U.S. Property Report

October 13th, 2014 | Articles,Buying Property in the U.S. | No Comments »

The Canadian run on U.S. properties has been quite extensive since the crash of 2007. Yes, 2007, not 2009 as most people think. Many hedge funds and folks like Warren Buffett have purchased discounted U.S. real estate. Why?

Smart investors, the ones who see a run up in the stock market and sell at the point where investors average buy in, have taken their money and bought discount U.S. real estate.

If you are still hesitating on jumping in to find good deals, consider this: the U.S. economy is rebounding and Americans are waking up to the fact that they can buy their own real estate again…so they will not wait for you.

Financing for Americans, although slightly more difficult than in the boom where anyone who could fog a mirror could qualify, many Americans now can get 100.5% financing for their principal residences.

Here’s another telling fact: Canadian banks have been buying ‘performing’ US notes (mortgages) for a discount to get cashflow…so while they are paying you 1% on your GIC, RRSP or bank account, Canadian banks are making anywhere from 5%-12% plus! How’s that for a spread?!

There have been so many negatives stated and reported by Canadian media and other ‘experts’, and although there may be truth to a certain degree of the negative press, the situations often used as examples are when Canadian’s  purchase US property in their own name…which is the LAST thing you want to do.

Here are 7 Common FAQ’s, Myths & Misnomers with Answers & Solutions

  1. Q: Do I have to give up 30% withholding tax on both rental income and 10% on the sale of a US property?

(Disclaimer: any commentary within is not meant as legal or tax advice, but for informational purposes only. Further, I am not a lawyer or an accountant)
A: Yes and no. Yes, if you are silly enough to own a U.S. property in your own name. 30% of every rental payment goes to the Internal Revenue Service, the “IRS”, unless you, or a US entity you control files a U.S. tax return.

Solution: Buying real property is always a major life decision, and often represents a major expenditure. When that property is in another country, there are additional tax and estate planning implications to consider. It is recommended, if you plan on owning rental property, assigning property, doing flips, buying tax liens/deeds or even buying and selling note (mortgages) that you ensure you protect your assets. One solution is to create a 3 tier company set up; one Canadian company which owns another entity(s) in the US. The US entity(s) will have an EIN number given by the IRS. This set up can not only protect your income, but can also protect you and your assets against liability.

 

  1. Myth: Locating good deals on U.S. property is as easy as calling a realtor in the area.
    Truth: In 99% of cases, this couldn’t be further from the truth. Realtors who deal with Canadians see you coming a mile away. When you purchase properties from MLS, you are paying retail, period. Sure, the deal will, in most cases still look much better than any deal you would find in Canada, however, there are better ways to locate deals.

Solution: In Canada, about 90% of residential real estate transactions happen from MLS. In the U.S., only about 65% of transactions are a result of MLS. The remaining 35% are sold from FSBO sellers, banks, lenders, hedge funds, Fannie Mae, Freddie Mac, and various auctions.
There are websites where you can check out these properties. Check out: Homepath.com, Homesteps.com, Ginniemae.com, as well as Auction.com which has a list of properties that were not sold at auction. Also, having a realtor with ‘pocket’ deals on your US team will assist in your deal finding.

 

  1. Myth: Here’s a statement many Canadians have been told by so called ‘gurus’: “Cities like Detroit, Chicago, Indianapolis, Columbus, Seattle, Newark and the like are good places to invest because they have cash flow.
    Solution: Let’s think logically about this. The top worst states for highest taxes are: NJ, NY, MN, IO, CA, DL, WA, and VT. These states coincidentally were voted the worst states to retire. Most of these states also have the highest housing prices in the US and many were barely affected by the crash, or not at all.

Where will these people retire? Millions upon millions will retire to the Sunbelt, period. Many of the Sunbelt states have no state tax and certainly have an overall lower cost of living. Most of these states are very prepared in terms of new medical facilities etc., in preparation for the ensuing flood of baby boomers to the south. So, it doesn’t take a genius to realize that getting in the way of that movement is where the money is, and will continue for years to come.

The top retirement states are: FL, AZ, SC and NC.

 

  1. Misnomer: Prices have gone up in the US…it’s too late to get in.

A: Not necessarily. This has only happened in a couple of cities such as Las Vegas. Here is an example of what has happened over the last 14 years. Let this chart do the talking:

Year Property type & size Value Rental Income
2000 1500 sq.ft. 3 BR/2 bath

 

$150,000 $1,200/month
2007 1500 sq.ft. 3 BR/2 bath

 

$300,000 $1,500/month
2014 1500 sq.ft. 3 BR/2 bath

 

$150,000 $1,500/month

 

So you can see that properties in many Sunbelt areas are available at year 2000 prices with higher rents than in the year 2000.

 

  1. Myth: Canadians can’t get financing for US real estate purchases.

A: This couldn’t be further from the truth. For second homes in many southern states, some banks will lend Canadians up to 80% LTV on the purchase. This is a fully qualifying loan so if you can qualify for the same mortgage amount in Canada, you can get approved. Secondly, for investment property purchases, there are many equity lenders that will lend you up to 70% LTV on the after repair value! That means when you purchase an undervalued property, the loan will be based on the value of the property once it’s renovated (a full appraisal is necessary prior to approval).

 

  1. Misnomer: Property taxes for non-residents will kill my cash flow.

Truth: A company formed in the US is considered a US entity. Purchasing a property in your company name means the owner (the company) will be subject to the same property tax amount as any US citizen.

 

  1. FAQ: If a tenant in my US property slips, falls and hurts themselves, I could get sued.
    Truth: Yes, if you own the property in your name, you face the highest liability. However, owning your properties in company names is your best bet to avoid lawsuits. There are many ways to set up companies as a Canadian (which for purposes of this report will not be discussed at this time) which can protect your assets from almost any frivolous lawsuits.

 

 

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