I recently spoke at the Best Ever Real Estate Investing conference hosted by Joe Fairless on this topic with my friend and peer Reed Goossens. Reed is from Australia, based now out of Los Angeles and has a podcast targeted to international investors from his home country who want to invest in the U.S. and he is also a multi-family syndicator. I also work with a multi-family syndication team stateside and have a growing number of international investors investing with us in the U.S. market. In preparing for our talk, we chatted about our experiences and below are some of the key takeaways I wanted to share with you.
Why are international investors interested in the U.S. market?
Stable and Regulated Markets – U.S. is still seen as a safe haven as many oil dependent economies have been hit hard, we have Brexit unfolding in Europe and these uncertainties coupled with falling currencies and slowing economies make the U.S. a relatively safe bet for overseas investors seeking a better opportunity.
Global diversification – It’s also a means for investors to diversify globally their real estate and currency commitments as well as shelter income from some countries that want to restrict capital flight.
Physical and performing asset – not a story. My investors understand real estate, they can see it and multi-family housing makes sense to them as we purchase physical assets that are already making money when we buy them and before we do the renovations and improve operational efficiency. This is not an investment idea but a proven asset class.
Family reasons – Many investors work abroad and have a spouse and children in U.S., some may be attending college and they want cash flowing investments to support them while they are here. This is even more true when some countries abroad restrict how much money one can transfer to the U.S. in a given year.
What are some of the considerations that investors from abroad must think about in deciding to invest here?
Current political and regulatory climate is favorable. The U.S. has highly regulated and transparent markets that help protect investors. The economy is performing relatively well compared to their home country in many cases and real estate as an asset class has performed well.
Capital movement restrictions as mentioned earlier. Overseas investors need to understand if there are any restrictions on how much they can move from their home country to invest in the U.S. They should also be aware of currency risk that may happen over the life of their investment.
Cross-cultural language and communication issues are less a concern since the English language is the world business language however it can be an issue for some especially in regards to legal communications and contracts. Investors should ensure they understand what they are agreeing to.
Legal and tax issues are an important consideration and is what most investors from abroad are interested in understanding. Here are some of the practical steps to enable one to participate in a U.S. based investment.
For U.S. tax reporting one needs a social security number or ITIN (International Tax Identification Number). It’s not uncommon to find an overseas investor who already has a social security number if they lived in the U.S. for work. However, expect that if they don’t, one will need to apply for an ITIN. Seek a CPA with experience in filing ITIN as it’s easy to make a mistake. Also, check with a CPA who can determine if one’s social security number is still valid.
File a U.S. tax return. Although certainly there are minimum incomes that don’t require filing (2016 tax year, if one makes under $20,700 joint or $10,350 single) its highly encouraged even when one falls below this level. My CPA encourages our investors she works with to file because with real estate (K-1 for partner syndication) we often have significant deductions that result in paper losses each year before the sale occurs in say five years. Hence, the investor filing each year can use those losses to offset future gains.
U.S. based bank account – which will also facilitate the handling of distributions from the investment. As I understand it, the international investor must be present to open a U.S. bank account which can be challenging logistically. I also understand post 911 it is increasingly difficult for non-residents to open accounts but best advice is to check with the big global banks like Citibank, HSBC and even Capital One (from researching this article) to see what they recommend. Some require a large deposit $50,000 as an example, passport, etc.
Consideration of any home country issues – for tax reporting on global income and capital movement restrictions consult local professionals. For U.S., legal structures such as asset protection strategies, seek U.S. based legal advice. This is especially true if the investor in not investing in limited partnerships as limited partnerships will limit the investors risk to just the amount invested.
In sum, international investors have a strong interest in investing in the U.S. and there are generally know restrictions for doing so. Before they do so, just ensure that you advise them on the important steps to execute this successfully. Provide professional support contacts such as a CPA with international experience in filing ITIN and can help them file their annual U.S. tax return. Also, have investor setup a U.S. bank account so they can receive the investment distributions by recommending large global banks to start this discussion.