By Joe Firmin 5-minute read (It’s a guide, not a quick post)
US real estate has long been a strong, desired investment in the global economy, but it may be tough to find someone who would or could walk a foreign investor through the process from start to finish… until now.
The Guide: How to Participate in US-Based Real Estate Syndications as a Foreign Investor
It’s important to seek out a CPA who’s experienced in helping foreign investors invest and run businesses in the US. Please do this. Here are 7 basic guidelines for participating in US-based real estate private equity investments for foreign investors.
#1 - Incorporate US-Based LLC / Corporation
Foreign investors must create an entity with which they can invest, an LLC or a corporation. An LLC is usually preferred for tax efficiency.
An LLC with a minimum of 2 partners (equity split does not matter) is required to reap the tax benefits. In our experience, most foreign investors open an LLC with their spouses or partners.
#2 - Apply for EIN (Employer Identification Number) and Register the LLC with the Required Agencies
Once the LLC is incorporated, foreign investors must apply for an EIN (Employer Identification Number) and register the LLC with various agencies. This is another area where CPAs’ and Attorneys’ experience with foreign investments is valuable and they can typically help you through this step very quickly.
#3 - Create an Operating Agreement Among the Partners
This one is as simple as it gets. Create and execute an agreement among all partners of the LLC.
#4 - Apply for ITIN (Individual Taxpayer Identification Number) or Social Security Number
Each individual partner in an LLC needs to have a social security number or apply for an ITIN (Individual Taxpayer Identification Number). Usually, foreign investors are granted an ITIN within 4-6 weeks of submitting their application.
PAUSE BUTTON: There are reputable companies that do these first 4 items for you, one we recommend is Corporate Direct. Tell them you’re looking to invest in real estate and want to set up the above items.
#5 - Open US-Based Accounts
With an EIN, operating agreement, and ITIN in hand, a foreign investor can open a US-based bank account. It’s best to choose a global bank with online access and wire features.
#6 - Filing the LLC US Tax Returns (Federal, State, and City) and Personal Tax Returns for all Partners
The LLC will need to file returns and the partners will have to file personal tax returns. The Schedule K-1 (tax document issued to syndication partners) often has significant tax deductions that result in paper losses each year (meanwhile you’re still earning cash flow).
Those paper losses can be offset against future gains from the sale of the asset and reduce tax payments.
Foreign investors should consult with professionals for asset protection strategies, legal structures, and related disclosure requirements.
#7 - Tax Treaty Benefits Are Available
CPAs and Cross-border tax specialists can help foreign investors discover the tax treaty benefits available, as they vary from country to country.
So, now that you see it is possible and how to make it happen, here are some important things to consider.
Considerations for Foreign Investors
Of course, there are pros and cons to every situation. Foreign investors must consider a few potential draw-backs in addition to all the attractive angles. Considerations for foreign investors may be capital restrictions, currency risk, and political and tax repercussions.
#1 - Capital Restrictions
Many countries have restrictions on how much capital can be moved outside their home country. These regulations change often and rapidly, so foreign investors must be current on their research.
#2 - Currency Risk
In seeking diversification across geographies and currencies, currency risk/ exchange rate changes are always an issue for foreign investors to be aware of when investing across a border.
#3 - Political and Regulatory Environment
The US exhibits a highly regulated and transparent market, and real estate, as an asset class, is an excellent economic performer.
#4 - Legal and Tax
As laws and taxation policy can differ between countries, foreign investors must ensure they understand or can get the right help to understand what they are agreeing to, prior to entering any contract.
7 Reasons Foreign Investors Love US Real Estate
Active and passive real estate investors from all over the world are attracted to the robust US market. Among many reasons, prestige, stability, diversity, market size, and more. Let’s run through the top seven reasons foreign investors love US Real Estate.
#1 - USA, USA, USA!
Many international investors hold US real estate in high regard and, often have a deeper knowledge of the US economy than their own country. There is much prestige associated with investing in US markets and having US real estate as part of their portfolio.
#2 - Stable and Regulated Markets
The US economy is viewed as a safe haven, as a gold standard for global real-estate investing, and a well-oiled machine providing long-term asset growth, often in opposition to commodity-driven economies around the world. In addition, laws in the US are of the utmost importance since many foreign investors have roots in countries where law enforcement is lacking.
#3 - Market Size
The US is the biggest economy in the world. In addition to that, individual states like Texas and California are vibrant, strong, large markets, and listed within the top 10 on the list of global economies.
#4 - Opportunity Diversity
In a country where individual states are listed among the top economies in the world, the size of the market available ensures a diversified portfolio like none other. Every niche is well represented and the associated market depth ensures that all stages, sizes, and types are accessible.
#5 - Global Diversification
The US economy allows investors to face minimal capital restrictions. Foreign capital is welcome, and a business-friendly regulation structure allows foreign investors to diversify while sheltering assets in a stable economy.
#6 - Asset Class Performance
Foreign investors understand that multifamily investing is one of the proven ways of building long-term wealth. US Real Estate is a high-performing asset class that has generated cash returns throughout the various stages of the business cycle throughout history…
#7 - Family Reasons
Many foreign investors have family living in or working in the US and/or travel to the US often. Since they also desire positive cash-flowing assets, it makes sense for them to invest in US-based real estate syndications.
US-based commercial real estate has proven its resilience and has created a reputation for being one of the top-performing asset classes in the world. Nonetheless, foreign investors should understand the “red-tape” and seek professional advice in navigating through it. Finding a preferred advisor with experience in this area can make the process smooth and efficient. We can recommend an advisor if you do not know one. Please let us know if you’re interested! We’re happy to help!
If you’re interested in learning more about becoming a passive real estate investor in real estate syndications, consider joining the Freedom Network. It’s absolutely free to join with no commitment necessary. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today!