Financial Considerations for Foreign Investors in U.S. Real Estate
Posted on July 31, 2018
U.S. commercial real estate yields tremendous opportunities for foreign investors. However, these investments involve significant complexities and challenges that foreign individuals must understand and for which they must prepare in advance. Below are some critical points that investors should consider and plan for under the guidance of experienced real estate professionals before entering the U.S. commercial real estate market.
Currency and Interest Rate Risk
Should foreign investors use the currency of their home country, U.S. dollars, or a mix of both when taking out a mortgage or securing a loan for the purchase of U.S. property? Which option will reduce an investor’s exposure to currency fluctuations? Is there any point during the term of a loan that an investor should convert currency from its initial form? Addressing these questions during the planning process can help foreign limit their exposure to currency fluctuations and rising interest rates.
Tax Risks
Under U.S. tax laws, foreign individuals may inadvertently meet the criteria to be considered U.S. tax residents who are subject to income tax on their worldwide income. The rules are different, yet equally complex, when considering how the U.S. tax system treats foreign investment for estate and gift tax purposes. With this in mind, foreigners must take precautions to structure their investments in U.S. real estate in the most tax efficient manner while avoiding the risk of double taxation on any gains. Similarly, consideration should be giving to how much time foreign investors spend in the U.S. and whether or not they or their heirs plan to immigrate to the U.S. in the future.
Timing Risks
Interest rates and exchange rates will fluctuate. It’s what they do. Therefore, it is nearly impossible to perfectly time an investment in U.S. commercial real estate. If a property meets an investor’s criteria, then invest. Trying to micromanage elements of an investment that individuals cannot control is a losing battle.
In addition to the earnings potential of foreign investment in U.S. commercial real estate, are a wide range of uncertainties and risks that differ across borders. Engaging the services of experienced real estate professionals during the planning process will go a long way toward minimizing these risks and maximizing the potential benefits.
The team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.