Everyone wants to buy US real estate because of the regulatory environment, stability, and economic growth. But, 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.
Sure, it sounds like a great idea, but how are you going to buy and manage something on the other side of the planet in a country you don’t really know?
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?
Once you’ve decided to invest in another country, you need to ask “why invest in US real estate” and not somewhere else. As a real estate investor you don’t want to limit your options.
Well, recently the US real estate sector has separated itself from other sectors in the US as well as from real estate in other countries.
The financial crisis is in the rear view mirror and the US economy is fueled by strong business and job growth. The US has a very stable real estate market and mature capital markets which compare positively to other countries.
Europe, being its most comparable area, has been embroiled in one economic crisis after another from Greece to Italy to Spain. Brexit, and strain on the welfare state from migration are just the most recent which can seen with widespread protests in France.
From a more micro perspective, US real estate has a lot of mature cities that have a lower cost than in many international cities such as London or Tokyo. While the US does have very expensive markets such as Los Angeles or New York City, there are a lot of core markets that offer good returns at a lower price point.
Additionally, the U.S. market is more liquid than other markets around the world and much more massive. So, it’s comparatively easy to sell and reinvest your capital somewhere else should your personal situation change or should economic conditions dictate your need to sell.
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
It easiest for U.S. Citizens and permanent residents to purchase US real estate. Foreigners have a more difficult time and have more hurdles to overcome. So, let’s talk about all the drawbacks you will face as a foreign buyer of US real estate.
No Fannie Mae and Freddie Mac
In the residential real estate market (1-4 units), Fannie Mae and Freddie Mac are the king of the home loan. Basically, they guarantee or purchase the majority of home loans so when they set standards, most banks and lenders follow suit. Unfortunately, they do not purchase loans from non-US citizens.
So, these are not an option for foreign buyers. You’ll have to focus on finding lenders that keep the loans on their own books and don’t sell them to Fannie or Freddie.
The problem for banks is that these loans are harder to sell on the secondary market. Foreigner buyers have a higher risk of default and it’s more difficult to collect unpaid balances if they live overseas. So, you will have a harder time qualifying and pay higher interest and fees to offset the risk they face.
Mortgages to Foreign Buyers Have Higher Interest
There are plenty of banks that will lend to a foreign national who lives outside of the United States, but they have to create loans that don’t conform with Fannie or Freddie guidelines and have to keep them on their own books.
So, they charge higher interest and higher processing fees.
They will also require a larger down payment to give them some more room in the chance that you default. Often they will require 30% or more as the down payment.
Generally, a bank looks at your income, your expenses, and your credit history to determine if you are qualified for a loan. For foreign buyers, it’s a lot more difficult for them to verify these things.
So, they will ask for a lot more documentation than they would ask of an American real estate buyer. This may include tax returns, bank statements, and any credit history available in your home country. They may require several months worth of bank statements, credit statements, and a huge variety of other documents, all of which is just to make them feel more comfortable extending a mortgage to you.
Because of all this extra underwriting, it will take longer for your loan to go through and finish processing.
To speed this up, you might want to apply for a loan at a bank in your home country that also does business or has a presence in the US. The bank will be able to verify your information more easily, but also extend credit in the US.
Fannie Accepts Green Cards or Work Visas
Fannie backed loans or FHA accept work visas. So, if you happen to be in the US, even for a short period of time, you may be able to qualify for one of these.
There may be some additional documentation requirements, but having FHA or Fannie backed loans will open a lot of doors, lower your cost and down payment requirements.
How to Invest in U.S. Real Estate
We’ve covered all the reasons to invest in the US and also all the difficulties you’ll face when trying to get a loan. Now it’s time to cover some basic information to help you get started as a foreign real estate investor buying US real estate.
The first thing to consider is what niche in real estate you want to get into.
Residential vs Commercial Real Estate
For some reason, residential real estate is considered any building with 4 or fewer living units in it. It is not exclusive to single family homes or condos which is great for investors if you want to get into small multifamily!
5 units and above multifamily is considered commercial, even though it’s residential living space. Also, all commercial office space, retail, etc is considered commercial real estate. This includes single occupancy buildings such a standalone pharmacy or restaurant.
The biggest difference to know about is how the price of real estate is determined. Residential real estate is based entirely on comparable sales and you can estimate the price based on a comparative market analysis. Conversely, commercial property is based entirely on the net operating income and capitalization rates in that market.
For residential property, to improve the value you need to improve the condition as compared to other similar properties in the area.
For commercial real estate, to increase the value you need to increase the income or lower the operating expenses.
It’s important to understand the difference between the two before choosing a niche. Each has it’s pros and cons and I invest in both types of real estate. But, you need a different approach depending on the type of real estate you choose.
Creating an Entity
Before you start shopping, you need to know how you will take ownership. If you are shopping for residential property, you will probably buy it using your own name. If you are buying commercial property, you will most likely need an entity to take ownership. This could be an LLC or Corporation.
Fortunately, foreigners can set up an LLC and the process is very simple.
The reason why creditors might want you to take ownership inside an entity is to protect the asset from liability elsewhere in your portfolio. Each LLC is a unique entity and the debts and liabilities in one are shielded from debts and liabilities in another.
So, if you do something silly in one property and a tenant gets hurt and sues, your other assets in separate LLCs are mostly shielded from this lawsuit.
The costs are slightly higher to own and operate a company, but the asset protection is well worth it both for you and for the lender.
Pick a Market
The US is massive and has hundreds of cities to choose from. You’ll need to pick one and focus on it if you want to have any chance of ever picking an actual property to purchase.
There are dozens of factors you might want to consider, but you’ll want to narrow it down to a few big factors first, then keep narrowing it down from there.
At first, you’ll want to consider the following major items:
You want to buy into a metro area and state that have positive population growth. This shows you that people want to live here and will move here from other places
You want to see new businesses opening and moving here from other areas. This shows the state and population have what businesses want – smart, educated, and hardworking employment base.
Generally, you don’t want to buy into a city that derives most of its jobs from one source. Good examples might be mining, oil, tourism, shipping, etc. If the majority of workers are employed in one industry, and the rest of the employment supports that industry, then you are set up for big problems if there is any issue in that industry.
Building Your Team
Once you’ve got all the admin stuff out of the way such as qualifying for a loan and establishing your entity, you’ll want to build a team in the city you will purchase in. Before you start looking for property, you will want to build your team.
You’ve already built some of your team, but there are still others you need to find. You should have already found a mortgage broker/lender, but now you need a good property manager, real estate broker in your target city, insurance agent in the target state, and contractors as well as inspectors.
You’ll need each one at some point and it’s good to build relationships with them before you actually start searching for property and need them. This way you won’t be scrambling around at the last minute.
But, be mindful of their time. You don’t want to take up a ton of their time asking questions when you have no business to offer them yet.
Searching For a Property
It’s finally time to start searching for property. If you’re looking for residential property, your agent will provide you suggested listings or set you up on an automated service that delivers listings to your email.
Commercial real estate is a bit trickier and will require you to know several brokers as well as use a service such as costar or LoopNet. In general, if you are buying commercial real estate, you need to get on the email list of the commercial brokers. So, you’ll need to call them all and ask to be on their distribution list.
Don’t be scared to make offers! Determine the value to you and make an offer based on that. If you are under the asking price, that’s OK. If you are over, that’s OK too.
The key is to make sure you get accurate financial information before making an offer. If possible ask for tax schedules or a trailing 12 month profit and loss statement. Smaller properties often don’t have these details so you’ll have to guess a bit more.
Next, take your numbers and put them into a real estate calculator so you know the cash on cash and overall return on investment. Once you know your returns and offer price, contact your broker and they’ll walk you through the process to making an offer.
Real estate is all about making assumptions then verifying those assumptions through diligence. In other words, it’s about taking risks then mitigating those risks.
What I mean by this is that you don’t have all the information available to you when you are putting together an offer. Sure, you’ve seen the general condition, some tax information, and rent roll/expenses, but you haven’t seen every unit, talked to every maintenance person, know your interest rates, etc.
Once your offer is accepted, you need to go through every line item and verify it’s accuracy. If it’s inaccurate, you need to adjust your calculator with the new information.
Once you’ve adjusted every item, you need to go back and consider if the deal still works for you or not. Don’t be afraid to back out at this point, but don’t get upset over small differences either.
At a minimum, you will want to verify the:
It seems like a lot, but that’s why you’ve built a team. Each one of those people will help you verify a piece of information that will help you make a good buying decision.
One Thing About Banking
To help avoid financial crime, there is a law in The United States called the “know your client” law which requires the bank to know who they are working with. In general, someone at the bank needs to know you in some capacity. This could be with an ID and an in person conversation, or it could be more or less.
Some banks allow you to do everything electronically. They may require you to fax or email copies of your ID or talk to them on the phone to establish that relationship.
Another way to open a bank account and work within the law is to establish a US account with a bank that operates or has a partnership in your home country as well. You can open the bank account in the US but verify your identity while being overseas.
Another way to avoid this hassle is to hire a property manager and just pay the costs of an international wire fee every quarter. They can collect your rents, pay your bills, and wire the profits to you every 3 or 6 months.
They say only Death and Taxes are certainties in life. In other words, the IRS always collects what’s due to it, so don’t try to avoid it. It’s better just to understand the requirements and do it.
Taxes are complicated, and they can be especially complicated with real estate because the tax laws of more than one country might apply. This is because different nations have different tax treaties with the U.S., so it’s really important to consult with a tax expert in your country as well as one in the U.S. to understand everything and make sure you are in compliance.
No treaty allows you to avoid taxes in the US, but some treaties allow you to pay just taxes in the United States. Other treaties require you to pay taxes in both the US and your home country. Additionally, the tax rates may vary depending on your nationality.
So, read the treaties, understand them, and consult with a tax professional or two.
Tax Benefits to Real Estate
In the US, real estate has some of the best tax benefits of all. You can offset the vast majority of your income and often pay little to no taxes 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.
Often, you can find yourself with a ‘negative income’ on paper even though you collected rent all year long and have a profit. You can carry those ‘losses’ forward to the next year and offset even more profits.
The only catch is the IRS will capture these taxes back when you sell. They’re pretty smart over there at the IRS and know that you’ll defer most profits until sale, so all foreign owners of real estate will have an automatic 10% of the sale price withheld by the IRS until taxes are filed.
Don’t worry, they will refund the difference if you overpaid, but you will also owe any difference if that 10% wasn’t enough to cover your taxes.
Other Ways to Invest in Real Estate
There are a lot of nuances to know and it can seem overwhelming. Nothing we laid out is any more challenging than investing anywhere else in the world (in fact, it’s probably easier in the US than elsewhere). But, if owning your own property is too difficult, there are other ways to have real estate in your portfolio without actually purchasing any physical property.
Real Estate Crowdfunding
Around the year 2014 real estate crowdfunding came alive. Crowdfunding is where you can pool smaller amounts of funds together with other investors to purchase real estate.
In general, you need to have a US based entity with a local bank account. That’s because the deal sponsors don’t want to withhold 10% of the value upon sale to meet the IRS requirements for withholding.
So, create your LLC and set up your bank account and you can invest in real estate via crowdfunding.
ETFs and REITs
Another way is to buy into Exchange Traded Funds or Real Estate Investment Trusts via the stock exchange. These are generally traded on the open market and you’ll need to meet the requirements that all foreign investors in stocks need to meet.
You’ll be buying a fund that invests in real estate without having the purchase the real estate for yourself. You won’t earn as much because of the management fees they charge, but you also won’t have to jump through all the hurdles of buying real estate.
There are few laws about conducting business in the US as a foreigner. As long as your company is set up, you have a bank account, and follow the law, you can do business.
So, you could become a private lender. Basically, instead of buying real estate yourself, you could be the ‘bank’ that lends on the deal. Investors are often looking for short term loans at a high interest rate to fund their deals.
If you know some investors, it may a good option for you.
Don’t Be Intimidated
Real estate investing is a big undertaking regardless if you are a US citizen or a foreign national.
You just need to know the steps, understand the risks, build the right team, and work hard at it. If you do all that you can achieve anything, including buying real estate in the US.
Chicago Real Estate Mogul: Here’s How You Flip Houses
Chicago-based Sean Conlon is a real estate investor extraordinaire. He started his career in the early ’90s, quickly becoming the top residential realtor in the nation with nine figures in annual volume.
Conlon’s the host of CNBC’s real estate show The Deed. In this video, Sean gives some insights into how to become a real estate investment master.
4 Tips For Managing Your Airbnb
I’ve been talking a lot about vacation rentals lately.
No, I haven’t gone out and bought one…yet. But, I want to!
And interesting factoid… Nearly 45 percent of all real estate purchases in the United States are made by people in search of profit. Investing in a short-term rental property is a great way to generate a steady income stream.
With the use of websites like AirBnB, just about anyone can turn a condo or house into a short term rental property. This is a great source of income for many families, and can be for you too!
But, most investors think that managing a short-term rental property is just too much work. The reality is, it’s not easier or harder than any other rental, you just need the right management in place.
There are a lot of options out there, but I’ve recently stumbled upon some software such as Rentbelly, which helps you manage property like this and makes it a lot easier.
The biggest hurdle that you will have to overcome as a short-term rental property owner is keeping enough bookings. This hurdle can be overcome with the development of a comprehensive marketing strategy.
Here are some essential tips for properly managing your short-term rental property.
1. Get A Feel Of What’s Happening In Your Local Area
Renting out your property in the off season can be a bit difficult. The only way to combat the lull that occurs during this low season is by staying up to speed on the events happening in your city. Knowing what events are coming up in your area can help you market your rental to the right audience.
Running targeted Facebook ads is a great way to connect with prospective customers. These ads allow you to target Facebook used based on things like their occupation, location and age. Once you know what type of event is happening in your area, you can make decisions regarding what type of people may attend this event. With this information, you can fine tune your Facebook ads and get more bookings.
2. Set The Right Minimum Stay Requirements
Setting the right minimum stay limit is crucial when trying to make money with your short-term rental. Ideally, you will want a higher minimum stay limit. While this may initially deter certain consumers, it will allow you to make more money in the long run.
Accepting a one night booking in the middle of a week can make you miss out on a one week booking later on. Realizing that short-term rental success is a numbers game is your first step to achieving your financial goals. Setting a minimum stay of three to four nights will guarantee that each booking will have a higher value overall.
3. Focus On Keeping Your Property Well-Maintained
In the world of short-term rentals, only the most pristine properties get consistent bookings. This is why you will need to devote time and money into keeping your rental property in good shape. If you are like most property owners, you simply don’t have the time to do this work on your own.
Instead of letting your short-term rental fall into a state of disrepair, you need to hire professionals to perform essential maintenance. With a minimal investment, you can avoid extensive repairs and keep your property booked solid.
4. It’s All About Great Customer Service
If your short-term rental is located in a larger city, chances are there is a lot of competition. Finding a way to set your property apart from competitors is something you need to view as a priority. One of the best ways to do this is by going above and beyond for your guests on a consistent basis.
Anytime a guest calls you with a problem, you need to address it in a timely manner. By providing guests with this type of service, you will be able to get great reviews from them. These reviews are like gold when it comes to attracting new bookings for your property.
Here’s How To Get A Mortgage You Can Actually Afford
So, you’ve finally decided to purchase a home. After years of contemplating if you should buy or rent, then saving, building your credit etc, it’s now time to dive in and get it.
Purchasing a home is exciting. After years of dreaming, you’re finally getting a place that you can call your own.
It’s really easy to get caught up in the excitement making you forget to ask one crucial question – how much “home” can you really afford?
…and, once you decide how much you can afford, you should stick to it. It’s all too easy to decide on a price, then find the home of your dreams is only $25,000 more. Then you start thinking, “we can make this work…” But, can you really?
According to statistics, the median monthly mortgage payment for homeowners in the U.S. is $1,030. That’s a lot of money.
While you may love the fabulous kitchen or huge backyard one house offers – if you can’t pay the mortgage every month or get the cash to fix what’s broken, your home’s never going to be a blessing.
The good news is, determining how much ‘house’ you can afford isn’t rocket science. You can use the four tips here and utilize online tools to help you figure things out.
Build a Solid Foundation
There are countless people who have gone broke by buying a house simply because they believe it’s the “grown-up” thing to do. However, life events such as having a baby or getting married aren’t reasons to buy a house.
The time will be right when the money is right. Before trying to figure out how much house you can afford, be sure you are financially ready to purchase a home.
To do this, ask yourself the following questions:
- Are you debt free and have an emergency fund of three to six months put back
- Do you have enough cash to cover moving expenses and closing costs?
- Can you afford a 15-year-fixed-rate mortgage?
- Can you make a 10 to 20 percent down payment?
- Do you have enough money to set aside each month into passive investments above and beyond your mortgage?
If you answered “no” to any of the questions above, it may not be the right time to purchase a home. Wait until you have a better financial foundation.
If you are currently financially stable, then move on to the next tip.
Maximize Your Down Payment
One of the biggest costs in a new mortgage is PMI or MIP. Both of these are different ways of saying that you need to pay an extra fee every month because you didn’t put enough down.
If you can get to 20% or more, then you won’t have to pay mortgage insurance for the lender. This can save you hundreds of dollars per month.
When buying a home, remember – the more money you can put down, the better. Higher down payments mean lower mortgage payments every month and the ability to pay your home off faster.
While the best option is to pay 100 percent of the home cost in cash, this isn’t viable for most. If this is the case, then try to put down at least 20 percent. By doing this, you can avoid paying for private mortgage insurance.
Calculate the Costs
All you need to do to figure out what you can afford when it comes to buying a home is to crunch a few numbers. If you need help with this, consider using a mortgage calculator with down payment, which will help you figure things out.
If you want to do things manually, consider the following:
- Add up all the income you bring in every month. If you bring home $2,000 per month, and your spouse makes $3,000, then your total monthly take-home pay is $5,000.
- Multiply your total monthly take-home pay by 25 percent to determine your maximum mortgage payment.If you are bringing home $5,000 per month, then it means that your mortgage payment should not be over $1,250 each month, including insurance and taxes.
Remember, your bank or lender will tell you that you can afford WAY more than that. In fact, some loans allow you to get to 40% or even 50% of your income going toward loans. While they may allow it, it isn’t financially smart to borrow every dollar you can afford.
Don’t Forget About Maintenance and Capital Expenditures
When comparing if you should rent or buy, most people look at the total rent, compare it to the mortgage, and say it’s better to buy a house.
What you are forgetting is that rent includes all the maintenance costs in a home whereas a mortgage does not.
As a general rule of thumb, it’s good to plan on spending around 1% – 2% of the total home value every year in maintenance and CapEx.
Major capital expenses are things like a roof or HVAC that last for several years. Even though you might have 10 years left on your roof, you should start saving for it now, along with the dozens of other major items that will not last forever.
So, if your home is $200,000, you should think about adding another $2,000-$4,000 per year in maintenance and capex. You definitely won’t be spending this much every year, but what you don’t spend now will be spent in a year or two when you have to replace a $12,000 roof, replace a garage door, etc.
If you have higher end appliances and fixtures, you should be more toward the 2% whereas standard grade homes can be closer to the 1% mark.
When you know your numbers, you will be able to shop for a mortgage and a home with confidence. Trying to determine what you can afford without considering the tips here may leave you with a home that’s going to cause you financial hardship in the future.
Remember, buying a home is not an investment, it is an emotional decision. Once you recognize that, you can begin to take it seriously and make decisions based on actual facts, rather than be driven entirely by your desires. If you base everything on the emotions involved with buying a home, you’ll dive right into a mortgage that you can’t really afford.