrictive to whom they accept into their community. This isn’t just true for foreigners. They aren’t legally allowed to discriminate, but they do set rules about the types of people they let into their communities. For example, some communities may only allow residents over a certain age for retirement purposes. Others may not allow the home to be rented or sublet.
Expect to go through an interview with a coop board. They’ll interview you, but you should interview them too to ensure the community is a good fit. Also, examine their financials to ensure the community is well managed. These communities may be better choices since common area maintenance is handled by someone else, and you just pay a monthly fee.
Taxes are inevitable. At the time of purchase, there will be land transfer tax. In some states, this is paid by the buyer, in other states it’s paid by the seller, and sometimes it’s split. In New York, the seller pays the tax up to a certain amount. In Pennsylvania, the transfer tax is split between both parties. This is negotiable between the buyer and seller.
When the property is sold, there will likely be capital gains tax.
Some countries have tax treaties with the US. Treaties are unique. For any tax advice, you should consult a tax professional in your home country, and a CPA in the US that specializes in real estate tax (the author is not a licensed CPA or lawyer).
Research The Market & Property
When I talk with friends abroad and mention I saw a $2,900 house for sale, they immediately want to purchase it as an investment. A $2,900 house sounds like a great deal, but in this case, it’s a terrible deal. This $2,900 house was in an area of New Jersey that’s in ruins and is only getting worse. The area is bad, the property is worse, and I can’t imagine anyone wanting to live there. In fact, the city is probably fining the owner due to the condition of the property, on top of the high property taxes being charged.
I didn’t even check the status of title (to verify the seller actually does own the property).
Prior to investing, talk with local real estate professionals. Learn about the area. You’ll want a qualified real estate professional to verify the owner of the property does actually own the property, with all the bundle of rights, and find out what’s happening in the area. Google Streetview is a great tool for that too.
There is no shortage of good deals out there, so make sure yours is one of them.
If you’ll live in the property, you could perform upkeep yourself. If you’ll be spending time abroad, you need to think about who will maintain the property in your absence. A house with an overgrown lawn will draw unwanted attention from the city, and large bill if they need to perform maintenance for you. If you’ll rent the home, you may need a property management company. At a minimum, you’ll need a call center to coordinate maintenance and collect rent.
If you have a reliable friend or company in the area, you’ll need their help.
Wrapping It Up
Investing in the US real estate market is generally a solid investment with better annual returns than the S&P 500. Consider how you’ll finance the purchase, analyze the property and area, and always seek professional help. Don’t forget you’ll need to maintain the home too – it’s an investment.