Real Estate Investor Magazine South Africa February/ March 2020 | Page 54

UNITED STATES Real estate investment the US 10 things I learned as a foreigner LADISLAS MAURICE N on-Americans are almost all familiar with scenes of people striking it rich in real estate in the United States. People speculate, flip, use credit, become rich and then sometimes lose it all. It’s a vast and attractive mar- ket, not just for the potential returns, but also because of the perceived safety of having a house or a condo in the United States. That being said, there are a few surprises awaiting the non-resident foreigner wanting to make a real estate investment in the United States. Many have made money, especially if they bought at the right time. However, the market in America is unique in many regards. It is important to understand the nuances of investing in the United States, as the market is in many ways very different from your home market. And if you get these points below wrong, it can dramatically impact your returns. 1 The way you set up your purchase is crucial, and requires preparatory work Many foreigners make the mistake of going to the United States and simply purchasing a property in their own name as it’s logical, easy and quick. However, if you qualify as a non- resident alien according to the IRS, then you are liable to pay a 30% withholding tax on your gross rental income, without any deductions allowed. Needless to say, you end up with a terrible yield. The way to avoid this is to create a local LLC, and purchase the property through that entity. My main point is that it is not straightforward, as there are many ways to structure your purchase. You must carefully analyse which structure is best for your particular situation before going to the United States. 2 Americans are less emotional about housing In Europe, selling your house is a pretty emotional decision. People typically keep them for many years, and often across generations. In the United States, people will sell their house in a heartbeat because they found a new job somewhere else. It also means that a house which might look fine for a European, might just be “old” for an American, and will 52 FEBRUARY/MARCH 2020 SA Real Estate Investor Magazine thus see its value depreciate quicker than you would expect. Same thing with condos; many Europeans make the mistake of going to Miami and buying a condo in some building from the 70s. For the European it looks fine but for an American it’s just an old condo that he might live in because he must, but not because he wants to. Similarly, beware of buying a “McMansion”, these massive houses in the suburbs that the boomer generation was so keen on. Millennials are not interested in, and don’t have the money for, massive houses with 6 ensuite-bedrooms. Boomers are dying & downgrading, and nobody is buying. As a non-American, it’s important to understand these cultural dynamics for your investment. In a nutshell, housing depreciates faster in America than in Europe. 3 Beware, you could very well get sued over something trivial Americans love to sue. They’ll sue you for anything. An oft repeated statistic is that about a third of businesses get sued in any given year. Your tenant might slip in the staircase, and somehow feel it’s your fault and sue you. For non- Americans this type of attitude and behaviour is completely incomprehensible, but it’s the reality. Americans are a generally reasonable people, but NOT when it comes to the law. So, what must you do? Get liability insurance, and preferably buy through a company to protect your other assets. 4 Choose your investment destination very carefully; politics matter At any given time, you’ll have local property markets that are booming, whilst others are crumbling. There is always a place to make money if you look hard enough and follow trends carefully. That said, you should take into account the local regulations and taxes. California and New York will tax you very heavily, and have complicated regulations, whilst other states such as Texas won’t even have a state income tax and will make kicking out delinquent tenants