Participating in US-Based Real Estate Syndications as a Foreign Investor

September 25, 2018

[This article is a guest post by Omar Khan, founder of Boardwalk Wealth]

 

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I moved to the US for the age-old reason – love.

 

My wife wanted to continue her career as a physician in the US. My experiences in finance meant that I could easily move with minimal hindrance.

 

So, I decided to bid adieu to the Great White North and moved south to Texas.

Once I did so, I started looking deeper into the US commercial real estate space, both for me and my investors.

 

However, what I found that hardly anyone could walk an international investor through the process from start to finish. Naturally, not many people knew how taxes worked in cross-border investments. From my personal experiences, I knew that taxes could make or break the investment decision. Hence, an inconsequential factor for Americans was a seriously consequential factor for my investors.

 

Over the course of the past few years, I have gone from being an LP investor to taking a lead role in due diligence, underwriting and running deals myself.

 

I wrote this post to help my Canadian and other international friends/investors better understand how to invest in commercial US real estate investments.

 

 

Why Foreign Investors Invest in US Real Estate

 

Real estate investors from all over the world actively (and passively) invest in the robust US market. I’ve covered some reasons below:

  1. USA, USA, USA!

  2. Stable and Regulated Markets

  3. Market Size

  4. Diversity of Opportunities

  5. Global Diversification

  6. Top Performing Asset Class

  7. Family Reasons

 
#1 – USA, USA, USA!

Global investors love investing in the US and, often times, pay a premium as they hold US real estate in high regard. From a personal perspective, I have observed that my international friends (Canadian and otherwise), often have deeper knowledge of the US economy than their own countries! This goes to show you the importance and prestige associated with investing in the US.

 

Source: National Real Estate Investor

 

 

#2 – Stable and Regulated Markets

 

The US market is seen as a safe haven and gold standard for global real estate investing. Unlike the commodity driven economies (Middle East, South America) or Europe (Brexit), the US economy is viewed as a well-oiled machine providing long-term asset growth. The rule of law in the US is of utmost importance as many investors come from countries where the enforcement of law is not upheld.

 

 

#3 – Market Size

 

Not only is the US the biggest economy in the world, but individual states like Texas and California are vibrant, strong and huge markets. To give you an idea of perspective, California is ranked #6 and Texas is ranked #10 in the list of global economies.

 

 

#4 – Diversity of Opportunities

 

The sheer size of the market ensures a diversity of opportunities that are not offered anywhere else in the world. Every niche is well represented, and the associated market depth ensures that assets at all stages of the lifecycle are well represented and easily investable.

 

 

#5 – Global Diversification

 

The US economy welcomes foreign capital and has a business-friendly regulation structure. Unlike many countries, investors face minimal capital movement restrictions. This allows foreign investors to diversify their portfolios and currency exposure while sheltering assets in a safe, stable and secure economy.

 

 

#6 – Top Performing Asset Class

 

Investors understand real estate, they see it, feel and know that multifamily investing is one of the proven ways of building long-term wealth. We purchase assets that are already generating cash returns. Our strategy is to make improvements and introduce efficiencies on top to make a good asset a great one.

 

Our investors understand that this is not just an investment idea but an asset class that has proven its worth over time, across cultures and throughout the various stages of the business cycle.

 

 

#7 – Family Reasons

 

Many investors, including those I know personally, have spouses/partners and children in the US or frequently travel to the US. As such, they want positive cash flow assets that will grow their long-term portfolios. This is especially true for investors from countries where capital movement is restricted especially regarding how much money can be transferred to the US.

 

Considerations for Foreign Investors

 

While US-based real estate investments can provide many benefits to foreign investors, there are a few considerations to keep in mind before investing:

  1. Capital Restrictions

  2. Currency Risk

  3. Political and Regulatory Environment

  4. Legal and Tax

 

#1 – Capital Restrictions

 

As mentioned earlier, many countries have capital controls that restrict how much investors can move from their home country to the US. These restrictions change often and rapidly, so be sure to do your research.

 

 

#2 – Currency Risk

 

Most global investors seek to diversify across geographies and currencies to negate currency risk. Nonetheless, currency risk is an issue that investors need to be aware of when investing in the US market.

 

 

#3 – Political and Regulatory Environment

 

With a highly regulated and transparent market, the US is a stellar economic performer and real estate, as an asset class, has performed remarkably well in the US.

 

 

#4 – Legal and Tax

 

These issues are important for an investor to understand as laws and taxation policy can differ from country to country. Investors need to ensure that they can understand or get the right help to understand legal communications and contracts.

 

Essentially, as in all legal cases, investors need to ensure that they understand what they are agreeing to before signing any documents.

 

 

How Foreign Investors Can Participate in a US-based Real Estate Syndication

 

Our preferred CPAs have extensive experience in helping international investors invest and run businesses in the US. We can also advise your existing CPA if the need arises.

 

Below, I have outlined a general guide for participating in US-based real estate private equity investing for international investors.

  1. Incorporate US-based LLC / Corporation

  2. Apply for EIN (Employer Identification Number) and Register the LLC with Various Required Agencies

  3. Execute an Operating Agreement Among Partners

  4. Apply for ITIN (Individual Taxpayer Identification Number) or Social Security Number

  5. Open US-based Bank Accounts

  6. Filing the LLC US Tax Returns (Federal, State and City) and Personal Tax Returns for all Partners

  7. Tax Treaty Benefits Are Available

 

#1 – Incorporate US-based LLC / Corporation

 

To get started, foreign investors need to create an entity to invest with. For foreign investors, two structures are available: LLC or corporation. The former – LLC – is preferred as it avoids double taxation and offers the most tax efficiency.

 

A single owner LLC is considered a disregarded entity and treated as a personal business for tax purposes. Hence, it loses most of the LLC benefits, and therefore it is best to have a minimum of 2 partners. With a minimum of 2 partners, all the tax benefits can now come into play.

 

The equity split does not matter. For instance, an LLC could have 50/50, 1/99, 40/60 or any other split. In our experience, most foreign investors tend to open these LLCs with their spouses or partners.

 

If that makes your head spin, don’t worry. We’ve got specialists who can easily cover this for you at very affordable rates. Plus, these are one-time costs.

 

 

#2 – Apply for EIN (Employer Identification Number) and Register the LLC with Various Required Agencies

 

Once the LLC is incorporated, the investor must apply for an EIN (Employer Identification Number) and register the LLC with various agencies. Although this sounds daunting, our preferred CPAs and lawyers have extensive experience in this area and can help you set this up in under a day.

 

 

#3 – Execute an Operating Agreement Amongst Partners

 

Next, you must draft and execute an operating agreement amongst all partners of the LLC.

 

 

#4 – Apply for ITIN (Individual Taxpayer Identification Number) or Social Security Number

 

It is not uncommon to find overseas investors who already have a social security number, if they have lived in the US for work. However, if you don’t have one, you will need to apply for an individual taxpayer identification number (ITIN).

 

Each individual partner in an LLC needs to apply for an ITIN. This can take up to 60 days. Our experience indicates that most clients are able to get their ITIN within 4-6 weeks.

 

 

#5 – Open US-based Bank Accounts

 

Once the EIN, operating agreement and ITIN are available, a foreign investor can open a US-based bank account. With our extensive banking relationships, we can help you in opening the right bank accounts with global banks that have exceptional customer service and online access.

 

 

#6 – Filing the LLC US Tax Returns (Federal, State and City) and Personal Tax Returns for all Partners

 

The LLC needs to file returns as well as partners have to file personal tax returns. The K-1 (tax return for syndicate partner) often has significant deductions that results in paper losses each year, while you keep making cash flow, before a sale occurs, say in 5 years.

 

Hence, those losses can be offset against future gains to reduce the tax bill.

 

Investors need to consult with their local professionals to determine tax and related disclosure requirements. For US legal structures – asset protection strategies – US-based legal professionals can provide the best advice.

 

 

#7 – Tax Treaty Benefits Are Available

 

These vary country by country and can dramatically alter the net returns that investors get from their investments. It is advisable to consult with your CPA. Boardwalk Wealth connects its investors with US-Canada cross-border tax specialists.

 

 

Conclusion

 

In summary, commercial real estate has proven its resilience and has continuously been one of the top-performing asset classes. Investors should understand their constraints before investing and seek professional advice. Our preferred advisors have extensive experience and can help make the entire process smooth and efficient.

 

 

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