Key Steps to Long-Distance Rental Investing, Part 3: Non-Citizens or Foreigners
With so much online property data and records, the U.S. is one of the best countries in the world to invest in real estate. So, if you’re a foreigner looking to do Long-Distance Rental Investing in the Land of Opportunity, you’ve come to the right place!
As part of our 3-part series on long-distance rental investing, we’ll take you through the key steps in setting up and running a rental business in the U.S. as a non-citizen. This applies to those who are living in the U.S. and those who are living out of the country. This does not include residents with a green card or work visa, as those have nearly the same benefits and abilities as citizens, provided that they can verify their residency.
Complying with USA Regulations
All foreign investors owning U.S. rental property are responsible for paying taxes on any and all rental income they earn in the U.S. regardless of any tax treaties that may exist.
Since some of the regulations and requirements can be confusing, Logical Property Management (LPM) has created this document to summarize the options for a foreign investor.
Foreigner investors can either pay a flat tax of 30% of their gross rental income or elect to file an annual US tax return and reduce their taxes by claiming deductions relating to ownership and managing the property. (i.e. Property Taxes, Insurance, Management Costs, etc.)
With either method of taxation, foreigner investors must have an Individual Taxpayer Identification Number (ITIN).
Obtaining A Taxpayer ID
As soon as possible, foreigner investors need to obtain a U.S. ‘Individual Taxpayer Identification Number’ (ITIN) for each owner of the property (Each person listed on the property deed). The application is done with IRS Form W-7, and foreigners must provide original certified identification documents.
The IRS has ‘Certified Acceptance Agents’ who are authorized to certify foreigner investors’ original documents and process the application. The W-7 form may look easy to complete, but we highly recommend finding a certified agent to handle it. Certified Acceptance Agents are located worldwide. It normally takes 4-6 weeks for a W-7 to be processed by the IRS.
Here is a link to the IRS website, listing Certified Acceptance Agents by Country:
Upon receiving an ITIN number from the IRS, a copy of the IRS letter showing the new Individual Taxpayer Identification Number (ITIN) must be sent to LPM.
Note: LPM will not manage rental property for foreign owners who do not acquire an ITIN number.
The Internal Revenue Service (IRS) requires property managers to withhold 30% of gross rents to ensure foreigner investors will file a tax return at year end. This is obviously very costly and cumbersome for a property manager and Logical Property Management will not do it.
However, there is an alternative that will exempt a foreign investor from the mandatory 30% withholding.
After obtaining an Individual Taxpayer Identification Number (ITIN), submit a completed IRS Form W-8ECI to Logical Property Management.
Note: Do not send the Form W-8ECI to the IRS. You send it to your property manager.
By filing Form W-8ECI foreign investors eliminate the mandatory 30% tax withholding as it notifies the property manager (and the IRS) the foreign investor will be filing annual tax returns to report their income and expenses related to the rental property. Most generally, Form 1040NR (Non-Resident Tax Return) is filed with the IRS. Those tax returns are due by June 15th of each year and you should consult with your tax professional.
W-8ECI Form remains in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any of the information on the form incorrect. For example, a Form W-8ECI signed on September 30, 2020, remains valid through December 31, 2023. Upon expiration of the 3-year period, you must provide a new Form W-8ECI.
If you do not file a form W-8ECI with your property manager, your property manager is REQUIRED by law to withhold 30% of your income from the rental and forward the funds to the IRS.
Note: LPM will not manage properties for owners who do not file the W-8ECI form with us.
Our business is property management and we do not choose to become tax collectors and have to administer sending 30% of your funds to the IRS.
At the end of each year your property manager should provide you with a year-end statement of your income and your expenses related to the management of your property. Along with the year-end statement you will receive a copy of IRS Form 1099 that reports your income to the IRS. You will then use your copy of Form 1099 to file taxes through your tax professional.
Legal Disclaimer: The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney and/or tax professional to obtain advice with respect to any particular issue or problem. Applicability of the tax or legal principles discussed in this material may differ substantially in individual situations.
Buying Property and Managing
Your main concern in Long-Distance Rental Investing might be that you won’t be able to visit the area often, if at all. Realistically, plane tickets are just too expensive, especially if you’re on the other side of the world. Even if you’re considerably near (like Canada), you’re better off forming a Tripod Team that will represent you in the States on a daily basis.
But where will this team start? What kind of properties do you want, and where? What kind of tenants should you expect, based on the neighborhood you’re investing in? Figuring out these criteria is crucial to understanding your level of risk vs. reward when investing in any market.
There are plenty of websites out there to familiarize yourself with specific cities or neighborhoods. The likes of Niche.com, Zillow.com, Mashvisor.com, and Redfin.com will become your go-to sites to assess real estate markets.
As you visit those websites, look for factors like these:
- The average rent should be stable or increasing
- The average home values should at least be stable, preferrably increasing
- The rent-to-price ratios should follow the 1% Rule, if you want positive cashflow
- The rent-to-income should be 40% or lower
- There should be stable population or growth
- The average income and education of the population should be average or above for the area/state
- The unemployment rate should be stablew
- There should be variety in employment opportunities (dependency on one employer type is risky, should the industry decline)
- The economy of the area should be stable
- The crime rates should be acceptable
- There should be shops, local amenities, walkable areas, and planned future improvements to attract rental demand
Additionally, try to find reliable, local information from a trustworthy source. For example, as a property management company, we have an ongoing series of deep dive articles that evaluates each Metro Detroit neighborhood and city for investors to consider. A quick scan of the articles will give you a holistic, honest overview of certain areas. We also provide tours for out-of-towners, in case any investors would like to conduct on-the-ground research. So, whatever city you’re looking to invest in, find an in-depth resource like this to guide you (reputable local property management companies are a good place to start).
Be careful to avoid any scams during the process, especially since you’ll be operating from a distance. Things like “real estate seminars”, duplicate listing scams, Turnkey Rentals, and “Quit Claim Deed” sales are, unfortunately, all over the industry, so beware.
Eventually, you might want to sell your properties. When you do, take note that the IRS will require you to withhold 15% of the amount realized on the disposition, or there will be additional taxes. For the full rules surrounding this, check out the IRS FIRPTA publication and the International Tax Gap Series.
Cash vs Loans
One of the biggest hurdles in investing as a foreigner is obtaining a loan to buy rental properties. It’s not impossible, but it requires more effort, especially if you’re not living in the U.S.
So, how do you apply for a mortgage as a non-citizen living overseas?
Your best bet is if you have a local bank with a presence in the USA. For example, Canadians have 7 possible banks that have a presence in the USA.
As a foreign national, you won’t be accepted by the two federally-backed home mortgage companies Fannie Mae and Freddie Mac for a rental property. Instead, look for lenders who can keep their loans in their own books. Be prepared to put down a bigger down payment though (30% or more), because they will be taking more risk with you. If you default on your loan, they want to be able to recover their funds through the foreclosure process.
Before they approve you, U.S. banks will do a background check on your credit history, employment history, proof of income, and more. For citizens, this step is relatively straightforward. They have a credit trail in the U.S. and W-2 forms to show their stability. However, for foreigners who only work with their own national banks, the U.S. will have a hard time verifying your background. For example, the 3 bureaus they trust are Equifax, TransUnion, and Experian. You won’t have a credit report with any of them. So, consider having ties with large, international banks that they will recognize.
Once you’ve secured your funds, it’s time to scout and buy your properties.
- Your best bet is if you have a local bank with a presence in the USA. For example, Canadians have 7 possible banks that have a presence in the USA.
- As a foreign national, you won’t be accepted by the two federally-backed home mortgage companies Fannie Mae and Freddie Mac for a rental property. Instead, look for lenders who can keep their loans in their own books. Be prepared to put down a bigger down payment though (30% or more), because they will be taking more risk with you. If you default on your loan, they want to be able to recover their funds through the foreclosure process.
- Before they approve you, U.S. banks will do a background check on your credit history, employment history, proof of income, and more. For citizens, this step is relatively straightforward. They have a credit trail in the U.S. and W-2 forms to show their stability. However, for foreigners who only work with their own national banks, the U.S. will have a hard time verifying your background. For example, the 3 bureaus they trust are Equifax, TransUnion, and Experian. You won’t have a credit report with any of them. So, consider having ties with large, international banks that they will recognize.
Once you’ve secured your funds, it’s time to scout and buy your properties
And that wraps up our series on Long-Distance Rental Investing! As you can see, long-distance investing isn’t inherently risky, but it does require more hoops to jump through for non-citizens. However, the value that comes with investing in the U.S. real estate market – being one of the biggest shareholders of global property value – has proven its worth, time and time again.
Long-Distance Rental Investing (or any kind of real estate investment) is not impossible. In this technology-driven day and age, anything can be done from a distance. You just need to do adequate research, form a capable team, and sustain your rentals with a trustworthy property management company.
There you have it. Now, go get investing!
Any other stories or tips you’d like to share on Long-Distance Rental Investing?
Image courtesy of Christina Morillo