In many international real estate markets, finding a piece of real estate that provides the kind of returns that passive investors in the United States have expected is challenging. Out of curiosity, we have looked at the cost of multifamily assets around Vancouver, Canada, and Sydney, Australia, for instance, and have yet to see a lot of upside potential. Not that the upside doesn’t exist, but it appears to be a different ball game. We seem to have some economic tailwinds in many real estate markets here that are stronger than in other parts of the world.
There are a multitude of advantages to investing in real estate in the United States:
- Within the USA, there is a diversity of distinct real estate markets, each with various attributes to meet the preferences and risk profiles of a wide range of investors.
- The USA has a strong, transparent rule of law with many robust legal protections not always found in other countries.
- Since the U.S. Dollar is the global reserve currency, there is less currency risk investing in U.S.-based real estate.
- The United States has a more pro-business regulatory environment compared to many nations.
- Real estate is a highly tax-advantaged asset class in the United States.
So, what if a Canadian, Australian, or Chinese citizen (to name a few) would like to invest in real estate in the USA?
First, one could purchase single-family houses as rentals. The significant disadvantage of this asset class is that foreigners generally cannot use conventional debt to buy real estate in the USA, so they must pay for houses entirely out-of-pocket without a mortgage. This decreases the scalability and cash-on-cash returns that leverage can provide. That goes for commercial properties as well.
Another way foreign citizens invest in leveraged U.S. real estate is through real estate investment trusts (REITs). While REITs are publicly traded, diversified, and liquid, the returns average 7-8% annually. One can invest in REITs as they invest in stocks in the stock market and buy or sell shares with relative ease online. A REIT fund is usually spread over an extensive portfolio of low-risk properties such as Class A multifamily complexes, data centers, or retail properties.
Online crowdfunding websites are now devoted to real estate investment for better returns with potentially more risk. An investor can choose real estate projects with various returns and risk profiles. Like REIT investments, one can invest smaller portions of capital (as little as $1,000). They can do so if one would like to invest passively in a house flip. If they prefer investing in a ground-up development project, that’s also possible. These investments are generally less liquid than REITs, so the investor must often wait months or years for a return of principle. Returns can be, on average, somewhat higher than REITS.
Another option is to invest through private syndications. Syndication is a structure where an asset or portfolio is purchased (or developed) by raising equity funds from several investors for the downpayment, capital reserves, and other associated costs. While syndications are not liquid and will often last at least five years, the returns are far more substantial.
To learn more about real estate syndications, please see our article entitled What is Real Estate Syndication?
On average, operators of value-added syndication deals generally project something in the range of 15% cumulative annual returns to investors. Ground-up development syndications will often return 25% or more per annum. However, development projects generally carry significantly more risk and should only make up a small part of the portfolio of very high-net-worth individuals. An investor typically needs to invest a minimum of $50,000 into a private syndication. Since syndications are only sometimes advertised to the public, it is crucial to form relationships with companies that perform syndications if one is interested in these investments.
What are the steps that a foreign investor must take to invest in a private U.S. syndication?
- First, the foreign investor should set up an entity to invest. For tax reasons, the ideal type of structure is a Limited Liability Partnership (LLP). The use of an LLP structure can avoid double taxation. The LLP must have at least two members. The other member could be a spouse, sibling, or child of the investor, and the equity can be split 50/50, 99/1, or anything in between. It will be governed by an operating agreement that an attorney can quickly draft.
- He or she must have an International Tax Identification Number (ITIN) or Social Security Number. To sign up for an ITIN, the investor must submit a W-7 form with the Internal Revenue Service (IRS).
- The next step is to apply for an Employer Identification Number (EIN). This is the most straightforward part of the process.
- Once the LLP is formed and assigned an EIN, it may open a business account with a bank in the United States. This is necessary so that there is an account to receive cash flow distributions from an investment.
The investor and partner will each need to file U.S. tax returns every year. Fortunately, real estate syndications typically have more tax advantages than other investments. Each year, the syndication sponsor will provide a K-1 form to the syndication members that will show paper losses even while the investment offers an actual profit. Without getting too deep into the details, this is an entirely legal way to shield income from taxes by depreciating the asset on an accelerated schedule.
There may also be some tax treaty benefits that the foreign can avail themselves of. We recommend that the investor consult with a certified public accountant (CPA) familiar with such matters. A U.S.-based CPA can also fill out and file tax returns for the investors.
While this process may seem daunting, all of the above steps (except the annual tax returns) only have to be taken once. In our opinion, this is a small price to pay, considering the significant advantage of investing passively in U.S.-based real estate syndications. On a risk-adjusted basis, we don’t believe a better investment vehicle exists than a well-run, U.S.-based real estate syndication.
Conclusion
There is a great deal of wealth worldwide looking for yield. Even if you are not a U.S. citizen, you can still take advantage of the stability and returns that passive investment in commercial real estate in the USA offers. With a few uncomplicated steps, you can make it possible.
We can help. If you are a foreign investor interested in investing in U.S. real estate syndications, please set up a call with us to discuss your situation. We can refer investors to some of the best CPAs and attorneys in the business, and we would be happy to help you establish yourself in some of the most robust real estate investments to be found anywhere in the world.
Disclaimer: The opinions conveyed in this article are provided for educational purposes only and should not be interpreted as an offer to buy or sell any securities or to make or contemplate any investment.