With the state of the Ontario landlord tenant board bureaucracy as laughable, and the challenges that investors face trying to purchase properties with a huge lack of supply, and governments who seem to only enact policies to suppress demand. It is no wonder that many Ontario investors seek to put their dollars to work in other provinces and other countries.
Money will always go where it will be treated best and investors usually will do the same. That’s why I am fearful when governments over tax, they are just pushing investors to take their money out of the country and invest where it will be treated best. Perhaps that’s a story for another article though.
One of the places where I hear a lot Canadian investors talk about is the American Market but there are a few things that Canadians need to be aware of. Let’s move past what people are posting on social media, into some deeper thinking around buying US investment real estate.
You need to understand the reason why you are investing in the US. You could be investing in the US in order to hedge against the Canadian economy and earn funds in US dollars.
Or you may feel that you will get a better return in the US, but that may not always be the case. I’d like to examine a couple of areas where investors have got into trouble when investing in the USA, and what ou can do to avoid it.
1. Your Purchasing Entity is Important – You do not want to have anything you make in the US double-taxed. That is the same dollar is taxed in the US and Canada. What you want to do is have your funds taxed in the US and then whatever that you bring back from the US to Canada is then taxed. I am not a tax expert, you should always get advice from an accountant who is trained in cross-border structures and has numerous clients who invests in real estate in both countries.
There are some people who might advise you to create a Nevada or Wyoming company to hide your assets in the USA from Canada. That is called tax evasion, and I would stay clear of it. If you want to create a business and be a professional investor, then setup your entity properly and disclose what you are doing in a professional manner.
2. Currency Volatility – When you are converting money from one currency to another you are also creating currency risk because currency fluctuate in value over time. This will effect the value of the assets that you purchased, if you base that value on the Canadian dollar.
Many people seem to have forgotten that the Canadian dollar what is at par with the u.s. dollar in 2008, 2011 and 2012. If you had purchased property when the Canadian dollar was worth $1.30 for $1 US you would have lost 30% in value, just in currency exchange. Now this only happens, if you were trying to bring those funds back to Canada at that time, but it is something that you need to consider.
One piece of advice that I heard from a an international investor, and I thought was a great piece of advice. If you are ever considering investing in a country outside of Canada, do not plan to bring that money back to Canada.
3. Leverage and Financing – Most people think that they are going to be getting the same type of financing that they get in Canada in the US. But if you are not a US citizen, you are treated as a Foreign National. You may not get the leverage that you are thinking perhaps as low as 50 LTV, amortizations of 25 years and interest rates abouve 7%.
Sure you might be able to get one or two mortgages from the big five Canadian banks, who have branches in the US but that is usually just for a vacation property and not necessarily rentals. It is not easy to gain any scale in the US, if you are depending on your Canadian credit record and banking history. You will need to build your credit history in the US and relationships with specific institutions.
There are five banks in Canada that make up 85% of the banking transactions. There are 5,000 banks in the US which allows you to create relationships particularly in specific areas that you may want to invest in the US. It is a much more time-consuming process but can be very helpful. There also many private lending options that are ouside of banks and financial institutions.
Alternatively you could partner with investors who are already investing in the US in large projects as a limited partner and take advantage of the leverage/financing that they are able to achieve on a larger scale, but perhaps not have as high a return. It’s a give and take scenario when it comes to financing and leverage in the US for Canadians.
You might be surprise to hear that CMHC lending is actually less expensive on larger multifamily projects than Fannie Mae and Freddie Mac offers on multifamily projects in the US. Although there are much more flexible interest only products that are available in the US than in Canada. It helps to make multifamily projects more profitable in Canada, as long as you are buying at good cap rates with a solid spread between interest rates.
I hope you gained a few insights on investing in the US, these are just a few things to consider when you are moving your consider.
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.
From Nashville to Beverly Hills: A Look at Taylor Swift’s Stunning Real Estate Collection
From Car Washes to High-End Real Estate: Shaquille O’Neal’s Diverse Investment Portfolio
Exploring Brad Pitt’s Impressive Real Estate Portfolio: From Los Feliz to the French Quarter
Arnold Schwarzenegger’s Real Estate Investment Mantra: Vision, Risk, and Discipline
From Actor to Real Estate Mogul: Leonardo DiCaprio’s Portfolio