The USA is an attractive destination for foreign nationals looking to invest in real estate, with increasing numbers of investors searching for long-term and short-term rentals. However, the process of foreigners buying property in the USA can be complex. There are rules to follow, documents to submit, and regulations to be aware of.
In this step-by-step guide, we will explore the critical components of how non-US citizens can buy American rental property:
- How to research the US real estate market
- Finding a trustworthy real estate agent
- Financing the property
- Making an offer
- Understanding US tax laws
This guide contains the knowledge and resources necessary to make an informed Real Estate investment in the USA.
Research the US Real Estate Market
Foreign buyers must conduct thorough research and gather a deep understanding of the market in the USA. Some crucial elements to consider during this process include:
Type of property
Foreigners interested in investing in rental properties in the USA must decide which type of investment will suit their needs. It is vital to research the rental history of the area, what other single-family homes, condominiums, and around properties are like, and the demand for either long-term or short-term rentals (STRs). Long-term rentals can provide a reliable and steady income stream, but short-term rentals (AirBnb, VRBO, booking.com, etc.) can generate a higher rental income, though they can be seasonal and less predictable.
Property Location
Properties in popular locations such as coastal towns, tourist hotspots, or city centers typically command higher rental rates. It is also worth researching popular states for foreign buyers, including Arizona, Texas, Florida, North Carolina, South Carolina, Georgia, Alabama, New York, Illinois, Michigan, Wisconsin, and California.
Rental income vs. expenses
When researching and analyzing a rental investment in the USA, foreign buyers must evaluate the property’s potential income against its cost to determine its profitability. This analysis involves examining the cash flow generated by the property and calculating its return on investment (ROI). Other financial metrics include the cap rate, cash-on-cash return, and net operating income (NOI).
Legal Requirements and US tax law
This research includes understanding and following state-specific real estate regulations, such as obtaining permits or licenses. Additionally, when foreign buyers earn rental income in the USA, they pay federal and state income tax.
Find a Reputable Real Estate Agent
There are multiple ways to go about this process, such as asking trusted acquaintances who have had success investing in Real Estate abroad, researching and contacting realtors in areas known for working with foreign investors, and reading reviews from other international buyers. Additionally, many agencies specialize in working with foreigners and offer services tailored specifically to their unique requirements – such as providing in-depth information on local markets and financing options.
When looking for a reputable agent and brokerage to work with, consider their:
- Experience working with foreign nationals: Foreign buyers should focus on finding a real estate agent with expertise in communicating across languages and cultures. An agent who has worked with foreign nationals before will have familiarity with the local home buying process, documentation, financing options, and tax requirements unique to foreign investors.
- Experience working with rental property investors: Investors purchasing a rental property require a different set of skills from an agent than a first-time homeowner purchasing a primary residence. An investor-friendly real estate agent will understand how to identify income-producing properties with strong cash flow and future appreciation potential. They can advise their clients on the best investment areas based on their goals.
Financing the Property
One of the biggest concerns for foreigners looking to buy a rental property in the US is how to finance the purchase. Fortunately, non-residents can obtain investment property loans in the US even without a US credit score or credit history. However, working with a mortgage lender offering US financing specifically designed for foreign nationals is important. They understand foreigners’ unique challenges in obtaining funding and can provide solutions uniquely catered to this public.
A down payment is usually required on a New Purchase loan, although the percentage can vary depending on the lender and the specific property. It is also important to note that many lenders require the property to be leased at the time of purchase or within three months of closing.
Foreign investors should also consider holding their US investment property in a US entity, such as an LLC. Doing so can help to protect the investor’s assets and limit personal liability. Additionally, it can make it easier to manage the property, collect rent and pay operating expenses, and comply with US tax reporting requirements.
Before making an offer on a property, it can be beneficial to obtain a pre-approval letter. This process involves submitting financial paperwork to the lender for eligibility review and loan pre-acceptance. With the pre-approval, buyers will have a higher level of certainty about the amount of financing they can secure, which can help them make a more competitive offer on a property and speed up the closing process.
How to Make an Offer and Close the Deal
Once a suitable investment property has been identified and pre-approval obtained, it is time to make an offer and close the deal. Here are the steps to expect when buying a property in the US:
Step 1: Make an Offer
To make an offer, buyers work with a licensed real estate agent who can help them draft a purchase contract. The offer should include the following:
- The purchase price
- Contingencies (such as financing, inspection, or appraisal)
- Any other important terms to the buyer
Note that in some states, it is customary for a real estate attorney to write the contract.
Step 2: Due Diligence
After the offer is accepted, the buyer will have a due diligence period during which they can have the property professionally inspected. During this part of the real estate transaction, buyers should look for common defects such as roof and foundation issues, plumbing and electrical problems, HVAC system defects, mold or water damage, pest or insect infestations, and review the tenant rent roll and payment history and property taxes.
In addition, it’s important to note that the lender will also conduct due diligence on the property while reviewing the property to approve the loan. The lender can ensure the property is a sound investment by conducting due diligence. A good lender will ensure their due diligence is professional and thorough, providing the buyer with trustworthy information about the property. This usually includes an appraisal to determine the property’s value, a title search to confirm ownership and any liens or outstanding debts, and an inspection to identify any potential issues that could impact the property’s value or the borrower’s ability to repay the loan.
If the lender approves the property, it provides further evidence to foreign investors that their chosen property is a viable investment. This is especially relevant for investors based in another country who have not been able to inspect the property personally.
Step 3: Obtain Financing
Assuming all goes well during due diligence, the buyer must lock in the property’s financing. This involves providing documentation to the lender, such as property value, debt service coverage ratio (DSCR), borrower’s liquidity, bank statements, and borrower’s credit profile in their home country.
If everything checks out, the lender will issue a loan commitment outlining the loan terms, such as the interest rate, payment schedule, and closing costs. At this point, the buyer will need to review and sign the commitment and provide any additional documentation requested by the lender.
Once the loan is approved, the lender will arrange for funding, and the buyer will need to bring the required down payment and closing costs to the closing. The lender will wire the funds.
Step 4: Close the Deal
Finally, it’s time to close the deal. This involves signing all necessary documents, paying closing costs and fees, and transferring property ownership. Foreign investors should work with a real estate attorney and a lender with experience with cross-border transactions to ensure everything goes smoothly during the closing process.
Understanding US Tax Law
Foreign nationals who purchase a rental property in the US should be aware of the tax implications of their investment even if they are not a US resident. Here are some key considerations:
IRS Publication 515
Foreign nationals who receive rental income from a US property are subject to US federal income taxes, capital gains tax, and estate tax. They must file a US tax return and may be required to pay estimated taxes throughout the year. Investors should refer to IRS Publication 515, which outlines the rules and regulations for calculating taxes on foreign income.
Withholding Tax and Tax Treaties
Foreign investors who generate rental income from US property may also be subject to withholding tax. This tax is withheld by the property manager or rental agent and paid to the IRS on behalf of the foreign owner. However, if a tax treaty exists between the foreign buyer’s country and the US, the withholding tax may be reduced or eliminated.
Tax Advantages of Holding a Rental Property in a US Entity
Foreign nationals who hold a US rental property in a US entity, such as an LLC, can enjoy certain tax advantages. These entities have an individual taxpayer identification number (ITIN), can offer protection against personal liability, and provide tax benefits such as pass-through taxation. Pass-through taxation means that the rental income generated by the property passes through the entity and is reported on the owner’s tax return and paid at their tax rate rather than being taxed at the entity level.
Conclusion
Buying rental property in the USA as a foreigner requires time, research, and collaboration with experienced professionals. Following these steps, considering these factors, and being aware of the rules and documents needed will help you make the process more manageable and increase the chances of a successful investment.
