Steps for a foreign investor to buy in the US?

Question

Hello friends,

Once again I am leaning on the experience of those on BP who have gone before me.

I am working with a friend from the Netherlands who would like to purchase their first investment rental property in the US. We are guessing around $50,000 (cash purchase) for a house that will rent for about $750. They will probably purchase in the market I know best.

So we have been diggering around online and trying to figure out the process. Here is my rough draft...

1) Setup an LLC in Colorado owned by my Dutch friend

2) Get a tax number for the LLC

3) Setup a bank account for the LLC

4) Transfer the cash from the Netherlands to the LLC bank account

5) Find a property and make an offer from the LLC

6) Give POA to an "agent" to close on the property

7) Sign an agreement with a property management company

What am I missing? I am sure there is a lot.

I would love to have a CPA and lawyer who have walked through this before. Any recommendations?

I am doing this for a friend of mine, but currently live overseas and might setup a business to coach foreigner investors to buy US real estate.

Mike

Linda Weygant · Answer

You are correct.

However backup withholding is a completely different critter and is generally associated with payments that get reported through the 1099 series (1099-INT, DIV, MISC, etc)

An LLC does not report payment to the partner via a 1099 and instead uses a K-1, so the withholding calculations and reporting methods are completely different.

An LLC does not remit backup withholding for a foreign partner and instead withholds and reports under section 1445 utilizing a combination of forms 8804 and 8813, reporting the payments on form 8805 to the partner at the end of the year.  It's not technically backup withholding, it's Section 1445 withholding.

This type of payment allows the partner to estimate their tax burden.  For my client, that was 25% so that stuck in my head from when I was working through all that.  But you're right, I should have said that the amount can (and should) be calculated and withheld at a proper rate.  Definitely one of the dangers of trying to answer a question quickly.

Linda Weygant · Answer

Your Dutch friend will also need to apply for an ITIN.  As a member of an LLC making a profit, your friend will have a duty to report and pay taxes on the profit and must have an ITIN (the equivalent of a social security number) in order to do so.

The LLC will also need to withhold 25% of the profits before remitting them offshore, which your friend would then report as a payment on his behalf when filing his tax return.

I just helped an Australian national set up this exact same situation and am working to set up a system for Chinese nationals to do the same.  PM me if you need more help or advice.

Steve Babiak · Answer

This link says backup withholding is 28% ...

https://www.irs.gov/taxtopics/tc307.html

Alex Franks · Answer

Please don't start with the lower end properties. Read this post and Pm  if you need to answer any other questions

The problem with the lower end assets, they are such a more hands on investments , just more of a headache. Which I'm about to tell you why. Yes, on paper the entry price point looks great. So folks are only seeing one side of things. Lower end properties tend to be higher maintenance, higher expenses, and much higher turn over rate. Another factor is the rental prices aren't making sense, while still continuing to rise. We owned 37 of these exact type of homes (lower end in RH SC during the timeframe of 2004 -2009). So I'm speaking from experience, these type of assets tend to burn holes through investors pockets. Most folks start here, (1) Because they do not know any better and (2) The price point is much more attractive. These are what I like to call recycled product ( Quote by "Jay Hinrichs") , which usually has a 5 - 8 year shelf life. Or in better terms " the game of hot potatoes"- who or which investor is getting stuck holding the bag. Easy way to look at things are any institutional, or Hedge funds buying in this asset class. Now they are mostly buying A - B assets. Their is a reason Wall Street, and most private money are parking their funds into higher class assets. Most times this is why newer investors, jump in because its all that is left on the table for them ( lower end )or what the Gurus are selling.

The information above from Cindy is great. I've spoken with Cindy here on BP a few times. I told most folks here on BP, and in many seminars ,that if I sit at computer long enough I can dig a lot of great information up to prove what a great city Charlotte is. We are Atlanta's little teenage brother growing up (fast) We are all lucky to be in a booming city basically still many years of growth left

I have to disagree on this being a good buy and hold market on most markets. From 2009-2013 this was one of the best buy ,and hold markets. Today we are facing an over priced market, rental returns are much less. I have some left over stock still holding from 2009. I was buying from $40k to $50k range. Same house now priced in $100k - $120k pre-rehab price range. I was also buying in 4 states; NC, SC, Georgia, & Florida. With that being said, "one man's junk is another man's treasure." So for out-of-state folks with (ex: California or NY) they tend to have much higher entry points. So buying a house here from $100k $150k with 1% rental rule. Still makes this a very attractive market for out-of-state or international folks. This does not mean we have a great buy and hold. For me personally, it says we are lucky that we still have a lower entry point then most folks markets.

If we jump in and really become bit more analytical. It is cheaper to build than buy today. We will be building new construction rentals for a few years. I am seeing this as  similar to the 2000-2004 market. So the box Vinyl Village type homes is the current build (mixed in with townhomes, duplexes, quads). That mixed with real estate cycles , which very folks even discuss or understand.

Now back to the 10% Cap rate this is why most international folks are going to get burnt, and  USA  folks will as well. When investing in these lower end asset classes, Folks brought in cities like Detroit and Michigan. Promised a 20% return on the properties. I challenged folks to show me that over 5 years period (I am sure those returns are a lot less). Keep in mind this has nothing to do with the homes. It has everything to do with our economy, salaries for the lower income bracket, and a renters mentality. No security in those type of jobs with very little insurance benefits so job changing is common among lower end renters. It is very hard for someone paying 35 to 45% of their income to pay rent. I know here comes that chatter, well property management will handle that, right? We owned a management company from 2009 -2013. We lost our asses with that side of the company. I did it mostly for our turnkey clients. Good Rule of Thumb for any management folks who want to get in the business. Get 300 homes plus or get out of the business. Not profitable with out the inventory.

Now back to low end assets, very rare you are every going to sell, and get retail prices in these areas. How many USA folks move to rental areas? Once a area is over 50 % or more rentals, values will eventually drop as will the area. We have artificially inflated prices, in most of the areas with cash sales to out-of-state folks, or local  cash buyers( who just don't know any better). Basically most people are showing up to the table, and all we have are scraps left! This is not just here; Kansas City, Indianapolis as most markets to just a name a few are going through same thing. I still jump on 3 to 5 webinars month with out-of-state folks seeing what they are selling. So limited sales potential down the road for every one.

I was working with as well as being one of these turnkey groups for a few years. We all setup table and booths in LA, San Fran, and other markets. Selling our cities, and our turnkey deals. Me and a few of the guys we got smart, and jumped into the international markets. I still play there my self and see a strong demand for the turnkey product (just not worth it for me). Folks if someone was to start a local solid turnkey business here in Charlotte NC (5/month ) there is a good demand out there for this product.

Now for the lack of inventory. We had a few smaller hedge funds here in 2011-12 buying before most folks realized. They were already here buying smaller up to 100 homes.. Then the big boys like invitation homes (Blackstone which is a large wall street fund for folks who don't know ) came in purchased 7000 plus homes in little under a year. Most of the vinyl villages, anything built 2000 above; 3bed 2 bath or larger was their focus. Banks are realizing they can go into the property now . Taking a lipstick approach to rehabbing. Sell it them selves as well. So that's a few reason for the lack of inventory.

Just my two cents,-- Alex

Fred Heller · Answer

@Michael Wentzel  I'm not terribly experienced with this but have dealt with it a couple of times.

You're on the right track. Your guy from the Netherlands needs to establish a LLC which will own the properties.

One additional step involves filing paperwork with the IRS. Without this, funds transferred out of the country will be taxed at a higher rate.

Any good real estate attorney will be able to walk you through it.

Good luck!

Steps for a foreign investor to buy in the US?

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