Types of Property Investment in the USA for Foreigners
When I speak to my Singaporean clients, most were surprised that someone living in Asia and non-residents have invested in the US real estate market.
Investment opportunities in the US housing market can be a very lucrative venture with America’s economic growth, stability, and regulatory environment.
There is no restriction on types of investment property for sale in the US.
Yes, that is correct, and clearly, this is not the case for the real estate industry in other countries.
You don’t have to be an American citizen to own a home in the United States.
US Real Estate Market
The United States’ housing market is extraordinarily friendly and convenient for any foreigner who wishes to invest in properties throughout the country.
In fact, for Singaporeans and Malaysians, owning a home in the US costs only a fraction of the price they would need to invest back home.
Now that I have your undivided interest, let me explain more.
The American government doesn’t maintain restrictions or charge hidden fees, such as extra stamp duties, to a non-citizen seeking a home or a wise property investment in the country.
Although the experience of buying a property in the US may differ – there are only four rules any foreign investor needs to keep in mind as they begin their search for a property in the United States.
We start with how the foreign real estate investors intend to hold the US real property.
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What Are The Types Of Property Investment In The USA?
Whether they are newly constructed or resale houses, several investment property types in the United States.
The most common Residential real estate category is single-family homes. Other types include.
- high-value homes
- multi-generational and
- vacation homes
With so many properties and real estate variants available, it is not just finding a property that appeals to your personality and resource.
If you want to invest in properties to flip real estate, it’s a different ball game.
You will want to understand better some peculiarities or challenges you will face.
One way to do so is by dividing real estate into several categories.
Residential Property Investment
Residential real estate investments are US real property that you can own and rent out.
- single dwelling units
- apartment buildings
A person or family pays you to live in a vacation property for a pre-agreed time frame.
Vacation rentals include these types of home experiences made possible by hosts on Airbnb.
- beach houses
- unique homes
One reason for favoring residential property is the low perceived risk.
You can rent a smaller property out easily.
We base the length of their stay upon the rental agreement, or as we call it in Singapore, the tenancy agreement they sign with you.
It is also known as the lease agreement.
In the United States, most residential leases are on a twelve-month basis.
Alternatively, if you can manage your properties, you can become an Airbnb host.
You can rent out unused short-term single rooms to entire houses to earn extra income.
When you grow your business, property management fees for a manager become marginal when looking at the investment return.
Commercial Property Investment
Commercial real estate investments are shops, office buildings, malls, skyscrapers, and even land.
There is a common perception that Commercial Property Investment is meant only for the “big boys” or big investors.
One of the most common queries I get from ordinary investors is whether they should opt for a Commercial Property or Residential Property for investment.
I think it’s easier to acquire or buy a ready commercial building with individual offices to lease out to companies and small business owners.
You can do this quickly without the time spent on new construction, which may take a few years.
Commercial property rentals normally involve multi-year leases.
Investing in ready properties may lead to more excellent cash flow stability flow and protect the owner when rental rates decline.
If the market heats and rental rates increase substantially, you may not raise the rental as you are locked in old agreements.
If you want to earn a rental income that will lead to greater cash flow flexibility, you may re-think this business model.
Commercial Property Investment Vs. Residential Property Investment
For comparison, you may want to read how commercial properties compare against residential properties.
Let’s discuss the low perceived risk of residential property when measured against commercial real estate’s perceived high risk.
Some perceptions might be correct, but it is not always right now with emerging trends.
In prime or premium locations, developers are unwilling to sell even if you’re eager to buy.
Developers are now leasing commercial properties instead of selling the units.
They prefer to put in on a long-term lease for up to ten years and give out a very high rental yield of up to 10%.
Once the loan tenure is up, the property is fully paid, and it is accessible to the developer.
The assured returns help the developer survive the long and sometimes delayed construction period and bad times.
They may tempt you to buy a commercial property.
When I looked at the experts’ high rental yields – commercial real estate is beautiful as it peak as high as 15%.
You might think to yourself, “Am I missing out on something here?”
All your family, friends, business associates, and even grandmother will rush to purchase a commercial lot if this is true.
Let’s break this down.
Pros Of Commercial Property Investment Types
Looking at average rental yields at 10%, look at prime locations to boost your returns from 13% to 15%.
However, what is essential is knowing the property’s actual value and paying the right price.
Consistent & Regular Returns
The minimum tenure is five years.
When you lease from a developer, the tenure is at least ten years.
For the next decade, the developer or owner is assured of consistent returns.
Top Location For Property Investment Strategy
Excellent prime location and quality retail chains, businesses, banks, and corporates attract more tenants in the vicinity.
Real estate investing in commercial properties causes a ripple effect that helps in better future rental yields.
Zero Furnishing Cost
Most tenants will renovate and refurbish their brand or corporate image- which means you can hand over the basic unit to the tenant.
As the landlord, you can lease the property to a bank.
Properties on the corner, lots with ample car parking, is an excellent location.
The bank will renovate the premise following its guidelines to set up the bank branch or an ATM.
You can lease the unit “as is” for commercial properties as different businesses renovate to suit their branding.
Compared to residential properties, you get to save on basic home furnishings, such as kitchen cabinets and electrical appliances, which adds to the property’s initial price.
Cons Of Commercial Property Investment
Are there disadvantages to investing in commercial property?
One important thing to keep in mind is the cost.
Aside from high underlying costs, commercial property is vulnerable to periodic bubbles and busts.
In a week market, businesses may fold, and tenants move out.
The prized commercial property can be difficult to sell when values are businesses are falling.
Commercial property investment is a costly affair as a thumb rule compared to investing in a residential rental property.
In many cities in the US, the price per sq. ft. may contrast sharply.
Presently, commercial property investment may be quite affordable because of a slowdown in the real estate sector.
Can Foreigners Buy Property in the United States?
There are different documentation requirements for foreigners when they buy US real property with a bank loan.
Non-residents won’t have credit data or a history of US tax returns for references.
Lenders require alternative documentation forms to approve them for a loan.
Whether they’re a US citizen, anyone living in the US must submit an annual tax return by the end of tax season in April.
Buying a commercial property requires more thorough research compared to residential real estate.
The location of the property and the nature of the business are essential criteria.
The purchase price of a commercial lot differs significantly in terms of future growth potential vs. a rental property with short-term rentals.
Property investors need to anticipate the area’s potential as demand and supply play a crucial role in your return on investment.
Any misjudgment can mean the investor locks in the costlier investment for a more extended period.
You may not resell the current market rate if the entire building has no tenancy or the prime business area has shifted.
GDP economic trends affecting real estate
The real fortune of commercial property investment links closely to the country’s economy, its GDP.
A weakening economy has a more severe impact on the demand for commercial space.
Even though businesses may scale down, people still need a place to stay.
So no matter what the economy is, there will still be tenants for a single property as their primary residence in comparison.
Loan at Higher Interest Rate
Getting a loan to purchase a commercial property depends on the bank’s risk assessment of your investments in the US housing market.
A point to note is the commercial interest rate is 1.5% to 5% more than the home loan interest rate.
Loan to Value Ratio
The average Loan Value Ratio (LTV) for a commercial property is 60% compared to 80% for a residential property.
A good LTV translates to you having to pool more money from your pocket.
No Tax Incentive
Unlike a home loan, you will not get any tax benefit for commercial property purchase on a loan.
One of the critical reasons most investors prefer residential property is that there is no tax benefit to reduce borrowing costs.
Low Capital Appreciation
I tell my investors to be cautious, while the high rental yields may be lovely and convincing.
The capital appreciation is very low.
This model is highly suitable if you already have your own business or plan to set up your commercial establishment.
Then it makes good sense to own the property instead of leasing it.
If you decide to move to another prime business area, you can lease this ownership property out. Otherwise, you can use it as a store for your goods.
The general upkeep and the maintenance of a commercial complex directly affect your commercial property investment.
If a rental property is unkempt, dirty, rubbish spilling out, with public toilets broken, the property’s image will be tarnished.
I prefer to visit or shop in a clean environment.
I’m sure your customers would prefer to find your business in the well-maintained area as well.
Difficult to find a Tenant
The smaller the size of your commercial property, the easier it is to find a tenant.
Shops or small office spaces can be easily leased to smaller businesses, and this becomes your rental property.
Let’s say if you have a 20,000 sq. ft. Office space or shop, you may find it difficult to lease that out.
Not Easy to Sell
When you consider this carefully, you realize that there aren’t many buyers for a commercial property.
Otherwise, all your family, friends, business associate, and even grandmother will rush to purchase a commercial property.
A commercial property is difficult to sell and may take a longer time to dispose.
Commercial Property Investment vs. Residential Property Investment
Your first investment should be a residential property that provides shelter and financial and emotional security to you and your family.
Your second property can be a commercial property bought for investment.
By doing this, you will have the best of both worlds as the rental yields are very high for commercial property investment.
Personally, I will avoid commercial property under construction as the risk is higher.
Sometimes, when projects stall, or there are delays in completion and issuing the Occupation of Fitness, buyers still have to continue serving their loans.
My other takeaway is not to buy a commercial property that is part of a residential complex.
Shop lots may appear very lucrative as there seems to be a “ready market” for businesses.
In reality, this may not be the case.
You will need to consider the high maintenance cost on the amenities and upkeep of the complex that each shop lot owner has to pay.
For retail businesses, the availability of parking can have a significant impact on your commercial property investment.
If you buy a shop without a parking space, you can’t expect many walk-in shoppers.
The same applies if there is no or minimal access to delivery, loading, and unloading goods.
It may be impractical and costly to carry your goods for a distance to your shop manually.
My last word is this; residential property investment is less risky compared to commercial property.
Retail Property Investment
Retail real estate investments comprise retail storefronts, shopping malls, and strip malls.
However, if you bought the right retail property way back in 2003, then you hit the jackpot.
A decade later, you can retire in your early ’40s.
According to EdgeProp Singapore, in January 2013, a new-sale transaction for a 161 sq. ft. unit at Alexandra Central sold for $2.87 million, or $17,820 p.s.f.
In hindsight, many Singaporean would have made millions if they invested in any of the nine developments: Alexandra Central, Centrepoint, Far East Plaza, Lucky Plaza, Novena Regency, Pavilion Square, People’s Park Complex, Sim Lim Square, and The Arcade.
Anyone of the strata retail transactions that have crossed the $10,000 p.s.f. Mark, based on URA’s caveat data.
Strip malls in the States are getting a second look from some retailers who have historically ignored them.
The rent at strip malls is typically cheaper as the stores are relatively smaller.
By anchoring grocery stores or gym tenants, retailers benefit from being in a place where shoppers visit multiple times a week.
Sometimes, to reward the landlord for keeping the surroundings in top-notch condition – the property owners also receive a percentage of sales generated by the tenant store on top of the base rent.
With a challenging time ahead, both landlords and tenants can work together to revitalize the retails space.
Most strip malls are located just off of a major road in a suburban neighborhood with mixed-use facilities.
Industrial Property Investment
Industrial real estate investments can comprise industrial warehouses leased to distribution centers or over long-term agreements for storage units’ facilities and even car washes!
Industrial real estate investments often have significant fees and service revenue streams.
They target these to generate sales from customers who use the facility temporarily.
They can model it after adding coin-operated vacuum cleaners at a car wash.
Sometimes it’s a coin-operated vending machine for filtered water.
Mixed-Use Property Investment
Mixed-use real estate investments combine any of the above categories into a single project.
Mixed-use property investments are increasingly popular for those with significant assets.
One of the essential and appealing methods is that this model has a degree of built-in diversification, vital for controlling risk.
An example of a mixed-use property could be five stories building leased by a bank on the ground floor, a popular fast-food chain, and a convenience store.
Above that, a quick-service restaurant, an upscale retail shop, and a beauty salon.
The owners converted the units above into service apartments or Airbnb, and they lease the top floor to a membership gym.
I find that this would work well in a mid-sized town with ample parking and a few big competitors.
Hands-Off Approach To Investing In US Real Estate
I have had many investors ask me, “Can I invest in real estate without touching a property myself?”
Yes, there is.
We have investors who don’t want to travel to the US. They don’t want to get into the nitty-gritty buying and rehab then reselling the properties.
Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, are popular in the investment community.
As an investor, you buy shares of a corporation that owns real estate properties through a REIT.
You receive an income as dividends.
REITs can be an excellent addition to the right investor’s portfolio if purchased at the proper valuation and with a sufficient margin of safety.
You can find a REIT to match your desired industry. For example, if you want to own hotels, you can invest in hotel REITs.
For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital.
As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the dividend’s ordinary income portion.
Tax Lien Certificates
What’s a property tax lien?
When an individual cannot pay his or her property tax, the local government (the county) files a tax lien imposed by law upon the property to secure the payment of the property taxes.
A tax lien is the actual legal claim the county has against the property for the unpaid amount owed on it.
The county can auction off the lien to raise the revenues to be used to run the county.
According to the law in the US, this is the most cost-efficient way to generate income.
Foreign Investors buy the liens in an auction.
The buyer of the tax lien pays the amount of taxes owed, and this “loan” to the property owners gives the buyer the right to collect back that money plus a guaranteed interest from the property owner.
The interest rates differ from county to county, and this makes the tax liens an attractive investment.
The law in the US If the property owner does not pay up within a certain period, the lien-holder can foreclose on the property.
Purchasing tax lien certificates is one way to get real estate exposure in your portfolio without actually investing in property.
Technically, I would say that this is like a fixed-income investment, just like a bond, because you are generating your investment return by lending money for interest income.
You are essentially financing a property, although you hope to invest in these tax liens and make some money from the situation.
You have no underlying stake in the appreciation or profitability of property beyond that interest income and the return of your principal.
If you’re looking at investment, you should first learn all about tax lien investing from a professional who has a solid track record before attempting to buy your first tax lien.
Like all investments, tax liens have risks. Tax Liens sometimes, as we say in Singapore, are not “clean.”
They come with additional hassles.
Some second liens from banks and other lenders might make collecting the money impossible if the home goes into foreclosure.
Regardless of the tax lien’s interest rate, the property may not be a good investment as it is in a poor neighborhood.
Sometimes, liens are put up for sale for a simple reason.
Even the county has no practical way to collect from the homeowner.
Other times, banks and hedge funds may rush into the marketplace and outbid all other investors.
When this happens, the investment is no longer attractive.
Essentially, as a tax lien investor, you take over as a debtor for the government.
If the property owner can’t or won’t pay, the home goes into foreclosure.
This may seem the most comfortable investment with the lowest risks.
Be very knowledgeable about real estate before you invest in this arena.
For this, having boots on the ground, with real connections with banks and real estate agents, helps.
They are the key people who will assist with the paperwork and application to foreclose the property and evict the home’s property owner.
Some investors don’t feel comfortable with this kind of potential scenario.
Can Foreigners Buy Property Investment In The USA?
Yes, yes, and yes.
The US government has no restrictions on foreign investments in US real estate.
So, in a nutshell, you can buy multiple properties in the US.
The same rules apply to US citizens, US resident aliens, and foreign nationals.
For all of us who live in Asia, we fall under the category of foreign nationals.
Now that you know that buying a property in the US is not a problem for foreigners.
I know the following questions you will think of.
The answer is simple.
You do not, I repeat. DO NOT.
- You do not need a Green Card.
- Or any type of visa.
- You do not need US citizenship to be eligible to do so.
You can buy a house in the U.S. That’s legal.
However, before purchasing your dream home in the United States, you need to secure an Individual Taxpayer Identification Number (ITIN).
An ITIN is a tax processing number only available for certain non-resident and resident aliens, spouses, and dependents who cannot get a Social Security Number (SSN).
You need to ensure compliance with the federal tax laws affecting US real estate transactions for foreign property buyers.
How Long Can I Stay In The US If I Own A Property?
After you buy your property, you can only live in it for a few months per year, subject to the duration of a visitor visa.
Foreigners owning property in the US is not uncommon.
But owning a property does not make you became a US citizen automatically.
Again, depending on which country you’re from, you may stay up to 90 days without a visa, but you will need a visa beyond that.
Typically, as a tourist, you cannot stay over 180 days at a time, and if you stay over 182 days (total) over three consecutive years, you may be subject to US income tax.
The average stay on an Electronic System for Travel Authorization (ESTA) is 90 days for Singaporeans.
Before embarking on your next big adventure, ensure you have the appropriate travel documents if you want to stay longer.
If you enter the United States on a tourist visa or visa waiver, your maximum stay will be 90 days.
With a B-2 tourist visa, you will usually be allowed to stay for up to six months.
Please check with the US Embassy for clarification on US Visa applications. https://sg.usembassy.gov/visas/
For Singaporeans, you can apply for ESTA no later than 72 hours before departing for the United States.
Real-time approvals will no longer be available, and arriving at the airport without a previously approved ESTA will likely result in being denied boarding.
Noble Sky International Expertise
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To help property investors grow Cash Flow Income with clear business objectives of investing in the US property market at a price lower than market value.
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