Purchasing US real estate as an investment

[CrazyCaper]

Hello CP,

My wife and I have discussed purchasing a US real estate as a rental property to add to our financial portfolio. Do any other Canadians have some experience or insight on how difficult it is and the legal and tax implications? Appreciate any help/advice you can provide.

[Sliver]

What kind of real estate, exactly? Like a house? This sounds like a huge pita. What made you think of doing this?

[opendoor]

Vacation rental, residential, commercial?

Buying the property isn't usually super difficult. There's a bit of red tape, but nothing all that onerous as long as you have everything together. If you're buying a vacation-type property, those areas are often set up well to assist with that (i.e. real estate agent will be more familiar with the process, there will be more lawyers in the area that specialize in cross-border transactions, etc.)

Taxes are similar. Not hugely onerous, but you'll need to get set up correctly to get taxed on a net basis, and then file in both countries.

Other than that, it would basically just be the normal issues with being a non-resident landlord. Those can be significant, either as a source of hassle (if you try to handle it yourself) or as an expense (if you outsource it). There are lots of property investors in the US, so to some extent you'll be competing with people who can manage it locally which puts you at a disadvantage.

And I would also keep in mind that there's far more disparity in most of the US between good neighborhoods and bad than there is in Canada. So make sure you really have a good handle on where you're buying.

[CrazyCaper]

Originally Posted by Sliver

What kind of real estate, exactly? Like a house? This sounds like a huge pita. What made you think of doing this?

We were looking at properties to utilize as short-term rentals(AirBnB). Tourist destinations like Austin, Phoenix, Myrtle Beach etc. Also like the idea of being able to use these properties when we travel. We understand the costs of hiring a property management company to handle the business on our behalf but figured it would be a good passive investment opportunity for us.

[Ryan Coke]

As far as doing work yourself on the property (either maintenance, or managing it), if it is a rental it can be considered working illegally in the US. I know it happens a lot, and I don’t know how often foreign landlords actually face significant consequences, but it is technically not permitted. If it’s a property for private use, then it isn’t an issue.

So as opendoor said, depending on the state the purchase isn’t very difficult. I owned in Arizona, it was not an issue at all. For taxes, you’ll need to file in both countries, so will likely need accountants that understand the process. And if you want to stay on the right side of things, then just make sure you have a management company that takes care of the unit. If you want to manage and maintain it yourself, just be aware of the risks.

[bizaro86]

Originally Posted by CrazyCaper

We were looking at properties to utilize as short-term rentals(AirBnB). Tourist destinations like Austin, Phoenix, Myrtle Beach etc. Also like the idea of being able to use these properties when we travel. We understand the costs of hiring a property management company to handle the business on our behalf but figured it would be a good passive investment opportunity for us.

Have you ever run an AirBNB before? It's more like running a hotel than a regular rental property. When you're doing the numbers you should assume something like 50% occupancy, and 0% during any time people wouldn't want to be there.

[Bill Bumface]

REITs don't call you in the middle of the night for a sewer backup.

[Rutuu]

Originally Posted by Bill Bumface

REITs don't call you in the middle of the night for a sewer backup.

REITs don't give him the leverage a property does.

Some of the dumbest rich people I've ever met in my life got there with property.

Pick somewhere with income growth, near amenities, and below or near the cost of replacement and you'll be sweet.

Keep us updated.

[blankall]

Many states will force non residents to get a property management company, as opposed to just leaving properties vacant and unattended. A potential cost to be aware of.

[sleepingmoose]

There’s also a lot of cities in the sunbelt that are heavily restricting short term vacation rentals 30 days or less (for example, around Palm Springs) in a way that makes it very difficult. It may not be a big deal depending on your intentions, but it’s a very different business model - it’s less vacationers and more geared towards snowbirds staying for months on end. It also makes it harder to slot in time for yourself.

Just do your research before getting too far down the road.

[Locke]

I have a number of clients with US Rental Properties and it can be done of course, but there are complications. I'd highly recommend discussing it with an accountant before pulling the trigger.

There are a lot of things to consider and those things evolve depending on your short and long-term goals

[curves2000]

Originally Posted by Rutuu

REITs don't give him the leverage a property does.

Some of the dumbest rich people I've ever met in my life got there with property.

Pick somewhere with income growth, near amenities, and below or near the cost of replacement and you'll be sweet.

Keep us updated.

You can definitely do well with real estate either residential or commercial no doubt about it. Having grown up in the business myself, I can tell you that it isn't easy as some people think.

Plenty of smart people will have bought an income property and than become totally amazed at the level of work involved and the annoyances they deal with.

Someone mentioned a short term rental being more like a hotel than a rental property and that is an excellent way of looking at it. I am not in the short term rental market myself but I always tell people, you got to deal with every tenants issues.

My brother had a few cross boarder rental properties in Arizona and purchased them cheap enough he was making good money. It was a lot of work dealing with homeowners associations, taxes, property management companies and more. He had grown up in the business as I had but got tired of some of the small things that you can't fix when your so far away.

Minor landlord/ tenant issues where the property manager just emails you to approve expenses for all purposes. It's one thing for you to go across town for a minor issue that can be dealt with right away but when your in a different country, it's a different game.

Nothing wrong with being honest with the OP and say that unless your 100% comfortable dealing with this issues and paying associated expenses, than don't get involved. Buying an income property is buying work too. If you can't deal with complaints than that's an issue as the easiest level.

It's like the people who buy restaurants, small operation ones and than are utterly amazed they are scrubbing pots, pans, dishes, shopping at Wholesale Club and Costco daily. Probably thought they would be in a suit, handing out the wine menu and being the top sommelier making $400 in tips while the $16 an hour employee's took care of the back.

Everybody needs to know what they are getting into and be honest about it.

OP: Best of luck with whatever you decide.

[Roughneck]

Originally Posted by Locke

I'd highly recommend discussing it with an accountant before pulling the trigger.

Do we get to take the helicopter to scout the property, or is that more of a new development thing?

[Lanny_McDonald]

Originally Posted by sleepingmoose

There’s also a lot of cities in the sunbelt that are heavily restricting short term vacation rentals 30 days or less (for example, around Palm Springs) in a way that makes it very difficult. It may not be a big deal depending on your intentions, but it’s a very different business model - it’s less vacationers and more geared towards snowbirds staying for months on end. It also makes it harder to slot in time for yourself.

Just do your research before getting too far down the road.

Short-term rentals have become a very hot topic are being banned in a lot of the attractive markets. I know here in Phoenix every municipality is adopting or investigating adopting new ordinances that will make short-term rentals hard to own and harder to rent. The outcry from communities after short-term rentals turn into party houses during major events has become deafening and municipalities are listening. They are also looking at the revenue generated from those properties and looking for their cut of those revenues through additional taxes and fees. Like sleepingmoose said, do your research, know your market well, know the laws and ordinances, and know how your revenue is taxed. Real estate can be a great investment, but I would be hesitant to get involved in a property if the goal is to use it as a short-term rental.

[DoubleF]

Don't assume that minor tweaks to what you're doing are insignificant. They can have major implications. Changing your mind from personal use/long term rentals/short term rentals can have big implications tax wise or municipal bylaw wise.

I've heard of more people selling their personal use or rental properties in the USA in the last few years. In recent years, I think property managers have to do withholding taxes on the rents. You aren't allowed to self manage. Claiming these foreign tax credits is allowed, but the CRA is inconsistent and a PITA in allowing those deductions. I don't recall what they said specifically, but I think it has to do with tax planning relating to the estate tax rule in the USA if the value of your worldwide estate is over 1 million in net worth.

Rules on properties are evolving rapidly worldwide. Just because you investigate the situation now for owning a US rental property doesn't mean it could suddenly go sideways fast with new rule changes in the coming few years. You have to stay on top of understanding this and you may need to refresh your understanding a few times a year.

[Tron_fdc]

I've bought and sold in Arizona.

GET AN ACCOUNTANT who understands Canada/USA taxes.

Also be aware, when you eventually sell your property the US government can withold up to 50% of the sale in ESCROW until you prove all the taxes are paid. We worked with the selling realtor before the sale closed and the IRS "only" withheld 20% which was $100k, and it took almost 3 years to recover it.

Buying a property in the US is super easy. But selling and pulling all your funds out of the USA is a giant, enormous, ridiculous PITA. I likely would NEVER do it again.

[calgarywinning]

Originally Posted by Locke

I have a number of clients with US Rental Properties and it can be done of course, but there are complications. I'd highly recommend discussing it with an accountant before pulling the trigger.

There are a lot of things to consider and those things evolve depending on your short and long-term goals

Not only this if it isn't held in trust there is a little caveat where the US Government has rights to your worldy possessions. As well as the tax reporting implications. So setting up the trust allows easier access to maintenance of the property, protection of your Canadian reported assets. Maintenance and setup on a trust runs $2500 a year. But a lot of high end financial planners and tax accountants can speak to this who have net worth clients who choose to own property in the US usually go this route.

I know a lot of people who have regretted their US purchases for other reasons as well. Like if you catch a housing bust.

I know some that just gown down and enjoy properties and let the cards fall where they may.

[Qwerty]

Originally Posted by Tron_fdc

I've bought and sold in Arizona.

GET AN ACCOUNTANT who understands Canada/USA taxes.

Also be aware, when you eventually sell your property the US government can withold up to 50% of the sale in ESCROW until you prove all the taxes are paid. We worked with the selling realtor before the sale closed and the IRS "only" withheld 20% which was $100k, and it took almost 3 years to recover it.

Buying a property in the US is super easy. But selling and pulling all your funds out of the USA is a giant, enormous, ridiculous PITA. I likely would NEVER do it again.

I work for a company that invests in US real estate and echo this. FIRPTA Withholding tax (federal) is a giant PITA. It is 15% of the gross and takes YEARS to get back. Then you also have state withholding tax (Georiga for example has this). Also be careful of things like transfer taxes depending on what state you invest in. We just got our 2020 refund cheque the other day, took almost 3 years. Also, be careful where you are going to Airbnb... we have a lot of property in Phoenix that is getting crushed. You aren't the first and won't be the last to go into the "hot" markets, but tread lightly!

https://unusualwhales.com/news/airbnbs-bubble-collapse

If any of this is true (revenue down 50% in Austin, Phoenix, etc) real estate could be starting to implode. That's probably a discussion better saved for a different thread though!

[Ryan Coke]

Geez, I had no problem getting my withholding tax back quickly, and selling was only a minor pain, nothing that I wasn’t expecting. In fact I am seriously considering purchasing something again. Just looking for a half decent entry point, so if there was a bit of a real estate implosion I’d happily jump back in.

[Locke]

Originally Posted by Roughneck

Do we get to take the helicopter to scout the property, or is that more of a new development thing?

Going rate is $250k per ride with no guarantees on round-trip. Also...I built the Helicopter myself in my backyard but its super safe, I pinky swear...just sign this here little waiver...

Originally Posted by Tron_fdc

I've bought and sold in Arizona.

GET AN ACCOUNTANT who understands Canada/USA taxes.

Also be aware, when you eventually sell your property the US government can withold up to 50% of the sale in ESCROW until you prove all the taxes are paid. We worked with the selling realtor before the sale closed and the IRS "only" withheld 20% which was $100k, and it took almost 3 years to recover it.

Buying a property in the US is super easy. But selling and pulling all your funds out of the USA is a giant, enormous, ridiculous PITA. I likely would NEVER do it again.

Truer words...it can be easy as you please or a complete nightmare.

Originally Posted by calgarywinning

Not only this if it isn't held in trust there is a little caveat where the US Government has rights to your worldy possessions. As well as the tax reporting implications. So setting up the trust allows easier access to maintenance of the property, protection of your Canadian reported assets. Maintenance and setup on a trust runs $2500 a year. But a lot of high end financial planners and tax accountants can speak to this who have net worth clients who choose to own property in the US usually go this route.

I know a lot of people who have regretted their US purchases for other reasons as well. Like if you catch a housing bust.

I know some that just gown down and enjoy properties and let the cards fall where they may.

This is also good advice, but even protection through a Trust may not save you headaches.

I just finished up with a client whose family held US properties in a Trust, the primary passed away and CHASE made them jump through more hoops than the Super Dogs at the Stampede because the rest of the beneficiaries were Canadian.

They did not want that cash leaving US soil, it was wild. It took YEARS.

And it was a complete and utter Circus. CHASE blamed the IRS, the IRS blamed CHASE and around and around they went...it was about as well oiled as a Toddler's birthday party.

And I thought it sucked enough owning Revenue property in Canada!

You're going to have to pay for some good professionals on both sides of the border, its going to be expensive and its going to suck but when the time comes to sell or inherit or whatever the next phase of the plan is, you're going to worship every dime you spent.