Getting in on the Sale of a Lifetime
Excerpt from February 2011 Issue of Canadian Real Estate Magazine called “Home of the Brave.”
When the average person is asked to think of a simple investor motto, they always say; “buy low, sell high.” I don’t think anyone would disagree that this simple truth should be at the core of any investor’s strategic philosophy. It is with ceaseless pursuit that the valiant investor scrutinizes deal after deal in search of those worthy to provide immediate, ongoing and future returns. Why is it then that so many Canadian investors today seem to accept high prices, low rates of return and are prepared to wait up to 25 years to see their Canadian properties pay off?
To be clear, I’m not saying there are no good deals in Canada, but I would like to highlight that most markets in Canada today are at the top of their cycle and it is increasingly tough to find the kinds of deals we as real estate investors are wanting. I personally prefer to swim downstream instead of up, don’t you?
As investors, we must be open to purchasing outside of our backyard, particularly if we can’t find good deals there. This may be out of our city, province or our country. There is a situation going on in the US that has resulted in the biggest real estate sale of our lifetimes; one that will ultimately emerge as the largest shifting of wealth our generation has ever witnessed. Sadly, like in anything, there are those that get involved and are rewarded and others that sit on the sidelines as observers.
Considering the current disparity in prices and value between the U.S. and most developed nations, many international investors are acting upon this huge “buy low” signal. This is a time when a mere down-payment on an investment property in any major Canadian city can buy one, two or more cash flowing properties in the US that have the potential to double or triple in value in a few short years. So why are so many Canadian investors so reluctant to get involved?
The underlying reason for lack of participation in this exciting sales event south of us seems to be fear…perhaps fear of the unknown. Fear is also equated to risk, and as Warren Buffet says;” Risk comes from not knowing what you’re doing.” I’d like to dispel some of the fears many Canadian investors possess which may negate alot of the fear/risk encountered when contemplating a U.S. investment.
Of course this fear/risk perception is quite understandable considering we Canadians get a skewed outlook on the U.S. by the media which distorts and generalizes the details and gives us aggregate statistics on the country as a whole. In actual fact, the U.S. is comprised of over 200 separate economies which display distinct differences to one other, thus making it necessary to pick one or two cities as a focus.
Research is Key
Research is an ongoing part of determining where the good deals are located and as such, we utilize many tools such as Trulia.com, Zillow.com, Rentometer.com, Cromfordreport.com and realytrac.com to determine the best cities in which to currently invest and strategies to employ.
The data provided by these sites gives current statistics on housing prices, number of sales, days on market, rental statistics etc. We essentially need to determine what part of the real estate cycle a particular city is in, if it has reached its “bottom” and if it has began to stabilize or even increase in price.
There is additional, extensive research we would do whether a Canadian or U.S. city. For instance, we like to understand if a single industry that drives the local economy or if there is a diverse economic mix. We must also consider unemployment levels of each city. It is interesting to note that the unemployment rates in Canada are at 8.0% and at 9.6% in the U.S. as of this writing, so there is not a huge difference; however we prefer working in cities whose unemployment rates are consistently below the national average, where there is strong rental demand and good absorption rates for newly renovated homes. These factors keep our flips moving and our rental properties full.
Taxes and liability
Many Canadian investors seem reluctant to purchase property in the U.S. because some states add a foreign tax amount to your property taxes. There is also concern that there is a 30% withholding tax on rents and profits when you sell a property. This is true if you buy the property as a Canadian in your own name.
We encourage our investors to set up a proper U.S. company structure, one we know works for Canadians, which essentially becomes an American entity. As a result, you are not subject to these additional tax burdens and do not get double taxed in Canada after filing taxes in the U.S. There are also many business write offs that are available to a company to reduce your taxes further.
It is a common fact that 95% of the world’s lawsuits happen in the U.S. They are a very litigious society and will sue for just about anything. That is why we not only need to protect ourselves from that occurrence, but eliminate the potential for it ever happening.
From a liability stand point, if you are holding rental property in one of your companies and are building equity; that looks like available money for any lawyer to usurp on behalf of their client with the inclination to sue you.
By putting a lien or a second mortgage on the remaining equity amount in your property from say, a Canadian company, you have essentially taken away any and all hope of any lawsuit. There is now no money to sue for!
If you would like more information on how to get involved in buying US real estate,
email me at [email protected]