Introduction Series

The Foreign Investor’s Guide to US-based Real Estate Syndications

January 27, 2021

The allure of investing in US real estate is strong, but it may be tough to find someone who would or could walk a foreign investor through the process from start to finish... until now.

Taxes and other potentially confusing details can make or break the investment decision when considered for cross-border investments. So, having gone through being a limited partner, to taking a lead role in due diligence, to underwriting, and to running deals myself, I want to share what I've learned as a foreign investor.

7 Reasons Foreign Investors Love US Real Estate

Active and passive real estate investors from all over the world are attracted to the robust US market. Among many reasons, prestige, stability, diversity, market size, and more. Let's run through the top seven reasons foreign investors love US Real Estate.

#1 - USA, USA, USA!

Many international investors hold US real estate in high regard and, often have a deeper knowledge of the US economy than their own country. There is much prestige associated with investing in US markets.

#2 - Stable and Regulated Markets

The US economy is viewed as a safe haven, as a gold standard for global real-estate investing, and a well-oiled machine providing long-term asset growth, often in opposition to commodity-driven economies around the world. In addition, laws in the US are of utmost importance since many foreign investors have roots in countries where law enforcement is lacking.

#3 - Market Size

The US is the biggest economy in the world. In addition to that, individual states like Texas and California are vibrant, strong, large markets, and listed within the top 10 on the list of global economies.

#4 - Opportunity Diversity

In a country where individual states are listed among the top economies in the world, the size of the market available ensures a diversified portfolio like none other. Every niche is well represented and the associated market depth ensures that all stages, sizes, and types are accessible.

#5 - Global Diversification

The US economy allows investors to face minimal capital restrictions. Foreign capital is welcome, and a business-friendly regulation structure allows foreign investors to diversify while sheltering assets in a stable economy.

#6 - Asset Class Performance

Foreign investors understand that multifamily investing is one of the proven ways of building long-term wealth. US Real Estate is a high-performing asset class that has generated cash returns throughout the various stages of the business cycle throughout history..

#7 - Family Reasons

Many foreign investors have family living in or working in the US and/or travel to the US often. Since they also desire positive cash-flowing assets, it makes sense for them to invest in US-based real estate syndications.

Considerations for Foreign Investors

Of course, there are pros and cons to every situation. Foreign investors must consider a few potential draw-backs in addition to all the attractive angles. Considerations for foreign investors may be capital restrictions, currency risk, and political and tax repercussions.

#1 - Capital Restrictions

Many countries have restrictions on how much capital can be moved outside their home country. These regulations change often and rapidly, so foreign investors must be current on their research.

#2 - Currency Risk

In seeking diversification across geographies and currencies, currency risk/ exchange rate changes are always an issue for foreign investors to be aware of.

#3 - Political and Regulatory Environment

The US exhibits a highly regulated and transparent market, and real estate, as an asset class, is a stellar economic performer.

#4 - Legal and Tax

As laws and taxation policy can differ between countries, foreign investors must ensure they understand or can get the right help to understand what they are agreeing to, prior to entering any contract.

How to Participate in US-Based Real Estate Syndications as a Foreign Investor

It's important to seek out a CPA who's experienced in helping foreign investors invest and run businesses in the US. Here are 7 basic guidelines for participating in US-based real estate private equity investments for foreign investors.

#1 - Incorporate US-Based LLC / Corporation

Foreign investors have to create an entity with which they can invest, an LLC or a corporation. An LLC is preferred for tax efficiency.

An LLC with a minimum of 2 partners (equity split does not matter) is required to reap the tax benefits. In our experience, most foreign investors open an LLC with their spouses or partners.

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

Once the LLC is incorporated, foreign investors must apply for an EIN (Employer Identification Number) and register the LLC with various agencies. This is another area where CPAs' and Attorneys' experience with foreign investments is valuable and they can typically help you through this step very quickly.

#3 - Execute an Operating Agreement Among Partners

This one is as simple as it gets. Create and execute an agreement among all partners of the LLC.

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

Each individual partner in an LLC needs to have a social security number or apply for an ITIN (Individual Taxpayer Identification Number). Usually, foreign investors are granted an ITIN within 4-6 weeks of submitting their application.

#5 - Open US-Based Accounts

With an EIN, operating agreement, and ITIN in hand, a foreign investor can open a US-based bank account. Do your best to choose a global bank with online access.

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

The LLC will need to file returns and the partners will have to file personal tax returns. The Schedule K-1 (tax document issued to syndication partners) often has significant tax deductions that result in paper losses each year (meanwhile you're still earning cash flow).

Those paper losses can be offset against future gains from the sale of the asset and reduce the tax bill.

Foreign investors should consult with professionals for asset protection strategies, legal structures, and related disclosure requirements.

#7 - Tax Treaty Benefits Are Available

CPAs and Cross-border tax specialists can help foreign investors discover the tax treaty benefits available, as they vary from country to country.

Conclusion

US-based commercial real estate has proven its resilience and has created a reputation for being one of the top-performing asset classes in the world. Nonetheless, foreign investors should understand the "red-tape" and seek professional advice in navigating through it. Finding a preferred advisor with experience in this area can make the process smooth and efficient.