Key Takeaways
- Foreign investors must research US market trends, financing options, regional laws, and tax requirements before buying.
- Buying through a business entity (often an LLC) is usually smarter than purchasing in your personal name due to tax and liability implications.
- International investors face specific requirements, including obtaining an ITIN, a 30% withholding on rental income, and FIRPTA withholding upon sale.
- Success depends on trusted local professionals, especially a knowledgeable property manager to handle operations, compliance, and communication across time zones.
Buying an investment property in the USA can be a great decision as an out-of-country property investor. But you should consider how factors like differences in taxation, laws, and time zones can impact your investment.
Foreign-based buyers of US real estate have to confront obstacles that their domestic counterparts don’t even know of.
This is why out-of-country property investors need a watertight property management strategy to ensure effective oversight of their assets.
In this guide, Louise Beck Properties will examine the biggest challenges foreign-based property investors face when buying and managing investment properties in the US and will recommend practical steps to help them overcome these problems.
Key Considerations for Foreign Buyers of US Properties
Understand the US rental market
As an international investor planning to buy US real estate, you must understand how to keep up with the fluctuations in market conditions.
Unless you plan to buy your property with cash, you must understand the available financing options and the interplay between interest rates and the performance of your investment. Another thing to keep in mind is how US real estate laws and regulations vary by region.
Choose the Right Location and Property Type
Key things to look at in a location are regional economic trends, neighborhood characteristics, rental demand, and local real estate regulations. You’ll also want to decide on the type of property to invest in.
Choose the Right Business Structure
You can buy your US property in your personal name or using a business entity. The business structure you choose will have dire consequences for your investment, in terms of legal liability, tax obligations, and your ability to protect the asset in the long term.
Buying an income property in your personal name is not recommended. Common business structures used by international property investors are here:
- Corporations: This can be an S-Corp or a C-Corp. Corporations may face higher capital gains taxes.
- Limited Partnerships (LP): This option might work if you have partners and want flexibility in sharing ownership duties and income distribution.
- Limited Liability Companies: This is by far the most popular choice for smart foreign investors.
Understand US Property Tax Laws
International property investors are required to obtain a Taxpayer Identification Number (ITIN) to file tax returns. They also face a 30% withholding tax on rental income (gross rental income, not profits).
When a foreign investor disposes of their property, as per the FIRPTA (Foreign Investment in Real Property Tax Act), there will be a 15% withholding tax on the gross sales price.
Managing Your US Property as an International Investor
Managing a rental property is a difficult task even for property investors based in the US. For foreign investors who must contend with problems caused by distance, time zone differences, currency fluctuations, etc., the task is monumental.
How do you navigate these problems to ensure the success of your US properties?
Build an Efficient Team
Rental properties only succeed through teamwork. That’s because there are so many aspects to making an investment property work that no one person can handle all the tasks effectively.
These facts are even truer for non-US-based investors. You need trusted experts to oversee the different needs of your investment property, such as a local estate agent, a mortgage broker, a skilled attorney, a CPA who understands property tax laws, etc.
Hire a Professional Property Manager
A property manager serves as your eyes and ears, or the person of authority in the rental property. The property manager must have sufficient know-how to oversee all the critical tasks that determine the success of your investment property, namely:
- Marketing: Property managers will know how to do this without violating the disclosure requirements for their region.
- Tenant screening: The established mechanisms for vetting the financial status and personal character of prospective renters will greatly impact your rental’s occupancy rates.
- Maintenance: This is the break-or-make factor for most rental properties. Repairs must be done promptly, adequately, and cost-effectively to ensure sustained profits.
- Communication and lease enforcement: Successful landlord-tenant relationships thrive on good communication.
- Regulatory compliance: A reliable property manager should know how to oversee the rental property in compliance with the relevant regulations.
Choosing the Right Property Manager
Given the critical role of property managers for non-US-based real estate investors, what should you look for when hiring a property manager for your investment property?
- Local market expertise: To ensure intimate knowledge of local trends and regulations that affect the operations of the property, the property manager should be local.
- Understands cultural differences: Your chosen property manager should have proven experience working with international clients. They should be familiar with foreign investors’ documentation, communication, and payment preferences.
- Navigating time zone challenges: The property manager must know how to bridge time zones to manage emergencies efficiently and ensure seamless communication.
- Offer comprehensive services: The best kind of property manager for non-US-based property investors is a full-service property management company.
- Robust communication systems: The right property managers will provide detailed updates consistently. They must be able to adapt feedback and updates to suit the peculiar needs of each client
- Transparent reporting: The property manager should be transparent about their fees. They should provide a dedicated portal where owners can access information about the financial details for the property.
- Legal compliance: Your chosen property manager must have demonstrable expertise in staying up-to-date with local, state, and federal laws.
Final Thoughts
Managing your investment property as a non-US-based investor is all about the quality of your relationships and the systems attached to those relationships.
That’s because practically every step from finding to buying, operating, and eventually selling your US investment property requires you to rely heavily on the expertise of others.
If you want more information on managing US properties or want to work with a professional property management company, contact Louise Beck Properties today!
