Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions.
Today’s question is about How to Invest in US Real Estate from another country than that means any country. Before I get to that question, remember to subscribe. Just smash that subscribe button on your mobile device or your laptop computer and you will get notified of every episode that comes out each and every week. Today’s question comes from AIJ and he says, hi, I’m a new listener to your podcast and read rich dad poor dad after you mentioned it multiple times in many of your episodes. Amazing read. Yes, it is a great book. I’m 27 years old and totally sold on the idea of real estate investing for wealth creation. How can I invest in US markets when I am based out of India? Would US-based banks be able to lend me money after I make a down payment for 20% and thirdly can investments made from outside the US also take advantage of 1031 tax-deferred exchanges? Thanks, love your podcast. AJ.
Thanks for the questions and these are great questions because we do get a number of people contacting us from other countries, particularly from Canada, the UK, Australia, sometimes in Europe and these are actually some of the common questions. So let me just break these three down. First and foremost, if you’re a foreign investor, meaning that you are a non-citizen or non-resident to the U S in other words, you’re out of the country, the process is exactly the same. You are still going to go through the same step by step process with our team or investment counselors or if even if you’re doing this on your own, you’re still going to go through the same process that you would as if you were here locally. So you’re going to decide on what market makes the most sense for you and then narrow that down to the areas and neighborhoods that make the most sense for you based on your investment goals.
And then you’re going to start looking at properties and you’re going to just underwriter vet those and decide which one or which ones you’re going to put under contract because you like them, you like the numbers, you like the location, everything checks the box. So the process is exactly the same. In fact, you’re going to assemble the same team whether you’re working with my team here and all the people that we work with, all the different service providers, from lenders to property managers, or if you’re going to assemble your own team, you’re going to build a team around you. And Robert Kiyosaki in his books talks about this all the time. That real estate is a team sport. So I’m pretty sure he mentioned that in rich dad, poor dad, but it’s the same process, same team. So the same rules apply and the same laws to you.
All the laws that we have here within the country apply to you regardless of where you live. That’s why a lot of people from foreign countries invest in the United States is because we have very strong rule of law. Things are very clearly defined and it makes real estate as an asset or an asset class, a very stable sound investment vehicle. The one thing that does change if you’re a foreign investor is the financing. So let’s kind of segue to that. If you do not have us credit and you are not a resident or citizen, then essentially you are going to be working with portfolio lenders or non QM lenders and non QM simply means non-qualified mortgage lenders. And these are lenders that do loans that are typically for borrowers that have unique income qualifying circumstances or they just don’t have credit that they can show, but they have enough in terms of their profile in terms of cash reserves and the property that qualifies for financing.
So these lenders typically look at property that you’re purchasing and they underwrite that and put more of the weight on the property or the asset that you are acquiring, which is their collateral. Then they do on you as an individual borrower, so this is the main difference as a foreign investor. Now one of the main differences in terms of the terms relative to conventional financing, which is what we hear in the US normally use to finance our acquisitions, our investments, the biggest difference is the down payment. The interest rates are going to be a little different as well. Sometimes they’re the same or similar or very close. Sometimes they’re a point higher. Sometimes there are two or three points higher. It really comes down to the lender, your profile, the terms that you’re looking for, the down payment you’re putting down maybe the location time in the economy and how loose or liberal they might be in their lending.
These things are going to change, but the down payment is typically the biggest variable. Let me give you an example of that. What you’re going to typically find as far as your down payment requirement for a lender, a non QM or portfolio lender for a loan for you as a foreign national is probably around 30% and I’m going to say plus or minus. Now I have seen it in the past as little as 20% but don’t count on that and don’t hold your breath on that. That’s not likely to be an easy thing to find today. You’re probably looking at 30% down and it could be as high as 40% I’ve actually seen some lenders out there that are more than willing to lend you financing and quite easily actually for 50% down. Their risk is so low. Having the property as collateral and having 50% equity in that property, so even then it’s still great.
Those are great terms, but if you can get something around the 30% down range, that means you’re still getting 70% financing and that’s fantastic. That’s still great leverage. Let’s just compare the numbers real quick to give you an idea of the difference between something that we would have with conventional financing at 20% down versus something that you might use with 30% down. And I’m even going to show you an example with 40% down. And these are just quick numbers. So I actually took one property that’s available on our website right now in the Pennsylvania metropolitan area. We’ve been moving a lot of property there. We have some solid deals, great numbers, good cashflow, they’re just great deals. So I just picked one randomly. The property is 149 nine and it rents for 1,545 a month. So it’s right around that 1% rent to value ratio.
And this is actually in a nice neighborhood, will grade as an eight class neighborhood. The net operating income on this as a little over 1200 a month. That’s without financing. So when you put 20% down on this particular property, your net cashflow true net after all expenses, vacancy and maintenance is 4,871 a year. And what I’m leading to is the cash on cash return with the 20% down, it happens to be 14.0% those are great numbers. Now what if you put 30% down instead of the 20% down? Well, what happens is this, your debt service is a little bit lower, so your cashflow is going to be a little bit higher. In fact, it’s about a thousand dollars more per year, so the cashflow on this is a little over $5,800 per year. When you look at your cash on cash return because you put 30% down, it’s 11.9% so it’s roughly 12% cash on cash return for that 30% down payment.
Let’s take this one step further. Let’s just hypothetically say you had to put 40% down because there was no other option. While your cashflow is going to be a little higher, it’s now $6,803 a year. Again, it’s about a thousand dollars more per year and your cash on cash return is now 10.7% still fantastic. It’s a double digit cash on cash return on your 40% down payment. Your numbers change a little bit, but remember your cash on cash return will go down as you put more down, but at the same time your cashflow goes up, your monthly and annual cashflow. Okay, that’s the financing. Let’s quickly talk about the 1031 because this is a topic onto itself now in regards to the 10 31 exchange, the tax deferred exchange. The short answer, yes you can take advantage of that same tax law that we can here in the U S the longer answer is just slightly more complex.
You see back in 1980 Congress here in acted the Foreign Investment in Real Property Tax act or what is called FIRPTA for short, and this is to impose a tax on foreign investors who were selling real property assets here in the United States. The act requires that anyone who buys real estate assets from foreign persons or entities must withhold a specific part of that purchase price which would normally go to the foreign seller. And why is that? It’s to ensure that the foreign seller pays the capital gains tax that’s due on the sale of that property. Otherwise it might be difficult for the US government or the IRS to actually find and chase after a person who’s already been paid the proceeds of the sale that lives in another country. It’s hard to enforce that. So, fortunately, there are three exceptions that apply to this act in regard to the withholding requirements.
And the first exception to the rule is that if the purchaser is buying the property as their personal residence, then it won’t apply. The second exception arises in the case that, uh, both the seller and the purchaser are doing a 1031 exchange simultaneously. That may not be likely. But the third exception is for transactions in which the IRS has issued a withholding certificate to the foreign seller. And interestingly enough, that certificate is actually called a withholding certificate. So foreign investors can take advantage of this tax-deferred 1031 exchange and basically have the same exact ability to defer taxes and build your real estate portfolio just like we do. But that takes a little bit of upfront planning. So the first thing that you should do is in the process of selling your properties, consult with a professional tax advisor. First of all to verify if FIRPTA actually applies to you.
And if so a tax professional can assist with applying for an item number which is short for an international tax identification number and then requesting that withholding certificate. And that’s really all there is to it. You don’t really need to worry about this all that much because we can help you with it. And also we will put you in contact with the professionals that you will need to talk to in order to do the 1031 exchange as well as any tax professional that can help you with the withholding certificate. And that’s all there is to it. Alright, so AJ, I hope that was helpful. I appreciate the question. Anyone else listening that has a question about real estate investing or finance? Be sure you submit that to me. Go to AskMarco.com if you haven’t already remember to subscribe to the show. I know I keep saying it, but I’m just simply asking. Help us share the show with other likeminded people. Remember to visit iTunes, leave us a rating and review. We appreciate you and thanks for listening. I will see you on our next episode.
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