The Surprising Challenges of Cross Border Commercial Investments
By SVN Rock Advisors Cross Border Group
Cross Border Commercial Investments is one of the most sought-after real estate investment vehicles. Whether it’s commercial, industrial, or multifamily residential, these investments offer considerable passive income and appreciation. The United States, being the largest economy of the world, where investments are traditionally among the most secure in the world, is one of the most sought-after markets within the real estate industry.
However, for investors seeking to invest from outside the United States, the country puts up considerable barriers that are challenging if you are not familiar with the laws. In many cases, many international investors who find themselves ill-prepared for the task, or partnered with real estate brokers without the experience to navigate the complicated process, end up walking away, losing out on the benefits the USA market provides.
Listed below are just some of the barriers international investors encounter when going cross border to try and purchase American real estate.
Finding the Right Properties
One of the biggest barriers to going cross border to invest in real estate is that, if an investor doesn’t physically travel to the country and do their research, they are buying blind. Many experts suggest that it can be a 6-12 month process to find the right property, make an offer, arrange financing, and close the deal. They recommend planning to make at least one cross-border trip to see the potential property before committing to buy.
Without a team working on an investor’s behalf to vet potential properties and find the right investment, a cross border investor is at a considerable disadvantage when trying to enter the American marketplace. As it will already cost the investor considerably in terms of fees and third-party contracts, it’s important that the right property be found so that the return on the investment is worthwhile.
A Complicated and Opaque Process
Cross-border investing faces a number of regulatory and bureaucratic complications. Deals may require US bank accounts, US credit scores, even representatives with US citizenship. It’s important for an investor to know what hurdles they will encounter. Unfortunately, many American real estate agents themselves don’t know. According to the North American Association of Realtors, 20% of real estate agents have been in the business for less than a year. The overwhelming majority of deals agents have experience with are between Americans, so it is difficult to find an agent who is experienced in the process of cross border real estate investment.
This lack of transparency will mean more middlemen to ensure the property transfer occurs smoothly and legally, and this means increased fees. Other fees that could plague an international investor include currency exchange fees, bank transfer fees, attorney fees, investment fees, as well as the traditional broker fees. Then there is the issue of taxes.
American Tax Surprises
It is complicated enough to go through the taxes related to property transfers and capital gains in one country, so one can imagine how the pain increases when a second country gets involved. In recent years, American taxes have been notoriously in flux, with changes approved by the American congress suddenly afflicting ex-pats and individuals with cross-border investments. This is over and above the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), with withholds income tax on foreign investment, cutting into an investor’s bottom line.
Capital Commitment and Liquidity Issues
With its considerable benefits, real estate investment comes with considerable risks. One of the challenges of real estate investment is the limit to how fast an asset can be turned into cash. Unlike stocks, real estate investments can’t be listed on a public exchange. The overall supply of buyers is lower, which depresses prices, particularly if the investor needs to sell their asset quickly.
Cross border real estate investment also requires significantly higher capital investment than investments at home. Whereas a 20% deposit is usually sufficient to secure financing for an investment, cross-border investors often need to put down 50% or 60%. The problem is that investors don’t have an American credit history, and financiers are unfortunately less likely to trust such investors. As a result, many international investments are conducted in cash, locking in considerable capital in an investment that might be tricky to get out from, should the need arise.
All of these pressures slow real estate investment transactions to a frustrating pace. A study by the Juwai Chinese Consumer International Travel Survey, 56% of Chinese Investors spend a year or more finding the right investment property in the United States and then closing the deal. Many other investors walk away. A study of international investors who decided not to purchase property in the United States found that half cited not finding the right property as their main reason, 34% citing the cost of their preferred property, and 32% citing an inability to obtain financing.
While these challenges exist, they can be mitigated, if investors turn to brokers who have experience in cross-border investments. International agencies like SVN and its affiliates have built up years of experience in dealing with American tax law, third-party fees, financial arrangements and managing closing costs. They have become adept at linking cross-border investors with properties that meet their immediate and long-term needs, and they’ve built up a network of contacts who can navigate the rough waters of cross-border bureaucracy and connect the investors to sound properties with a strong return on investment.
The real estate market in the United States is too valuable to be ignored. By connecting with an experienced brokerage team that understands the unique challenges of cross-border investing, international investors can reap the benefits of the American market, without running afoul of the obstacles.
SVN Rock Advisors Cross Border Investing approach involves a multi-tiered ownership structure in order to avoid excessive taxation or liability.