The surprising challenges of investing in U.S. real estate

Founder and CEO , SVN Rock Advisors Inc.
  • Apr. 9, 2019

Real estate is one of the most sought-after investment vehicles.

Whether it’s commercial, industrial, or multi-family residential, these investments offer considerable passive income and appreciation. The United States, being the largest economy of the world, where investments are traditionally among the most secure in the world, is one of the most sought-after markets in the real estate industry.

However, for investors seeking to invest from outside the United States, the country puts up considerable barriers which are challenging if you aren’t familiar with the laws. In many cases, international investors who find themselves ill-prepared for the task, or partnered with real estate brokers lacking the experience to navigate the complicated process, end up walking away, losing out on the benefits the U.S. market provides.

Listed below are just some of the barriers international investors encounter when going cross border to try to purchase American real estate.

Finding the right properties

One of the biggest barriers is that, if an investor doesn’t physically travel to the country and do their research, they are buying blind.

Many experts suggest it can be a six- to 12-month process to find the right property, make an offer, arrange financing, and close the deal. They recommend planning at least one cross-border trip to see the potential property before committing to buy.

Without a team working on an investor’s behalf to vet potential properties and find the right investment, a cross-border investor is at a considerable disadvantage when trying to enter the American marketplace.

As it will already cost the investor considerably in terms of fees and third-party contracts, it’s important the right property be found so the return on the investment is worthwhile.

A complicated and opaque process

Cross-border investing faces a number of regulatory and bureaucratic complications.

Deals might require U.S. bank accounts, U.S. credit scores, even representatives with U.S. citizenship. It’s important for an investor to know what hurdles they will encounter. Unfortunately, many American real estate agents themselves don’t know.

According to the North American Association of Realtors, 20 per cent of real estate agents have been in the business for less than a year. The overwhelming majority of deals agents have experience with are between Americans, so it is difficult to find an agent experienced in cross-border real estate investment.

This lack of transparency will mean more middlemen to ensure the property transfer occurs smoothly and legally, and this means increased fees. Other fees that could plague an international investor include currency exchange fees, bank transfer fees, attorney fees, investment fees and the traditional broker fees.

American tax surprises

Then, there is the issue of taxes.

It is complicated enough to go through the taxes related to property transfers and capital gains in one country, so one can imagine how the pain increases when a second country gets involved.

In recent years, American taxes have been notoriously in flux, with changes approved by the United States Congress suddenly afflicting ex-pats and individuals with cross-border investments. This is over and above the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which withholds income tax on foreign investment, cutting into an investor’s bottom line.

Capital commitment and liquidity

With its considerable benefits, real estate investment comes with considerable risks.

One of the challenges is the limit to how fast an asset can be turned into cash. Unlike stocks, real estate investments can’t be listed on a public exchange. The overall supply of buyers is lower, which depresses prices, particularly if the investor needs to sell their asset quickly.

Cross-border real estate investment also requires significantly higher capital investment than at home. Whereas a 20 per cent deposit is usually sufficient to secure financing for an investment, cross-border investors often need to put down 50 or 60 per cent.

The problem is that investors don’t have an American credit history, and financiers are unfortunately less likely to trust such investors. As a result, many international investments are conducted in cash, locking in considerable capital in an investment that might be tricky to get out from, should the need arise.

All of these pressures slow real estate investment transactions to a frustrating pace.

A study by the Juwai Chinese Consumer International Travel Survey found 56 per cent of Chinese investors spend a year or more finding the right investment property in the United States and then closing the deal. Many other investors walk away.

About half the respondents in a study of international investors who decided not to purchase U.S. property cited not finding the right property as one of the key factors; 34 per cent cited the cost of their preferred property, and 32 per cent cited an inability to obtain financing.

Finding the right team to smooth the process

While these challenges exist, they can be mitigated, if investors turn to brokers experienced in cross-border investments.

International agencies like SVN and its affiliates have built up years of experience in dealing with American tax law, third-party fees, financial arrangements and managing closing costs.

They have become adept at linking cross-border investors with properties that meet their immediate and long-term needs, and they’ve built up a network of contacts who can navigate the rough waters of cross-border bureaucracy and connect the investors to sound properties with a strong return on investment.

The real estate market in the United States is too valuable to be ignored. By connecting with an experienced brokerage team that understands the unique challenges of cross-border investing, international investors can reap the benefits of the American market, without running afoul of the obstacles.

SVN Rock Advisors’ cross-border investing approach involves a multi-tiered ownership structure in order to avoid excessive taxation or liability. 

Derek Lobo is the CEO of SVN Rock Advisors Inc., a unique full-service brokerage firm. He has focused his entire career on the North American apartment building business. He’s recognized…

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Derek Lobo is the CEO of SVN Rock Advisors Inc., a unique full-service brokerage firm. He has focused his entire career on the North American apartment building business. He’s recognized…

Read more

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