Foreign Investment in U.S. Real Estate I Great Jones

With the advent of globalization, foreign investing in nearly all U.S. markets continues to grow year to year. Estimates suggest that foreign investments account for upwards of $2 trillion per year in the United States, often in spite of earning substantially lower returns. Real estate remains one of the most steadfast of these investments. While domestic investments in real estate still remain a prominent part of the U.S. economy, foreign investment in U.S. real estate has become a growing trend over the past decade. U.S. property investors are now in competition with a larger pool of investors and need to seek out competitive advantages like a great property management company to make their rental property stand out and assist with their acquisition strategy. Learn more about this trend below and what this means for U.S. property investors.

Foreign Investing in Real Estate by the Numbers

U.S. real estate transactions to foreign buyers totaled about $78 billion in 2019. When looking at the numbers between commercial real estate vs residential real estate, a majority of these foreign buyers preferred residential properties in suburban areas, as opposed to properties found in small towns and metropolitan areas in major cities. Most foreign purchases in real estate were in Florida, followed by:

California
Texas
Arizona
North Carolina
Illinois

So what does this mean for property investors in the U.S.? Well, for example, a U.S. investor that purchases a rental property in Gainesville, FL is not only competing with other U.S. investors for tenants but also a slew of foreign investors. In this case, investing in services for property management in Gainesville, FL, may be a lucrative way to gain a competitive edge in that market.

Over the last few years, the largest share of foreign buyers has consistently originated from China or Canada. Mexico remains the third most common foreign investor in U.S. real estate. However, numbers show an overall decrease in these shares across the board.

In 2018, the number of Chinese investors hovered at around 15 percent before dropping to 11 percent in 2019. Despite the drop, Chinese nationals still accounted for over 19,000 properties in the United States, which generated about $13 billion in sales.

By comparison, Canadian buyers of residential properties in the United States has continued to see a decrease since 2011. However, in 2017, the total property sales to Canadian-based buyers peaked at about $19 billion, the highest it has been over the last decade. By 2019, those sales dropped to about $8 billion.

Why Are Foreigners Investing in Residential Real Estate?

As one of the richest countries in the world, the United States has always been a safe and often lucrative investment for foreigners. Even despite some hiccups and the decreases in investment numbers over the last few years, residential real estate in the United States typically sees consistent and significant appreciation. For foreigners, property is also less expensive in the United States than in similar countries, including Canada and the United Kingdom. Read about some of the reasons why foreign investors prize U.S. real estate below.

Rising Rental Rates

One potential reason for the growing trend of foreign investors in real estate is the increasing rental rates in multifamily properties throughout the United States. Between 2018 and 2019, rental rates in Las Vegas, Nevada, increased by about 7.9 percent. Furthermore, about 61 percent of foreign buyers believed that housing prices in the United States were higher than prices in their respective countries.

Fixed-Rate Mortgages

Even given recessions and housing crises, the United States has remained surprisingly steadfast in providing easy access to mortgages and generally lower borrowing costs than other countries. Many countries similar to the United States, including Canada and the United Kingdom, do not provide long-term fixed-rate mortgages to potential home buyers. Most countries only offer short-term mortgages with an adjustable rate. Being able to maintain the same interest rate over a period of 15 to 30 years is boon to anyone buying or investing in real estate, especially for foreign nationals.

Cash Flow

Generating high yields can be difficult outside of the U.S., even in hot spots like London. Most investors in foreign markets settle for relatively low yields in exchange for stable (albeit overpriced) markets. In some countries, investors will put money into properties knowing that they actually present negative cash flow. Without a fixed-rate mortgage, that can quickly turn into a gamble that does not present capital gains.

By comparison, foreign investors can easily pay less for properties in the U.S. while getting an assured positive cash flow every month. If you are not paying your own mortgage or rent, that equates to a stable and fairly reliable source of passive income.

Property Value

The actual value (not accounting for residential real estate depreciation) of a property can vary based on age of the home, location, general condition, and a dozen other factors. However, in terms of price per square foot, property in the United States is consistently more affordable. Some beachfront properties in attractive markets still sell for about $200 per square foot. Residential properties get even more affordable as you move inland. By comparison, areas in London sell for upwards of $8,000 to $10,000 per square foot.

Safety and Protections

While the regulations surrounding residential property investment can feel cumbersome, frustrating, or inconvenient to the average U.S. citizen, those regulations are in place to provide protection for potential homeowners and investors. These regulations ensure the protection of assets, along with various means to prevent a severe loss of money in the investment. All of this just makes for a more ideal investment for foreigners.

Primary Residence

While the cash flow and passive income are perks, many foreigners simply invest in property as a primary residence in the United States.

What Foreign Investors May Not Know

Although there are plenty of benefits to investing in residential real estate as a foreigner, investments can still come with plenty of hurdles for non-U.S. citizens. Here are some things that foreigners should keep in mind if they do plan to invest in real estate.

Higher Prices on Mortgages

Many banks and institutions will gladly lend to foreign nationals who do not live in the United States. However, instead of more conventional mortgages, these institutions may only offer non-conforming loans that have a higher interest rate and different underwriting guidelines. While this may still be at a fixed rate, you would still be paying more than someone living in the United States.

Larger Down Payments

Banks generally consider foreign investors a higher credit risk. That often means that you will have to pay a higher minimum down payment to the lending institution. You can typically expect the lender to ask for at least 30 percent of the sale price before providing the loan.

Approval Processes

For a U.S. citizen, the approval process is simple and usually involves checking credit history and tax returns. Foreigners usually do not have a domestic credit history or American tax returns, so lenders will ask for bank statements, income tax returns filed in your home country, and several months of credit card statements. That all generally means a much more complicated approval process that may potentially take a long time. You can potentially shorten that period by applying for your mortgage through a global bank that has a presence in the U.S. and in your home country. This can potentially help you reach a lower interest rate.

Work Visas and Green Cards

If you are in the U.S. on a work visa (even if it is temporary) or have a green card, you may actually have more options available. You may even qualify for a typical Fannie Mae or FHA loan, but the lender may still ask for information that proves that your legal status or work status will get extended.

Taxes

Different countries have different tax treaties with the United States, so it is worth looking into the tax laws. When you sell your property, you will have to pay a capital gains tax and 10 percent of the gross purchase price will be withheld by the IRS. If you earn any rental income on your property, you will also likely have to file and pay for income taxes annually.

How to Stay Competitive Against Foreign Investors

Foreign investment in U.S. real estate still remains fairly consistent. Because of this additional competition, U.S. investors struggle with maintaining a competitive edge against these foreign investors. Foreign investors capitalize on great single family rental cap rates which make it difficult for U.S. investors to find properties in the best places to buy rental property. Also, once you have invested in property, the rental market is that much more crowded by foreign real estate investors trying to place tenants. As mentioned before, one way to stay competitive is by enlisting professional property management services to help you place high-quality tenants and manage your overall property. With property management services in Jacksonville, FL to Austin, TX, Great Jones helps maximize your investments and reduces any stress that comes with managing a real estate portfolio. This way, you have more time on your hands to make strategic decisions on future investments.

If you have any questions, consult a property management professional to learn how to better handle and compete with foreign real estate investors.

Sources:

The Trend of Foreign Investments in U.S. Residential Real Estate

Foreign Investing in Real Estate by the Numbers