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Basic Guide For Foreign Buyers of Real Estate in the USA
As the Great Recessions is slowly but surely fading away with the hopes of eventual recovery showing up on the horizon, foreign buyers and investors starting to pursue opportunities in the US real estate market again. Even though stable recovery of the housing market is still “work in progress”, many foreigners recognize that American real estate is “On Sale”, plus the dollar is historically weak, so many buyers are trying to snatch the bargains in residential and commercial properties here. However, a foreign buyer investing in the US must take extra diligence to plan the acquisitions due to nuances in taxation laws, title holding rules, money transfer rules and many other factors. There are many aspects to consider, I’ll concentrate on some key points:
(1) DOCUMENT EVERYTHING: Before you transfer even a dollar here, make sure you can verify where the money came from. Any transfers over $10,000 into the US, including your all cash real estate buys, will be reported to the federal authorities, and when the Feds come asking questions, you need to make sure that you can prove legal sources of your cash. According to 2001 Patriot Act and the Money Laundering Control Act of 1986, escrow and title companies, brokers, banks must report to the federal authorities any large deposits and money transfers over $10,000. Make sure you have documentation backing up your sources of income, taxes paid overseas, bank account statements, investment account statements, in other words – the paper trail.
(2) FINANCE OR ALL-CASH? If you are planning to buy with all cash, it will give you many advantages as the “all cash” buyers might enjoy deeper discounts from motivated sellers in many areas. All cash buyers can close deals very fast, and some sellers prefer to deal with buyers like this. However, I recommend that you plan the acquisitions with a real estate investment adviser to see if buying with some type of financing will be financially more beneficial for your investment strategy because of leverage-enhanced ROI and distribution of risk among several properties.
If you’re looking to finance your real estate acquisition in the US, be prepared to encounter some tough times. Real Estate Financing is pretty tough for even Americans these days, but for foreigners it’s even tougher. There are only a handful of institutional lenders who will consider loans for foreign nationals, but they will all require a large downpayment (at least 30% or more) and verification of income from your country. If you have a work visa in the US, such as H or L, and have an established credit history in the US, you may be able to qualify for regular financing with as little as 3.5% down even though you are still considered a “foreign national”.
If you have established relationship with your bank in your own country or another foreign bank, you may consider obtaining financing from them and then bringing the loan proceeds into the US as “all cash” purchase, again just make sure to have documentation as to where the money came from.
Alternatively, there a many private lenders who will lend up to 65% of the asset value at 9-12% annually regardless of your immigration status, and if you are looking for a commercial property, you might be able to finance it easier too, because commercial lenders underwrite loans primarily on the merits and income of the property itself, rather than the borrower.
(3) CONTROL YOUR ASSETS: In the US you can hold title to the property in many different ways: as an individual, corporation (either domestic or foreign), Limited Liability Company, partnership, living trust, pension fund, or many other form of entity. Each of these forms has advantages and disadvantages, especially when it comes to taxation of the rental income received from your investment property, transfer of the property to related or unrelated parties, estate planning and many other situations. You need to decide BEFORE you buy a property in the US how you will own the property, spend some time with a knowledgeable international tax advisor to learn about your options.
Investing in real estate is a very hands-on enterprise. You must think through the details before you buy the first property. It’s very hard to operate a rental business when you don’t see what’s happening yourself. I’m working with many investors and have owned many rental properties, and can tell many horror stories about property management companies embezzling money from out of town investors, renting units for cash but reporting them vacant, overinflating repair bills, etc. How are you planning to control your investment physically while living in India or Russia and owning properties in the US?
(4) BEFORE YOU ENTER, PLAN YOUR EXIT. Are you planning to sell for profit? How long before you sell? Did you account for the future capital gain tax? Will you take the money out of the country? If you are planning to sell for profit but re-invest proceeds into another property, you need to become familiar with 1031 tax-deferred exchanges that allow you to trade and consolidate properties for years and decades without paying a dime of taxes until their final disposition. It’s a great tool for smart investors that can make you very rich, but again, you have to plan for this strategy in advance and consult with a knowledgeable person. Besides, when you are selling a property here as a foreign individual, you are subject to all kinds of withholdings regardless if you made any profit or not, including 10% withholding under FIRPTA just because you are a foreigner, 3 1/3% withholding in California because the property is non-owner occupied, etc. But, you can avoid some of these withholdings if you learn the rules and plan your title holding strategy in advance!
(5) VISA CONSIDERATIONS: Important misconception I see among many foreign buyers that I’d like to address here: don’t assume that owning real estate in the US will automatically entitle you to a US visa. You can own $10 million of properties in the US, but still be denied an entry visa. So, make sure to get your visa status cleared first and then come to the US to look at areas of interest and specific properties. DO NOT EVER BUY PROPERTIES SIGHT UNSEEN!!!
(6) WHY REAL ESTATE? Finally, ask yourself honestly: why are you investing in real estate in the US? Because of visa, passive income, future market appreciation, or because you are thinking of making it your future home? If visa and investment potential are your main decision factors, consider some alternatives that can provide you with similar ROI (return on Investment) and visa opportunities, such as EB-5 visas ($1 million dollar minimum), “Regional Centers” ($500,000 minimum), E-2 small investor visas ($200,000 investment), etc. Or you can combine several strategies, depending on your preferences and access to capital.
Bottom line: your investing in real estate here should be a RESULT and the FINAL STEP of some serious planning path. Measure seven times, cut once, as we say in Russian. It’s much easier to avoid costly mistakes before you step into this market than waste time and money undoing mistakes made in the course of a rushed poorly planned real estate venture. Happy Investing!
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