In a global context, Canada’s currency and economy are relatively strong. Consequently, Canadian investors are looking beyond our borders for investment opportunities. Real estate in the United States, particularly the warm, sunny ones where prices have dropped to a fraction of what they were five or six years ago, has become irresistible to a surprising number of Canadians. The comparatively higher prices of real estate in the most desirable places in Canada have added to the appeal.
Of the $33 billion of US residential property sold in 2009 to foreigners, close to a quarter was sold to Canadians. Not surprisingly, the most popular states for Canadians to purchase were Florida, California, and Arizona.
Words of Caution
So many Canadians are buying US real estate that American realtors are holding seminars and workshops in our major cities and people are actually buying properties sight unseen. As with any investment, due diligence is a must. Listening to a sales pitch, reading a brochure and perhaps watching a video are not sufficient due diligence for purchasing real estate. At the very least, personally view the property and gain an understanding of what and where you are buying.
When you purchase property, a house, or condo in the US, recognize that you are a foreign buyer. Some rules are different for foreigners than they are for Americans, and rules that apply in Canada may be completely different from those in the US.
For example:
- Property taxes could be as much as 50 percent higher than the amounts permanent US residents pay
- Mortgage terms may be different for foreigners
- If you rent out the property, the income must be reported and taxes paid in the US, or under some instances, the tenant could be responsible for withholding taxes
- Estates are handled differently in the States than in Canada
Be aware, too, that if you purchase any kind of real estate with shared management and/or maintenance — for example, property on a golf course, a house in a gated community, or a condo in a high-rise building —you could be one of only a few owners in the development. Your portion of the overall management and/or maintenance costs could be significantly higher than you expect. Vandalism and disrepair could be problems.
If you’re buying real estate strictly as an investment, hoping to rent out the house or condo, be aware that in some uncomfortably hot locations, people escape for the summer months and reside there only part time. Finding a year-round tenant could be a problem.
Unlike in Canada, where real estate survived the downturn relatively unscathed and values generally appreciate year after year, the situation in the US is significantly different. Real estate prices tumbled in the past few years and in some cases still are dropping drastically. That’s one of the major reasons US real estate is appealing to foreign investors. Will prices rebound or even recover in the long term? Who knows? All those people who lost their homes, and even those who watched family and friends lose their homes, are unlikely to believe anytime soon that real estate is a good investment.
Yes, there may be some great bargains in real estate in some very attractive locations in the States. As with any investment, research thoroughly and deal with knowledgeable, reputable sales agents. If the deal sound too good to be true, don’t buy!
Alternatives
For the same reasons US real estate might appeal to you as an investment, there are others that are far more liquid, easier to value, have no US estate tax issues, and are much easier to manage. Contact your Nakamun advisor to discuss other foreign investment opportunities.
