Foreign investments in the US real estate market have been dramatically increasing over the past several years, and there are no signs of them slowing down any time soon.
If you’re a non-US resident looking to own an investment property in the country, you’re in luck. The housing market in the United States has always welcomed foreign property investors and provided them with a friendly business environment across all 50 states. As a matter of fact, the country is the single largest recipient of foreign direct investments (FDI) and cross-border capital in the world. Forbes reported that, according to the Bureau of Economic Analysis at the Department of Commerce, the US received more than $450 billion of foreign investments over the last few 2 years!
There are many reasons why property investors from all over the world wish to buy and own investment properties (both residential and commercial) in the United States, despite obstacles and challenges posed in some cases. Besides being a great strategy to build a diversified investment portfolio, here’s how you, as a foreigner investor, will benefit from investing in the US real estate market.
What Attracts Foreigners to the U.S Real Estate Market?
1. The Stable Market and Strong Economy
Several years have passed since the housing crisis, and the US real estate market is now stronger than ever. Among things that attract foreign investors to the United States are its transparent legal system, low taxes, outstanding infrastructure, and access to the world’s most lucrative consumer market. In addition, the American government doesn’t maintain restrictions or charge hidden fees to non-US residents seeking out a home or an investment property in the country. Thus, a foreign real estate investor has the ability to operate with relative freedom in the US.
Moreover, with a population of over 300 million people and a comparatively qualified workforce, the United States has one of the world’s strongest and most stable economies. With respect to real estate investing, this leads to increasing demand and provides property investors with great opportunities. This results in attracting buyers and real estate investors from countries where the situation is much more volatile and real estate prices are skyrocketing such as Dubai, China, and Singapore.
Some would think that the strength of the US dollar might discourage foreign real estate investors as their purchasing power diminishes. However, thanks to the stability of the US housing market, this actually had the opposite effect! Now, more foreigners buy investment properties in the United States because they see the country as a safe haven for their capital, as opposed to their home countries which might be facing difficult economic conditions. At the same time, the US housing market is distinguished for its large scale and liquidity, providing foreign investors with the flexibility to exit their investments if they decide to invest their capital elsewhere.
2. Available Financing
Some foreign buyers mistakenly believe that they can’t qualify for financing from a US bank. However, many banks do lend to non-US residents to finance their purchase of investment properties. Instead of relying on conventional mortgages, the US home loan market offers foreign real estate investors a variety of nonconforming, safe, and affordable mortgage loans with their own underwriting guidelines.
Something worth mentioning here is that in order to qualify, foreign real estate investors are typically required to make larger down payments (30%-40% of the purchase price) to obtain financing for their US real estate investment properties. Many banks have different requirements regarding the loan limit, the amount of deposit with the bank, or the credit score required to qualify. These requirements could also differ from one state to another. So, as a foreigner real estate investor, make sure you discuss what is required of you with your bank in your state of choice.
A piece of advice: consider big-name banks with global operations. These institutions have the necessary experience to verify credit established in other countries and will guide you through the process of buying US investment properties. On the other hand, plenty of foreign real estate investors opt for paying cash for investment properties to avoid the hurdles of obtaining a mortgage loan. If that’s the case with you, we suggest looking for affordable parts of the country – they do exist!
3. The Tax Benefits
Homeowners in the United States are subject to property taxes regardless of their nationality. However, remember that foreign investors tend to put larger down payments? Well, doing so is actually beneficial! A real estate investor who purchases an investment property with 40% to 50% down payment is able to avoid paying income taxes on any rental income generated from the property for the first 10-15 years! The US government also allows foreign taxpayers to deduct certain expenses from income like mortgage interest, property taxes, and depreciation. Eventually, this will change the longer a foreigner holds the property, but it’s still a great way of avoiding taxes on your investment property for a number of years.
Unfortunately, things can be more complicated with foreign investments as the tax laws of more than one country may apply. Your tax liability as a foreign real estate investor will depend on where the purchase is from and whether your country has a tax treaty with the United States. Moreover, the American government requires foreigners to file tax returns in a timely manner. Otherwise, you may be subject to financial penalty, and a tax of 30% of your gross rental income may be assessed.
Therefore, before closing any deals, make sure to consult with a tax attorney in your country (possibly in the US as well) to get answers to tax-related questions.
The Top Market for Foreign Real Estate Investors in the US
According to the National Association of Realtors, the states of New York, California, Florida, and Texas are the top destinations for foreign investments in the United States. Nonetheless, foreign real estate investors should also take a look at other markets as well because according to Mashvisor’s data, they offer great investment opportunities for high returns.
One thing you should know first is that different locations in the United States yield different returns depending on the optimal rental strategy – traditional (long-term) rentals or vacation (short-term) rentals. Accordingly, we provide you with two lists regarding where to buy an investment property for a good return on investment taking into account your optimal rental strategy. This data is projected using Mashvisor, a real estate investing tool that uses traditional as well as predictive analytics to provide property investors with accurate real state analytics to help them make smart investment decisions. So, where should you invest?
If your optimal rental strategy is traditional rentals, consider investing in:
As you can see from the above data, investment properties in these locations provide investors with a high rental income and a cap rate of above 10%, which is what most real estate experts believe to be a good return on investment.
The Bottom Line
When it comes to real estate investing, there are few countries that are as welcoming and kind to foreign investors as the United States. There are significant advantages to real estate investing in the US housing market that keep on attracting more and more foreign investments. These include safe and stable market economy, available financing, tax benefits, and ability to receive a better return on investment. Therefore, if you’re thinking of diversifying your investment portfolio through buying an investment property, making your purchase in the United States might be a good idea.
Eman Hamed is Content Writer at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that usually takes three months can now take 15 minutes. They provide all the real estate information in easy to understand visualizations.