Real Estate Investment: Three Key Considerations for Foreign Investors
Real estate investment in places like Florida and California is on the rise, due in some part to the influx of foreign capital.
Reasons for the rise in foreign investment include:
- The US dollar continues to be weak against the Euro and other foreign currencies
- The US economy has recovered from economic crisis
- Property values are still low, compared to prices before the crash, and the market is sharply on the rise.
- Other world economies, most notably European countries, are now in crisis
- Foreign capital, especially from Europe and Venezuela, is in flight
- The Chinese economy is transitioning, and many fear a political swing to the right
Conditions are perfect for foreign individuals and companies looking to diversify, move capital to a safe place, and/or establish a foothold in the US. To invest successfully, there are three basic principles to consider.
Foreign Investment: Principle #1
Real Estate Professionals
Foreign investors may not be fully familiar with the local market and legal procedures. After all, even the most sophisticated business person cannot know all the intricacies of doing business in a foreign environment. So, whom can you trust?
There is no question finding a good realtor is fundamental to successful investment. A good realtor knows how much a property is really worth and, more importantly, how much it will likely be worth in the future. A realtor also knows how much the property can generate in rent. There is no downplaying the role of realtors in real estate investment, but there are a couple of limitations.
First, realtors are not allowed to give legal advice. Foreign investors may specific concerns, such as taxation and asset protection, which involve careful planning. These crucial issues should be handled by a competent lawyer– not only one who knows real estate but one who specifically works with foreign nationals. Such lawyers are adept with land trusts, limited liability companies, offshore accounts, and other techniques for protecting you and your investment.
Foreign Investment: Principal #2
Investment of any kind is always a big deal. There is significant money on the line and, for investors who come from particular countries — such as China, Argentina, Venezuela, and North Korea – there may be legal concerns. It is important foreigner nationals understand the implications of their investments and make their goals clear to the professionals working on their behalf. Of course, language is one important component. If possible, find local professionals who speak your native language. There is more to it than that, though.
Legal systems around the world may be similar in some ways, but there are always differences. Even among US states, there are considerable differences. If you want to actually understand your investment, you will need someone who can translate concepts. Sometimes, understanding similarities and differences between one system and another may be more important than language. Even if you have significant experience and knowledge investing in another country that does not mean you will understand a real estate transaction in Florida without the assistance of someone who is knows both systems.
Foreign Investment: Principal #3
As an international investor, you will have to team up with at least one real estate professional. You have some options to consider.
There are professionals who receive a commission on the sale-purchase. Buyers usually love this arrangement because commission-based professionals, such as realtors, do not charge anything unless and until the transaction is finalized. I have no doubt these people are very ethical, but it is worth pointing out commission-based professionals have an incentive to see the transaction occur whether or not the purchase is favorable for the investor. In fact, the more the investor pays for the property, the greater the commission.
You can also find people in the business who are willing to partner with a capital investor. So, for example, the partner might find the good deals and take care of the realtor work, while you provide the capital. The downside to this arrangement is you will have to share profits. On the other hand, the advantage is both your interests align. The more money you make, the more money your partner makes. For the most part, this arrangement creates good incentives, although there is a chance the partner might be less risk-adverse than you would like.
Lastly, you can hire a fee-based professional, such as an attorney. Thinking in terms of how interests align, an attorney is essentially neutral. Attorneys receive their fee whether the deal closes or not and whether the investment is successful or not. Perhaps, that is the downside. However, consulting a real estate attorney is the one way you can be sure you are getting unbiased advice from someone with a professional responsibility to consider only your best interests.