Today’s weak U.S. economy creates a once-in-a lifetime opportunity for investors in U.S. real estate.
Foreign nationals purchased $77.9 billion in U.S. residential real estate during 12 months ending in March 2019, says the National Association of Realtors. That’s about 3% of all U.S. homes.
The truth is, some foreign investors are successful in U.S. real estate. But many are not.
This article offers foreign real estate investors key ideas to improve your chances of success.
While opportunities abound, foreign investors need a specific game plan to succeed:
- Find a guide who brings you local real estate market knowledge.
- Create your U.S. tax, legal and banking plan before starting to invest.
- Do complete due diligence on any property you buy.
Alvernia offers you a simple, practical way to invest in real estate, based on best practices from top investors.
As your guide, we help you avoid the traps built into the “trial and error” approach. With a guide, you don’t need to spend on specialized real estate education — so you can free up more capital to invest in real estate.
Alvernia brings you expertise, practical experience and street smarts. Here’s what foreign investors need to know before you begin to invest in U.S. properties.
Foreign Investors Need a Local Guide to U.S. Real Estate
The right guide assures that you avoid the mistakes that foreign investors often make. For example, you will need to avoid all these pitfalls:
- Buying in the wrong macro- or micro-markets.
- Skipping or delegating due diligence on deals.
- Choosing properties to buy through a real estate agent, friendly amateurs, friends or family members who do not understand real estate investing.
- Failing to analyze investment fundamentals.
- Lacking an exit strategy.
The right guide in U.S. real estate steer you toward the right macro-markets where local economies are growing. Your guide can help identify good micro-markets, which are owner-occupied neighborhoods where tenants rent for the long-term.
The right guide can teach you to perform proper due diligence on each property, so you can be totally objective on each property you evaluate. Due diligence ensures that:
- You don’t pay too much
- You avoid unforeseen renovation costs
- You work with independent, 3rd party appraisers and inspectors before you buy.
The right guide also helps you estimate vacancy and maintenance costs, and plan an exit strategy for each property.
Working with a guide who understands U.S. real estate investment lowers your risk, and saves you time and money. A guide helps you avoid common pitfalls such as buying:
- A house because it’s located near a relative or friend.
- Because you expect short-term appreciation in the neighborhood.
- A “vacation house” that’s also intended to generate income.
- The picked-over properties that are available through foreclosure.
- The properties available to the public through a real estate agent, rather than properties in the private real estate market.
The right guide also helps you create a legal, tax and banking plan. These plans are essential to succeed in U.S. real estate investing.
What Foreign Investors Will Need to Plan Ahead to Meet Legal, Tax and Banking Needs
A proper business structure, legal, tax and banking plan generates 3 benefits for foreign investors in U.S. real estate. It:
- Creates a business structure to shelter your personal assets
- Minimizes your taxes
- Ensures the free flow of money through a U.S. bank.
How to Create Your U.S. Legal Structure
As a foreign investor, you can hold U.S. real estate 3 ways:
- In your own name (not recommended)
- As a C corporation (C Corp)
- As an LLC (limited liability company), LP (limited partnership), or LLLP (limited liability limited partnership).
When you hold property in your name, you put your personal assets at risk. For example, your U.S. assets can be seized if a U.S. court rules against you. The more U.S. properties you own, the greater your risk.
That’s why many foreign investors form an LLC for each of their properties. Doing so builds a firewall that legally separates each property from the others and from your personal assets.
An individual or a married couple can own an LLC. LLC owners are called members, and LLC operators are called managers. Both members and managers are protected under the LLC business structure.
An LLC works best for foreign investors who have a single property, or 1 to 3 properties in a single state. If you plan to hold more than 3 properties, a Series LLC can save you money by reducing the number of annual filings and fees (except in California).
A limited partnership (LP) protects the owners are limited partners, but not the general partners who operate the business. Similarly, an LLLP protects the owners but not the operators.
What’s the payoff of forming an LLC, LP or LLLP? When an LLC, series LLC, LP or LLLP sells a property, it is taxed at a lower rate – 15% – than a property sold by a C Corp.
LLCs, LPs, LLLPs and C Corps all must file annual reports. Foreign investors will need to secure a resident agent (a legal agent for your company) and a mail forwarding service with its official mailing address in the U.S.
How to Pay the Least in U.S. Taxes
The United States taxes income at 3 levels of government: federal (U.S.), state and local. Most investors pay taxes at all 3 levels.
You have 3 options to pay federal taxes on your U.S. real estate investments:
- Stay completely outside the U.S. tax system. In this case, expect to pay about 30% of gross income in federal taxes.
- Register in the U.S. tax system to become eligible for a lower tax rate. You will need to file U.S. tax returns each year.
- Register in the U.S. tax system and make an ECI (effectively connected income) election. This is available only to active (not passive) real estate investors, and results in a tax rate of about 10%.
It’s your right to choose the option that leads to the lowest tax bill for you. Note that:
- If you are a nonpermanent resident of the U.S., you will need to get an Individual Taxpayer Identification Number (ITIN), which can take months to get.
- If you reside in the U.S. as a citizen or green card holder, you will need a Social Security number.
- Your company will need an Employer Identification Number (EIN), except in the case of a sole proprietor or single member LLC.
- Some states also require you to get a state tax identification number.
If you file federal income tax returns, you also need to file state tax returns in 43 states. Note that 7 states – Alaska, Florida, Nevada, South Dakota, Texas, Washington state and Wyoming – do not levy any state income tax. (To be clear, Texas and Washington state levy other types of taxes you may be subject to.)
In addition to income taxes, real estate investors should expect to pay:
- Transfer taxes on the sale of a property.
- Property taxes to local governments.
- Capital gains taxes (15% of your net gain) when you sell a property at a profit. Note: under FIRPTA (U.S. Foreign Investment in Real Estate Property Tax Act), a purchaser must withhold 10% of the fair market value to partially cover any federal gains taxes that are due on the sale.
- Estate taxes vary case by case. They depend on your home country, estate tax laws there, and the status of your home country’s tax treaties with the U.S.
Why You Need to Open a U.S. Bank Account
Since most property management companies will not wire dollars outside the U.S., you will need a U.S. bank account to access your income.
Most U.S. banks require that account holders show up in person to open, close or make changes to bank accounts. Banks require identification such as a passport.
To open a bank account for an LLC, you will need an ITIN, plus the EIN of your LLC.
That’s why many investors first open a personal account, then open an LLC account later, when the ITIN and EIN are both in hand.
If you’re a foreign investor thinking about investing in U.S. real estate, work with a guide who can help you create a specific game plan to succeed:
- Create a U.S. tax, legal and banking plan before you start to invest.
- Choose the right macro- and micro-markets to buy in.
- Do all the due diligence required to ensure solid fundamentals on any property you buy.
If you have questions about investing in U.S. real estate, we’re here to help you find good answers. Contact us at FreedomDoc@AlverniaCM.com or fill in this form.
Alvernia Capital Management is a private real estate investment company in Tennessee. We focus on rebuilding communities and building opportunities for investors.
We encourage respect and generosity by investing in young talent. We will be launching a foundation intended to become the preeminent developer of talent for deserving underprivileged individuals in the Caribbean and Bahamas, the birthplace of our founder, Dr. Rudolph Francis.