- Foreign Investment in U.S. Real Estate I Great Jones
- Foreign Investing in Real Estate by the Numbers
- Why Are Foreigners Investing in Residential Real Estate?
- Rising Rental Rates
- Fixed-Rate Mortgages
- Cash Flow
- Property Value
- Safety and Protections
- Primary Residence
- What Foreign Investors May Not Know
- Higher Prices on Mortgages
- Larger Down Payments
- Approval Processes
- Work Visas and Green Cards
- How to Stay Competitive Against Foreign Investors
- The Texas Advantage: Why Texas is the Best State for Multifamily Apartment Investing
- Why is the Lone Star State Attractive To Foreign Investors?
- How to be Successful in Multifamily Apartment Investing?
- Texas Triangle: Massive Opportunity for the Multifamily Investor
- The Chinese purchase more U.S. residential real estate than buyers from any other foreign country, but Trump’s trade war may change that
- China has become the largest foreign buyer of U.S. residential real estate
- A Chinese pullback could have serious effects for some West Coast markets
Foreign Investment in U.S. Real Estate I Great Jones
With the advent of globalization, foreign investing in nearly all U.S. markets continues to grow year to year. Estimates suggest that foreign investments account for upwards of $2 trillion per year in the United States, often in spite of earning substantially lower returns.
Real estate remains one of the most steadfast of these investments. While domestic investments in real estate still remain a prominent part of the U.S. economy, foreign investment in U.S. real estate has become a growing trend over the past decade. U.S.
property investors are now in competition with a larger pool of investors and need to seek out competitive advantages a great property management company to make their rental property stand out and assist with their acquisition strategy.
Learn more about this trend below and what this means for U.S. property investors.
Foreign Investing in Real Estate by the Numbers
U.S. real estate transactions to foreign buyers totaled about $78 billion in 2019.
When looking at the numbers between commercial real estate vs residential real estate, a majority of these foreign buyers preferred residential properties in suburban areas, as opposed to properties found in small towns and metropolitan areas in major cities. Most foreign purchases in real estate were in Florida, followed by:
- North Carolina
So what does this mean for property investors in the U.S.? Well, for example, a U.S. investor that purchases a rental property in Gainesville, FL is not only competing with other U.S. investors for tenants but also a slew of foreign investors. In this case, investing in services for property management in Gainesville, FL, may be a lucrative way to gain a competitive edge in that market.
Over the last few years, the largest share of foreign buyers has consistently originated from China or Canada. Mexico remains the third most common foreign investor in U.S. real estate. However, numbers show an overall decrease in these shares across the board.
In 2018, the number of Chinese investors hovered at around 15 percent before dropping to 11 percent in 2019. Despite the drop, Chinese nationals still accounted for over 19,000 properties in the United States, which generated about $13 billion in sales.
By comparison, Canadian buyers of residential properties in the United States has continued to see a decrease since 2011. However, in 2017, the total property sales to Canadian-based buyers peaked at about $19 billion, the highest it has been over the last decade. By 2019, those sales dropped to about $8 billion.
Why Are Foreigners Investing in Residential Real Estate?
As one of the richest countries in the world, the United States has always been a safe and often lucrative investment for foreigners.
Even despite some hiccups and the decreases in investment numbers over the last few years, residential real estate in the United States typically sees consistent and significant appreciation.
For foreigners, property is also less expensive in the United States than in similar countries, including Canada and the United Kingdom. Read about some of the reasons why foreign investors prize U.S. real estate below.
Rising Rental Rates
One potential reason for the growing trend of foreign investors in real estate is the increasing rental rates in multifamily properties throughout the United States.
Between 2018 and 2019, rental rates in Las Vegas, Nevada, increased by about 7.9 percent.
Furthermore, about 61 percent of foreign buyers believed that housing prices in the United States were higher than prices in their respective countries.
Even given recessions and housing crises, the United States has remained surprisingly steadfast in providing easy access to mortgages and generally lower borrowing costs than other countries.
Many countries similar to the United States, including Canada and the United Kingdom, do not provide long-term fixed-rate mortgages to potential home buyers. Most countries only offer short-term mortgages with an adjustable rate.
Being able to maintain the same interest rate over a period of 15 to 30 years is boon to anyone buying or investing in real estate, especially for foreign nationals.
Generating high yields can be difficult outside of the U.S., even in hot spots London. Most investors in foreign markets settle for relatively low yields in exchange for stable (albeit overpriced) markets.
In some countries, investors will put money into properties knowing that they actually present negative cash flow.
Without a fixed-rate mortgage, that can quickly turn into a gamble that does not present capital gains.
By comparison, foreign investors can easily pay less for properties in the U.S. while getting an assured positive cash flow every month. If you are not paying your own mortgage or rent, that equates to a stable and fairly reliable source of passive income.
The actual value (not accounting for residential real estate depreciation) of a property can vary age of the home, location, general condition, and a dozen other factors.
However, in terms of price per square foot, property in the United States is consistently more affordable. Some beachfront properties in attractive markets still sell for about $200 per square foot. Residential properties get even more affordable as you move inland.
By comparison, areas in London sell for upwards of $8,000 to $10,000 per square foot.
Safety and Protections
While the regulations surrounding residential property investment can feel cumbersome, frustrating, or inconvenient to the average U.S.
citizen, those regulations are in place to provide protection for potential homeowners and investors.
These regulations ensure the protection of assets, along with various means to prevent a severe loss of money in the investment. All of this just makes for a more ideal investment for foreigners.
While the cash flow and passive income are perks, many foreigners simply invest in property as a primary residence in the United States.
What Foreign Investors May Not Know
Although there are plenty of benefits to investing in residential real estate as a foreigner, investments can still come with plenty of hurdles for non-U.S. citizens. Here are some things that foreigners should keep in mind if they do plan to invest in real estate.
Higher Prices on Mortgages
Many banks and institutions will gladly lend to foreign nationals who do not live in the United States.
However, instead of more conventional mortgages, these institutions may only offer non-conforming loans that have a higher interest rate and different underwriting guidelines.
While this may still be at a fixed rate, you would still be paying more than someone living in the United States.
Larger Down Payments
Banks generally consider foreign investors a higher credit risk. That often means that you will have to pay a higher minimum down payment to the lending institution. You can typically expect the lender to ask for at least 30 percent of the sale price before providing the loan.
For a U.S. citizen, the approval process is simple and usually involves checking credit history and tax returns.
Foreigners usually do not have a domestic credit history or American tax returns, so lenders will ask for bank statements, income tax returns filed in your home country, and several months of credit card statements. That all generally means a much more complicated approval process that may potentially take a long time.
You can potentially shorten that period by applying for your mortgage through a global bank that has a presence in the U.S. and in your home country. This can potentially help you reach a lower interest rate.
Work Visas and Green Cards
If you are in the U.S. on a work visa (even if it is temporary) or have a green card, you may actually have more options available. You may even qualify for a typical Fannie Mae or FHA loan, but the lender may still ask for information that proves that your legal status or work status will get extended.
Different countries have different tax treaties with the United States, so it is worth looking into the tax laws. When you sell your property, you will have to pay a capital gains tax and 10 percent of the gross purchase price will be withheld by the IRS. If you earn any rental income on your property, you will also ly have to file and pay for income taxes annually.
How to Stay Competitive Against Foreign Investors
Foreign investment in U.S. real estate still remains fairly consistent. Because of this additional competition, U.S. investors struggle with maintaining a competitive edge against these foreign investors. Foreign investors capitalize on great single family rental cap rates which make it difficult for U.S.
investors to find properties in the best places to buy rental property. Also, once you have invested in property, the rental market is that much more crowded by foreign real estate investors trying to place tenants.
As mentioned before, one way to stay competitive is by enlisting professional property management services to help you place high-quality tenants and manage your overall property.
With property management services in Jacksonville, FL to Austin, TX, Great Jones helps maximize your investments and reduces any stress that comes with managing a real estate portfolio. This way, you have more time on your hands to make strategic decisions on future investments.
If you have any questions, consult a property management professional to learn how to better handle and compete with foreign real estate investors.
Enter your email to get in contact with our team of real estate experts. We’ll answer any questions you have on staying competitive with your investment.
The Texas Advantage: Why Texas is the Best State for Multifamily Apartment Investing
Texas is the best state in the US – at least, for multifamily apartment investing (and great BBQ, football and music).
US real estate – and Texas real estate, in particular – is a hot commodity for foreign investors. This trend has been picking up steam over the past decade and shows no sign of stopping.
Foreign buyers purchased $5.1 billion in apartment communities through June of 2016—a record high; over the previous decade, foreign investors averaged $5.4 billion in multifamily annually. And in 2015 international buyers invested $19.6 billion in apartment properties, taking a 12.8 percent share of the total $133.5 billion in apartment properties bought and sold that year.
Texas continues to have a lot of potential for foreign investors due to the size of its markets. As a percentage of the total market, foreign investors do not comprise as big a portion as New York and California, which means there is still more room for growth.
Source: National Real Estate Investor
Why is the Lone Star State Attractive To Foreign Investors?
- Strong Economic Growth
- Pro-Business Environment
- Positive Job Growth
Strong Economic Growth: Texas is the second largest economy in the US with a GDP of $1.6 trillion.
This ranks it in the top-10 global economies. The state consistently comes in first for its economic climate, economic growth and job creation. 109 of the 1,000 largest public and private companies in the United States call Texas home, including AT&T, ExxonMobil and Dell.
Pro-Business Environment: Texas has a long and proud history of being extremely pro-business.
With no corporate or individual income tax (yes, you read that right!), it boasts one of the lowest tax burdens in the country.
The Texas Enterprise Fund (TEF), established in 2003, has invested ~$500 million to bring major corporations, small businesses and investment capital to the state.
Positive Job Growth: The pro-business stance has led to positive job growth, year in and year out.
According to research released December 2016 by Greater Houston Partnership, from 2010 to 2014 Houston alone added nearly half a million jobs, and the city continued to post 12-month net job gains throughout 2015 and 2016.
Even the oil crisis did not put a major dent in Houston’s job numbers. The overall state of Texas added more jobs in 2017 than it had in any month since 2013 (and those other months weren’t slow months).
Where businesses go, jobs go—as do the employees required to fill those jobs. Those employees all need a place to live, which ultimately promotes a robust real estate market.
How to be Successful in Multifamily Apartment Investing?
Selecting the right market is THE most crucial decisions an investor can make in managing their portfolio. We believe, the two primary metrics when evaluating a market are:
- Population Growth
- Job Growth
People move where the jobs are, and companies want to be where strong employment bases are. Simply put: are people moving to this market, and do they have jobs when they get there? If the answer is yes, then there is a good chance you have found a great multifamily market to investigate further.
Keeping this in mind, I went through Forbes’ 2016 list of the fastest growing cities. Texas ranks highly due to its impressive and sustainable long-term growth.
Population Growth: Texas is the second most populous state at 28 million strong (US Census Bureau). It has grown at ~11% since 2010, twice the national average.
Within Texas, the region known as the Texas Triangle – loosely defined as Dallas in the north, Houston in the east and Austin-San Antonio in the west – has experienced explosive growth over the past decade.
It contains four of the fastest growth cities in the US with a remarkably diverse economy.
The state population is growing overall, but it’s growing in the right ways for apartment investors. There are over 2M Texans, in the prime renting ages between 18-30. Millennials, the largest generation in US history, are in this range and are mostly renters.
Between 2005-2015, Houston and San Antonio both saw millennial growth over 16%, while San Antonio and Dallas saw 6%+ millennial growth.
As young people continue to flock to Texas’ biggest cities, they will be looking for an apartment to rent as they get settled in their careers and lives.
How big is the Texas triangle? 17 million people over 58,000 square miles. By 2025, that number is expected to be over 30 million people.
That’s pretty big, even for Texas.
Job Growth: As mentioned above, Texas is home to 109 of the 1,000 largest public and private companies in the United States. If Texas were its own country (and many people argue that it already is), it would be larger than Canada and South Korea. Currently, it accounts for ~10% of the total US GDP and its share is growing every year.
All of this translates into one thing – jobs. The state unemployment rate is at the national average of 5%, but in our focus areas of the Texas Triangle, it is closer to 3%. Since 2007, the state has added 1.8 million jobs.
Even as the U.S. economy headed into a recession in 2008, the Triangle metros led the nation in job creation with Houston topping the list at 42,000 new jobs.
Of the top 100 metros, Houston, Dallas-Fort Worth, San Antonio and Austin were among the 10 largest for job creation in 2008.
While the vast majority of America is just now bouncing back from a stagnant economy, the Texas Triangle flourished over the last 8 years.
Naturally, the Texas Triangle’s population and job growth are having a positive effect on housing demand. Home prices in the region have stabilized and begun to increase even while we are seeing home prices nationally continue their decline.
More relevant to us and our investors, multi-family housing inventory can’t keep up with population growth, and the region is seeing extremely low vacancy rates coupled with steadily rising lease rates.
In fact, as we can see from the images below, Texas vacancy rates have been going down while rents have been steadily creeping up, at a faster pace than the national average. Obviously, this is welcome news for apartment investors.
Texas Triangle: Massive Opportunity for the Multifamily Investor
To summarize, this region offers some compelling facts:
- Exploding, long-lasting population growth and attractive demographics
- Diverse economy and strong jobs market that shows no signs of letting up
- Multifamily inventory that is not keeping up with demand
And we haven’t even begun to talk about the warm, sunny weather, the absence of the state income tax, high quality of life and affordability. All roads clearly lead to Texas!
The Chinese purchase more U.S. residential real estate than buyers from any other foreign country, but Trump’s trade war may change that
The trade dispute between the U.S. and China reached a fever point in recent days, as Washington and Beijing have gone tit for tat in imposing higher tariffs on imports.
Concerns that the two countries would not resolve the dispute sent the Dow Jones Industrial Average DJIA, +1.39% and the S&P 500 SPX, +1.66% reeling Monday, before staging modest rebounds Tuesday and Wednesday.
Chinese investors have been the biggest purchasers of U.S. residential real estate for six consecutive years, but President Trump’s trade war, and China’s efforts to reduce its national debt and boost economic growth, could change that.
And if the impasse continues, the effects could be even more far-reaching. “The Chinese government could place stricter capital controls about taking money China and buying in America,” said Lawrence Yun, chief economist at the National Association of Realtors. China’s government has already put pressure on Chinese nationals to reduce their commercial real-estate investments.
Meanwhile, the U.S.-China trade dispute has sent the Chinese yuan USDCNH, -0.12% to new lows relative to the dollar. “It’s already making U.S. real estate more expensive” for Chinese buyers, said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
The trade war also adds to U.S. economic uncertainty at a time when real-estate demand is weakening even in some of the country’s hottest housing markets.
Also see:Trump’s trade war with China doesn’t bode well for an already shaky U.S. housing market
China has become the largest foreign buyer of U.S. residential real estate
In 2014, China supplanted Canada as the source of the largest share of foreign buyers of U.S. residential real estate, according to data from the National Association of Realtors.
In 2018 dollars, Chinese buyers accounted for roughly 25% of total foreign investment in U.S. residential real estate. Canada was No. 2 at 9%.
Of the 284,000 properties sold to foreign buyers last year, some 40,400, or 15%, were bought by Chinese nationals. Five years earlier, Chinese nationals had purchased 23,075 homes, representing just 12% of all properties sold to foreign buyers.
Even China’s growing share in recent years represents a small percentage of overall investment in U.S. residential real estate. As of 2018, foreign buyers in aggregate accounted for just 3% of U.S. home sales, the association added. That figure had been rising, but experienced a modest decline between 2017 and 2018. The figures for 2019 are expected to be similar to the 2018 levels.
“ ‘The Chinese government could place stricter capital controls about taking money China and buying in America.’ ”
— Lawrence Yun, National Association of Realtors
Long before the current trade dispute, the Chinese government had been creating hurdles for its citizens who wanted to invest abroad.
The country started restricting outbound investments in 2016, allowing residents to take only the equivalent of $50,000 the country, as a means of propping up the country’s currency.
This not only made it more difficult to purchase real estate in America but prompted some Chinese investors to sell their U.S. assets.
Read more:Major flooding in the South is a cautionary tale for all homeowners
A Chinese pullback could have serious effects for some West Coast markets
Un foreign buyers from other countries who spread their investments more evenly across the U.S., Chinese residential real-estate investment is highly concentrated on the Pacific Coast. Nearly 40% of Chinese buyers have purchased in California, home to a large Asian community.
“ Chinese buyers also play a big role in the real-estate markets of college towns as more Chinese students have opted to study at American universities. ”
But California isn’t the only place where a fall in Chinese buyers would make a difference. Chinese nationals represent a significant share of the foreign buyers of residential real estate in the New York City metropolitan area and growing shares of buyers in states including Florida and Texas.
Chinese buyers also play a big role in the residential-real-estate markets of college towns, as more Chinese students have opted to study at American universities, Yun said.
However, a retreat by Chinese buyers could be good news for Americans looking to purchase a home, especially in such costly Golden State markets as San Francisco, Los Angeles and San Diego. These are among the most expensive in the entire country, and their popularity had contributed to double-digit home-price appreciation in recent years.
The rate at which home prices are climbing has recently slowed as buyers have struggled with affordability. The lack of competition from foreign buyers, who typically enter competitive all-cash offers, could provide an opportunity to get a better deal on a home for locals looking to buy.