Six Reasons Cross-Border Real Estate Investors Avoid US Market
Foreign interest in US real estate has always been very high, but completed transactions are actually very low. The US real estate market is the most sought-after investment in the world of real estate, but the reality is that most investors never dedicate the time and energy due to the barriers to entry. The reason it’s in such high demand is because it’s been increasing in value since 1963, it’s a secure investment, lands a scarce resource, and the US has an $18 trillion economy. There are many reasons why International investors should invest in the US, but the requirements are too high for most to complete a transaction.
Cross-border residential and Commercial Real estate has always been appealing to investors of all types but many haven’t been able to enjoy the returns US real estate provides according to The NAS 2018 Commercial Real Estate International Business Trends due to not being able to find the right investment property, high cost of purchase, difficult transferring funds across border, Immigration laws and visa issues, financing, prohibitive U.S tax laws, exchange rates, and loss of home country benefits to name a few. In addition to what has been found in the study limited access, lack of transparency, high fees, lack of liquidity, high capital commitment, and slow transactions hinder investors from taking the leap.
Limited access
Real estate has been an investment vehicle of the wealthy for a very long time, they know the power of passive income and capital appreciation. The problem is that it’s never been accessible to regular people, the barriers to entry have always been to high, especially when it comes to US commercial real estate and multifamily housing. Some of the barriers are citizenship, US bank accounts, Credit Score, financing, cash requirements, accreditation, and having accessibility to the right sponsors and fund managers.
If you want to invest in US real-estate internationally you have to plan at least one international trip to visit any potential property that you might be interested in. This 6–12-month process will take much of your time and will require a ton of cash just to find the right property. It will cost you an arm and a leg in fees, and you will have to work with several 3rd parties to get it all done, assuming you even have the connections to find the right property to begin with. The reality is that it’s very hard to find the right investment opportunity when you don’t have a team guiding you through the process, and when 1 out of 5 real estate agents has less than one year of experience, don’t count on much help their either.
Lack of transparency
Research says that 1 out of 5 real estate agents has been in business for less than a year according to the North American Association of Realtors. This shocking fact illustrates why it’s difficult to rely on a real estate agent to guide you through a complex process of purchasing International real estate, there is a good chance they have never done this before. Lack of transparency drives up the cost of real estate transactions and frustrates most investors making real estate more of a thorn in the side. Because there is a lack of transparency there has to be more middlemen in the deal to ensure that proper transfer takes place. The lack of transparency you will go through won’t be on purpose, but rather because of lack of experience and foresight.
High fees
Investing in real estate internationally is going to cost you a lot of money in fee’s. A few that are worth mentioning are exchange fees, transfer fees, broker fees, attorney fees, taxes, and investment fees. If that wasn’t enough you also have to consider (FIRPTA) Foreign Investment in Real Property Tax Act of 1980 Income tax withholding. Foreign investment can be an expensive process that cuts into your bottom line, making it less appealing to invest real estate abroad. At the very least, investors that decide to move forward will need consulting from a US accounting and legal firm to help structure their entity and file necessary tax returns.
Illiquidity
Liquidity is defined as how quickly an asset or investment can be converted into cash. It’s a combination of an abundance of supply and demand, low barriers to entry, high speed of transaction, and broad access to markets. Real estate unlike stocks, lacks two distinct advantages; it can’t be listed on a public exchange and sold in market hours, and the overall supply of buyers is much lower as a result of not providing the same access. In other words, you are restricted by only having real access to buyers in that region, since most investors don’t look too far from where they live–except in the case of International real estate ventures. The real estate transaction is more challenging Because is burdened with third parties, regulation, arduous financing, and high capital requirements.
Once a buyer is found it’s a lengthy process to complete the transaction with a likelihood that the transaction might not be completed at all, which is why you see backup offers being so common in real estate. The higher the price point the less liquid the asset is, making commercial real estate the least liquid of all. One of the biggest drawbacks traditionally with investing in real estate is the illiquidity.
High capital commitment
Investing in real estate in general requires a large amount of capital, but it’s even worse when you are looking to invest abroad. Instead of being required to put down 20% cash in a typical financing arrangement you often might be required to put down 50–60% down instead, that’s if you are lucky enough to even qualify for that. Many investors might be stuck with only cash investments or may have to look at expensive alternative methods of financing.
This is because you are considered a high-risk investment and you have low credit history. Even though you might have excellent credit in your own country, it doesn’t carry over in the US. Those that want to invest in US real estate should plan on coming up with several hundred thousand dollars even for a smaller conservative investment.
Speed of transaction
Real estate transactions are notorious for being slow in nature, it could take you at minimum six months to purchase an international property once under contract. One study finds that 56% of Chinese investors spend over 1 year finding their ideal US investment property according to Juwai Chinese Consumer International Travel Survey. Most international investors plan a trip to the US to find a real estate agent as well as visit any property that they are interested in while they are there, this of course lengthens the process even further. With a good six months just in finding the ideal real estate asset only to spend another six months going through the transaction it’s easy to see why many never invest at all. There are missed opportunities when it takes that long to invest in real-estate.
A Revolution in the making
The good news is that investors won’t have to face the challenges above with RealtyReturns.io. Through the RealtyReturns platform investors will have more accessibility to US real estate than any other point in history– with a simple point and click interface investors can choose the type of asset they are interested in and invest in smaller fractions of real estate using only 2 ETH. Realtyreturns has ERC-20 compliant tokenized real estate assets that can be traded on any exchange or platform that is ERC-20 compliant, this opens up trade to the $50 billion Ethereum market. Because the Ethereum market is global and is constantly expanding investors can expect a more liquidity than ever before. This market won’t be limited to weekdays or specific trading hours, it’s a global market that’s open for business 24 hours per day.
Democratizing global access to investment grade commercial real estate using the blockchain. Visit RealtyReturns.io and join our Telegram group https://t.me/realtyreturnsglobal
Trevor Whiting
VP, Investor Relations
RealtyReturns
Experienced Sales Leader of over 14 years and has started offices in London, Toronto, and the US. He was VP of Investor Relations of RealtyMogul where was responsible for revenue growth, sales operations, and growth initiatives. Under his leadership, he developed a sales playbook that resulted in 2x growth.
