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 U.S. 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 whatsoever on types of investment property for sale in the U.S.
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.
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 U.S. 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 out a home or a smart property investment in the country.
Although the experience of buying a property in the U.S. 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.
What Are The Types Of Property Investment In The USA?
Whether they are newly constructed or a resale house, there are 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 variants of properties and real estate 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 of the peculiarities or challenges you will face.
One of the ways to do so is by dividing the real estate into several categories.
Residential Property Investment
Residential Property Investment Residential real estate investments are U.S. real property that includes single dwelling units, houses, apartment buildings, townhouses, and vacation houses – where a person or family pays you to live in the property for a pre-agreed time frame.
One of the reasons for favoring residential property is the low perceived risk.
You can rent a smaller property out easily.
The length of their stay is based 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 for investment purposes.
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 up and rental rates increase substantially, you may not be able to raise the rental as you are locked in old agreements.
If you want to earn rental income that will lead to greater flexibility in cash flow, then 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 say 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 free to the developer. The assured returns help the developer to survive the long and sometimes delayed construction period and bad times.
It may be tempting 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?”
If this is true, then all your family, friends, business associate, and even grandmother will rush to purchase a commercial lot.
Let’s break this down.
Pros Of Commercial Property Investment Types
When we look at average rental yields at 10%, you may want to look at prime locations to boost your returns to 13% to 15%.
However, what is important is knowing the property’s actual value and pay 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 Is Key When buying 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 handover 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.
For commercial properties, you can lease the unit “like it” as different businesses will renovate to suit their branding.
Compared to residential properties, you get to save on cost for 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.
As a thumb rule, commercial property investment is a costly affair compared to investing in a rental residential property.
In many cities in the U.S, the price per sq. ft. may contrast sharply.
Presently a commercial property investment may be quite affordable due to 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 or not, 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 at the current market rate if the entire building has no tenancy or if 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, in this regard, 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 to 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 why most investors prefer residential property is there is no tax benefit to reduce the overall cost of borrowing.
Low Capital Appreciation
I tell my investors to be cautious about it 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 relocate 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 impact your commercial property investment.
If a rental property is unkempt, dirty, rubbish spilling out, and public toilets were broken, the property’s image is 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.
Not Easy 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 will 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.
In other words, it is not easy 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, financial, and emotional security to you and your family.
Your second property can be a commercial property bought for investment purposes.
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 the issuance of the Occupation of Fitness, buyers still have to continue to service their loans.
My other takeaway is not to buy a commercial property that is part of a residential complex.
Shop lots may appear to be 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 the owner of each shop lot 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 for delivery, loading, and unloading of goods.
It may be impractical and costly to carry your goods for a distance to your shop manually.
My final word is this; residential property investment is less risky in comparison to commercial property.
Retail Property Investment
Retail real estate investments consist of 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 starting to get 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 gyms tenants, retailers benefit from being in a place where shoppers will visit multiple times a week.
In some cases, to incentivize the landlord to keep 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 consist of everything from 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.
These are targeted to generate sales from customers use the facility temporarily.
It can be modeled 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 units above are turned into service apartments or Airbnb, and the top floor is leased to a membership gym.
I find that this would work well in a mid-sized town with ample parking and a few big competitors.
Is There Any Way To Invest In Real Estate Without Dealing With The Property Myself?
I have had many investors ask me, “Can I invest in real estate without touching a property myself?”
Yes, there is.
I can assure you that we have investors who don’t want to travel to the U.S. 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.
All in all, 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 fails to 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.
In other words, a tax lien is the actual legal claim the county has against the property for the unpaid amount that is owed on it.
The county can auction off the lien to raises the revenues to be used to run the county.
According to the law in the U.S., 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.
It is the law in the U.S. If the property owner does not pay up within a certain period of time, 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 in exchange for interest income.
You are essentially financing a property, although you are hoping 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 starting to look 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 situated in a bad 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.
You have to 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 U.S.?
Yes, yes, and yes.
The U.S. government has no restrictions on foreign investments in U.S. real estate.
So, in a nutshell, you can buy multiple properties in the U.S.
The same rules apply to U.S. citizens, U.S. 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 U.S. is not a problem for foreigners.
I know the next questions you will be thinking of.
The answer is simple.
You do not, I repeat. DO NOT
- You do not need a Green Card.
- Or any particular type of Visa.
- You do not need U.S. citizenship to be eligible to do so.
You can buy a house in the U.S. That’s legal.
However, before you can purchase 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 nonresident 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 U.S. real estate transactions for foreign property buyers.
How Long Can I Stay In The U.S. 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 U.S. is not uncommon.
But owning a property does not make you became a U.S. citizen automatically.
Again, depending on which country you’re from, you may be able to stay up to 90 days without a visa, but beyond that, you will need a visa.
Typically, as a tourist, you aren’t able to stay more than 180 days at a time, and if you stay more than 182 days (total) over three consecutive years, you may be subject to U.S. 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, make sure 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.
By contrast, with a B-2 tourist visa, you will usually be allowed to stay for up to six months.
Please check with the U.S. Embassy for clarification on U.S. 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.