Foreign Real Estate Investment in the US is Profitable: 6 Reasons (2024)

Many people believe that real estate is the best investment option available in the United States, and for a good reason. The stability and security of property values, combined with historically low-interest rates, means that now is an excellent time to invest in real estate. And as a foreigner, you may wonder if this type of investment is right for you.

In this blog post, we’ll look at some of the benefits of investing in U.S. real estate and answer some common questions foreigners have about the process. So if you’re considering investing in America, keep reading!

Is Investing in US Real Estate as Foreigner a Good Idea?

Real estate, in general, is an excellent option for investment. Investing in real estate can be a good strategy if you plan on building your wealth. Once you invest in a real estate property, it can become an excellent long-term investment since the property’s value may increase over time. Or if you put up your property for rent, you can also generate a good enough passive income from it.

As a foreigner, investing in the U.S. real estate market comes with a lot more responsibility than just buying and owning a property. For one, you will be required to spend a certain amount of money to begin.

Buying and investing in a real estate property like an apartment, residential property, commercial property, or complex can be expensive as it comes with costs related to the property’s maintenance and income gaps if you are between tenants for a time.

If you’re strategic about buying property and have a solid plan for the future, you can easily finance your purchase. Furthermore, if you take the time to save up in advance, your savings will come in handy.

6 Reasons Why Investment in the U.S. Real Estate Market is the Best for Foreigners

The U.S. real estate market, can bring various opportunities for foreign investors to generate good wealth and uplift their portfolios on the side. Likewise, here are six reasons why the U.S. real estate market is the best option for a foreign investor:

Lack of restrictions by the U.S. government

The Government of the United States does not restrict any foreign national from buying an investment property in the US real estate market. In addition, there are no additional tax regulations on foreign investors in the U.S. Here’s how you canpurchase a property as a foreign nationaland non-US resident in the U.S.

According to the National Association of Realtors, almost $1 trillion worth of U.S. real estate has been sold to foreign investors in the last ten years. This proves that U.S. real estate market is highly accessible with fewer restrictions on purchasing a property.

Good stability

Asset forfeiture laws are much more strict in the United States. The government may seize properties for various reasons, including constructing a transportation or utility network. The government has also historically given fair compensation for confiscated property. Because of these governmental restrictions, the U.S. housing market is relatively stable, making it an attractive investment for foreign investors.

Furthermore, house values in the United States are anticipated to increase by 17.3% over the next year (Per Zillow Home Value Index), making this a fantastic chance for foreign investors to profit from dollar appreciation.

Higher rental yields

“Rental yield” is a term that covers the total yearly rental income in comparison to the cost of the property. More specifically, it’s what landlords can anticipate making annually before taxes, upkeep fees, and other miscellaneous charges are figured in.

The U.S. is high in demand for rental homes and tenants. According toZumper Year-End Rent Report, the cost of renting two-bedroom apartments increased by 13% in 2021. An investment property can be helpful in bringing out good rental income if leased in the U.S.

Diversification of investment portfolio

If the stock market crashes, your assets in the form of investment properties may still be appreciating, saving you from any potential losses. Furthermore, having a diverse portfolio bolsters your reputation as a savvy investor.

Highly accessible real estate market

The U.S. real estate market, is a desirable destination for foreign investors because of the diversity of investment opportunities and lack of restrictions on purchasing a property.

Compared to other investment assets and techniques, real estate investments in the U.S. are easier to fund and finance.

According toFit Small Business, you may borrow up to 90% of the purchase price, and interest rates are frequently lower than anticipated ROI. For example, the average interest rate in 2022 will be about 4.73 percent, and mortgage interest rates have not exceeded 6 percent for almost 15 years, as shown in the graph below.

Tax deductions and advantages for foreign buyers of real estate

When foreigners rent out their residential property in the U.S., they must pay a 30% tax on their rental earnings. Although them being a foreigner who owns the property, they only need to pay taxes on their net rental earnings for U.S. tax returns. This means the person could make various tax deductions on mortgage repayments, insurance payments, maintenance, repairs, utilities, property management, homeowner association fees, etc.

There is also an option for 1031 exchange which can help you save the maximum amount on your tax deductions. Section 1031 allows you to defer taxes when you sell your property and reinvest the profits and gains into another similar property.

Plan Out Your Real Estate Investment in USA Beginners

Paying in cash

One thing to note before buying a real estate property for investment is that many real estate finance professionals and experts advise not to borrow money to purchase assets. The reason is-

For example, you buy an investment property through a mortgage and put it up for rent. Most likely, you will get a high turnover and loan repayment through the rent; however, if you don’t have a renter for some time, you may not be able to repay your mortgage loan, which can result in financial difficulties.

Moreover, If you can’t make your mortgage payments, it may harm your credit score and cost you money in the long term. Even if you cannot pay in cash, there’s still a way to get a mortgage with no U.S. credit.

However, as a foreigner, you can still get a mortgage loan without having a credit score. Yes! HomeAbroad can help you through the entire process of getting a mortgage loan with no U.S. credit score with just a few simple steps.

Furthermore, If you’re looking to purchase a property by borrowing money, make sure you can afford the mortgage payments without depending on rental income.

Strategize your expenses

As a foreigner, purchasing a real estate property in the U.S. also comes with the cost of taxes, repairs, maintenance, and other utilities. If you do not have enough time to check every detail of the property and its maintenance, you can go through a rental company in this case. A rental company will take care of any repairs, upkeep, and rent collection of your property.

Working with a rental company can be costly, but it can help ease the hurdles of maintaining a property. Relying on a rental agency can be a good option if you don’t want to handle all the responsibilities of owning property or don’t have enough time and resources to keep track of everything.

Make sure you price your rental property high enough to cover all fees and other required expenses comfortably. You should also save the first few months’ worth to cover property repairs. It’s also essential to have insurance on the home (and plan for the expense). Finally, it would be best if you were prepared to face any new costs and other issues, perhaps with a sinking fund for the property.

Do your research

If you plan on buying an investment property that you wish to sell later, the most important thing to do before that is to go through the deed. You can start by looking into the area you are buying in, find out if any new roadways are being constructed near the land you’re buying and how that will influence the property’s value.

If you’re buying a house and the seller says they can’t move, there may be a reason. First, you should check whether there’s a mortgage on the property and if it has any liens or judgments against it. You might also wish to think about comparable properties in the area, including whether it’s becoming increasingly popular and other external factors that could influence home value.

Investing is a risky business. At times your investment might make you money, but there’s also a chance it could decrease in value. Areas that you predict will grow may not always end up doing so, and places that were once valuable may lose their luster, but once you are done researching thoroughly, you can make the best investment decision. A CIPS (Certified International Property Specialist) agent can help you find the property that align with your investment goals.

Have a humble start

To begin investing, some real estate investors start by buying a double-story house, living in it, and renting out the rest of the space. This is a great approach to get started, but remember that you’ll be living next door to your tenant. If you’re tight on money but wish to enter the real estate market, know that wholesaling might be your investment strategy.

Moreover, set up a budget in which you may easily cover your monthly mortgage payments while still living comfortably without any additional rent payments.

As you get more comfortable being a landlord and managing an investment property, you may want to acquire a bigger house with greater income potential. It’s simpler to buy and maintain additional properties—and earn a higher investment return—once you’ve acquired several houses.

What are the Different Ways to Invest in a Real Estate Property in the USA as Foreigner?

Rental Properties

Suppose you like to take an interest in doing things by yourself and want to plan out stuff about property renovation and have the skill and patience to do so. In that case, owning a rental property can be an excellent chance for you to DIY as a foreigner in the U.S. You’ll need to have a sizable amount of money saved up before planning your property’s makeover. This is to help cover costs like maintenance and vacancies when you don’t have tenants.

U.S. Census Bureau data indicates that sales prices for new homes (a rough measure of real estate values) rose steadily from the 1960s to 2007, then dropped during the financial crisis. Afterward, sales prices picked up again and even surpassed pre-crisis levels.

The total long-term effects of the coronavirus pandemic on real estate values have not yet been determined.

House Flipping

House flipping can be a great experience for you if you have a prior experience in real estate investing. House Flipping requires expertise in the real estate market with marketing, renovation, and real estate valuation. It also demands capital, time, and the potential to supervise any maintenance that is needed on the property. In addition, real estate flippers are unique in that they often seek to profitably sell the undervalued properties they purchase within six months or less.

You can also indulge in a long-term investment through house flipping. You can buy a reasonably priced property and add your own touch to it by renovating it. This might be a long-term investment in which you purchase one or two houses at a time and improve them.

Real Estate Investment Trusts (REITs)

Foreigners investing in the U.S. can try investing in the real estate market through REITs. A REIT is a type of investment where you invest in a company that owns properties. The company gives you money from the rent people pay to live in the properties. This is a popular investment method because it’s easier than owning property. You don’t have to be a real estate expert to do it.

Non-residents who mainly reside in their home country and are looking to invest in the U.S. real estate market have the advantage of not being taxed on their income. Since they do not work or generate their primary income from the United States, they cannot be taxed on their income. As a result, only dividends are typically taxable, even to non-resident aliens.

Because you do not live in the United States, you will not be required to oversee everyday property operations personally.

If an investor were to invest in a REIT, they would have an easier time selling the investment if need be. Even though owning real estate is not always easy to sell, someone who doesn’t live in the country can sell their units within the REIT Fund.

FIRPTA

FIRPTA is the Foreign Investment in Real Property Act. For non-resident aliens selling US-based real property, the U.S. government wants to ensure they are paying taxes on the gains. Therefore, the IRS requires non-residents to go through many hoops when selling USRPA. For example, there is a 15% withholding requirement on the gross price, not the sale price. Sometimes, this may be avoided by jumping through other groups and obtaining a withholding exemption certificate.

The U.S. government wants to be fair and square with everyone doing business in the United States, whether a U.S. resident or a non-resident alien. Therefore, they want to ensure that everybody pays taxes on their gains. Here’s when FIRPTA comes in, FIRPTA is the Foreign Investment in Real Property Act. Under the U.S. tax code, a seller is required to withhold 15% of the gross price and not the sale price if they sell real estate in a foreign country, resulting in what is known as “netting” fees that can be a bit expensive.

Foreign residents investing in REITs can avoid the FIRPTA tax only if they meet certain requirements to prevent tax deductions like the Domestic Controlled exception. In addition, some treaties can help reduce the tax withholding on foreign investors. In general, the withholding is 30%.

Online real estate Investing platform

Online real estate is an exciting platform for those looking to invest in big commercial or residential deals with others. The term ‘crowdfunding’ is used when an investment is made through an online real estate platform.

This still necessitates investment cash, although not as much as purchasing a property outright. Online platforms link investors wanting to finance projects with real estate developers. You can diversify your assets with minimal money in certain situations. This is an excellent option for foreign nations who want to invest in the U.S. real estate market without being physically present in the U.S.

3 Considerable Factors for Foreigners Investing in the US Real Estate

Asset Protection Strategy

Planning asset protection is necessary when investing in a foreign country like the U.S. It can protect you from any litigation risks in the U.S. Many foreign investors in the U.S. go for an LLC. A Limited Liability Company is a type of business structure in the U.S. that protects its owners from being responsible for their personal liabilities and debts. An LLC is a well-planned structure that is also more tax efficient, depending on where you live and your tax situation.

Many people in the United States use LLCs (Limited Liability Companies, which is a transparent structure different from a corporation) to hold their properties. For example, some people put every individual property in its own LLC, while others will put two to five properties in one LLC.

Whatever you do, you will need to put properties in an LLC in the state where you’re investing.

There are various ways you can use an LLC. Many people buy an LLC for every individual property, whereas others prefer to put 2-5 properties in a single LLC. Whichever way you choose, you will have to put your properties in an LLC in whichever state you are investing in.

An LLC protects your assets if someone sues you for an injury they sustained on your property.

U.S. Tax Returns

Knowing about your tax returns is an important thing to understand when you are investing in the U.S. The tax treatment can differ for different foreign investors in real estate. You must make sure you’re paying your dues to the IRS promptly, and you will have nothing to worry about the IRS if you do everything correctly and legally.

You can also look for a professional tax preparer with experience in working with foreign non-residents in the U.S.

Although you likely won’t have to pay much in taxes if you’re only bringing in small amounts of rent and taking depreciation, be sure everything is organized because the penalties for not doing so are quite severe.

If you have an LLC and operate a business, you must submit an informational return called Form 5472 for each one with activities during the year. The fine for not submitting it has recently risen to $25,000. This regulation applies to real estate investors and to anyone who employs U.S. structures.

Avoid Estate Tax

You would think that if you didn’t live in the United States and died, the U.S. would not take any of your assets. However, this is not always the case. Even if you don’t live in the U.S., your estate can be taxed when you die if you don’t follow the right strategies.

If you’re a U.S. taxpayer, you can claim a multi-million dollar estate tax exemption that applies to your whole life through the unified estate tax credit. However, your exemption upon death is significantly lower if you are not a U.S. citizen. For example, you will be subject to the estate tax if you own one good rental property. The United States will then demand payment of any outstanding taxes after your death.

“What’s my connection to the United States? Why am I paying this tax?” you might wonder. Because you have a U.S. asset – U.S. real estate – it will be an issue if you’re a foreigner and own U.S. property in your name. If you want to invest or spend time in the United States, keep your diversification mentality and internationally organize your affairs to avoid ending up owing the estate tax.

7 Reasons Why Foreigners Want to Invest in the U.S. Real Estate Market

Convenient debt terms and interest rates

The long-term, fixed-rate mortgage is far from a global standard. Most countries offer adjustable-rate loans with shorter terms, but U.S. lenders provide the opportunity to lock in a low-interest rate for up to 30 years. Stabilized-asset loans from agency lenders like Fannie Mae or Freddie Mac are even more attractive, offering non-recourse guarantors and interest-only periods.

It’s worth noting that the interest rates in the real estate market are currently at historic lows, which means that this is the right time for foreign investors to grab the opportunity and buy real estate in the U.S.

Low valuations on property

There are plenty of properties in the U.S., and new development in the country is almost constantly growing. Some of the U.S.’s least expensive real estate markets, including a low entry barrier, can be found in the middle of the United States. By comparison, European and Asian investors must not overpay for stability.

When foreign investors are looking to buy a premium property with a competitive bargain on the market in the United States, there are areas like New York, San Francisco, and Los Angeles.

The cost of living in popular U.S. cities like San Francisco is high. However, it’s still relatively affordable compared to other international metropolitan areas. For example, residential real estate costs $7,180 per square meter in San Francisco while it costs $26,262 in London (U.K.),

$28,570 in Hong Kong (China), $10,947 in Toronto (Canada), and 10,932 in Mumbai (India).

Proper Cash Flow

Purchasing a real property can be one of the most profitable ways to boost your income. You can buy a commercial or residential real estate investment property and put it up for rent. You can receive monthly rent checks from renting your place to tenants, increasing your income. Note: You’ll need to research your renters’ payment histories if you want to reduce the likelihood that they will eventually stop paying their rent.

Return on investment

Value appreciation of property is an essential aspect that foreigners must know before buying an investment property. If your real estate property increases in value over time, then you can sell it for a great deal in the future.

Note: Since appreciation is not guaranteed, you will need to closely look into what you are buying and invest in the right real estate to see a good output income vise.

You can finance up to 90% of the purchase price, and the interest rates are often lower than your expected ROI. In 2022, average interest rates will be around 4.73%. Additionally, mortgage interest rates have stayed below 6% for almost 15 years.

Securing a long-term investment

Real estate is a long-term investment, so you may keep it for several years while waiting for it to appreciate. You may also make monthly money by renting your real estate while you wait for the value of your property to rise.

Passive Income

An investment in real estate in the U.S. is a great pathway to start getting a passive income. If you’re a foreign non-resident and can’t keep an eye on your property every day, that’s understandable! On the other hand, you can charge tenants for using your single-family or multi-family residential property. Either way, you’ll still be making money off of it.

Protection Against Inflation

Inflating costs are one of the primary causes of inflation, so real estate investments are seen as a safeguard against it. When the prices of items and services rise, home values and rents typically climb. On the other hand, investment houses may provide you with increasing monthly payouts and appreciation to help safeguard you financially when everything else costs are rising.

Instead of negatively impacting real estate investments, they generally rise in value along with inflation and bring in a much greater value. For example, the graph below shows how home prices have stayed consistent with increasing inflation over the last three decades.

Conclusion

Real estate is a smart choice if you are looking for an investment property in the United States. The market is strong, and there are opportunities for both rental and resale income. In addition, foreigners may find that purchasing property in the U.S. offers certain tax advantages not available in their home country. We hope this article has been helpful and informative.

If you are interested in buying an investment property in the US, here is a guide for you: How Can You Buy an Investment Property in the US?

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