How to Buy Rental Property in the USA Foreign Buyers Take Note
Before we talk about how to buy rental property in the USA, I wanted to talk about the feeling and experience. Buying your first rental property is like seeing snow for the first time. It is exciting and a little bit daunting at the same time. Learning to ski or snowboard takes time but once you know how to do it, it’s an enjoyable ride. The property buying process is very similar. It takes time to put all the pieces of the puzzle together but it can be very rewarding once you get into it.
The Buying Sequence – Foreign Buyers Take Note
International Tax-payer Identification Number is applicable to foreign buyers. US buyers have a social security number. When you buy a property in the US you need a tax file number from the IRS (Internal Revenue Service). This is a long-winded process and could take 6 to 8 weeks. The best advice is to find an US Accountant who could do this for you. This would cost around $100 – $200.
Set-up an Entity – Limited Liability Company or similar
US is a very litigious country and so it’s not recommended to buy assets under your name. An entity will give you asset protection and limited liability. You need an US Attorney to do this. There are websites which can set up a generic LLC that don’t really take your circumstances into consideration. They are much cheaper but won’t provide any recommendation as to what entity to set up or which state the entity should be setup in. At this stage you should have some idea of states that you are looking to buy based on your property investment strategy. So I suggest using a good US attorney. This can cost anywhere between $1,000 and $2,000 depending on entity type and your situation. Traditionally this takes less than 10 days.
Note: Series LLC – This is like a parent LLC with multiple child LLC’s within it. This costs more to set up, but here’s the thing: after you setup a series LLC and find a bank to open a bank account – The bank may ask you what is a Series LLC? Do you want to be in that position?
Set-up US Bank Account
In order to receive rental income and also to pay property related expenses, you would need a US bank account. Most property management companies in the US will not transfer funds overseas and you don’t want this either, as it can be very costly. You would want to set up a business checking account in the name of your LLC. US banks are quite strict when setting up new bank accounts and you would have to be personally present in the bank to open a personal account. Checking account is important as the US banking system is still a little backwards compared to other developed countries and they use checks frequently. This is a good time to set up a Forex account in your country so that you can transfer funds at a better rate than what the banks will provide. The US bank account setup process will take around 5 days and should not cost anything.
Start Looking for Property Financing Options
This can be a little tricky. The banks in the US are difficult to deal with. Don’t try to do this alone. You need to find a US mortgage broker who is experienced in finding loans for foreigners. The first question to ask is, do I have to travel to the US to close the deal? I know it’s a weird question to ask upfront but it’s best you know this upfront. Other questions to ask are:
- Is there a minimum loan amount or minimum property price? E.g. – minimum loan amount – $60,000, minimum property price – $100,000
- What is the loan to value ratio (LTV)? E.g.- 60%
- Loan term – E.g. 30 years
- Fees – E.g. $2,000
- What are the documents required?
- Interest rate?
- Fixed rate option available?
- Can you buy property within a LLC?
This could take a long time hence you want to start this process even before looking at any properties. Once you understand your financing options you can shortlist properties that fit the criteria.
Look for a Suitable Property
I hope you have read how to analyse a residential property investment. If you did, then you should be well armed. If not, find a property consultant or broker who can do this. Look for a property that fits your strategy and meets the financing conditions. Work out the numbers and make sure the property is going to produce cash flow. Look at all the estimates and make sure they make sense. If it is an older property it needs more money assigned for maintenance. If the property is in Texas then taxes are quite high. Check the vacancy allowance and so on.
Sign the Contract
Sign the dotted line. Make sure the contract has some contingencies like finance and inspection. This will help in case you need to pull out of the deal.
Do your Due Diligence
This is when you would need to organize a building and pest inspection. These cost around $500 and take about a week. Talk to the seller regarding any issues highlighted in the building inspection. You can either agree for the seller to fix all major issues before you close the deal or negotiate a price reduction. Your bank will order an appraisal at this time. The appraisal can be different from the purchase price. This is what the bank thinks the property value is. The bank will go by the appraisal value and not the purchase price. If you have done your research then this should not be a problem but if the property is over valued then either you have to negotiate with the seller or pass on the deal and find another. If you have to pass on a deal, don’t worry. Its better than paying extra $$$ and the process is generally a good learning experience.
This is a good time to line up a property manager. Ask for references from your contacts thus far. Speak to your property manager to get a feel for their quality of work and ethics. Get title insurance and property insurance quotes. In the US people can tie up a property if certain bills are not paid. For example if mortgage or tax bills are not paid, there could be liens or encumbrances on the property. Title insurance is where all property title records are investigated and you get a clear title. This policy says that, if there are title issues that were not discovered up to that point, then the policy covers you as the buyer.
Close the Deal
If you have done everything right then this is a breeze.
Now I know you must be saying this is awesome but there is a lot more. Creative financing, commercial real estate, syndication and much more. You just have to start. Take a leap of faith. Understand real estate is a turtle; it is slow-moving. This whole process could take 3 to 6 months, but after your first deal it does get quicker as there are no setup required. Your LLC and bank account will be setup. You would also have knowledge and experience. Remember one important lesson you can’t guarantee the exact amount of cash flow per month. This will vary based on expenses, but you can have a rough idea. Be prepared for changes and unexpected situations. You never know whats around the corner. Build your real estate portfolio slowly, keep accumulating property and keep learning.
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