Foreign Investment in North American Real Estate
Foreign investment in North American real estate involves the acquisition of property—both commercial and residential—by individuals or entities from countries outside Canada, the United States, and Mexico. This trend has sparked various reactions, particularly in the U.S., where concerns have historically arisen regarding foreign ownership and the perceived economic implications. Notably, fears have shifted over time, focusing on investors from Japan, Saudi Arabia, and, more recently, China.
In contrast to many countries, the U.S. imposes relatively few legal barriers for foreign buyers, although challenges such as financing and tax obligations can arise. Foreign investors often face difficulties in securing loans, as banks may be hesitant to lend to individuals without established credit histories in the U.S. These complexities necessitate that many foreign buyers are financially robust or have strong international banking support. Furthermore, the tax structure can vary depending on whether the property is connected to a U.S. business or treated as investment property, leading to tax rates that can complicate transactions.
As global mobility increases, the landscape of international real estate investment may expand, allowing a broader demographic access to property ownership across borders, making it less exclusive to wealthier individuals.
Foreign Investment in North American Real Estate
The topic of foreign investment in North American real estate refers to the purchase, sale, and leasing of real property, both commercial and domestic, in Canada, the United States (US), and Mexico by investors interested in land outside their home countries. In the US, in particular, this subject has frequently been the source of considerable anxiety, as some people interpret it as indicating that the country is being "taken over" by outsiders. Usually, such fears are concentrated on a particular country at times when that country’s economy is outperforming that of the US in one respect or another. During the 1980s, people in the US were worried about investors from Japan purchasing land; several years later, Saudi Arabia became the more pressing concern. In the early twenty-first century, the focus switched to China. To a lesser degree, such fears are also present in other countries. Mexico, for example, has long restricted the purchase of its land by foreign nationals, although these restrictions have been lightened in the twenty-first century. Into the mid-2020s, concerns over foreign investment in North American real estate continued. Although Canadian investors became common in the American real estate market, activity by China, Norway, and Qatar was also noted. As the economy became less stable in the mid-2020s, foreign investment in North American real estate fell.
Brief History
When persons who are not citizens of the US seek to purchase land in the US, they encounter relatively few legal obstacles. Many countries around the world have laws against non-citizens buying land, but this is not the case in the US, where federal and state laws generally do not prohibit such purchases. The only types of restrictions that tend to come up are those put in place by private owners of land or by homeowners associations and similar private organizations. Some of these private groups do place restrictions on foreign investors’ purchases, mainly due to concerns about being able to make sure that they will receive payment. Because foreign investors are often located outside of the country, some of them thousands of miles away, it can be difficult to work with them when disputes arise, so some private landowners have policies in place that do not permit sales to foreign investors.
The difficulties that do arise during real property transactions with foreign investors buying land in the US are usually related to tax rates. Determining the correct taxes owed and the party to whom they are owed can be challenging because there are multiple jurisdictions involved. Taxes are usually owed in the state where the property being purchased is located, but there may also be tax implications for the purchase in the purchaser’s home country. As far as the property taxes due in the US are concerned, there are generally two options available. The first option is called "effectively connected income" and applies when the real estate being purchased is effectively connected to a business in the US. An example of this might occur when a restaurant owned by a foreign national decides to purchase an adjoining lot in order to build a parking lot. The land that will hold the future parking lot is effectively connected to the restaurant. In these cases, the land purchase is taxed at the same rate that it would be if the purchase was being made by a US citizen or corporation. For land that is not effectively connected to a US business, the other option is to treat it as an investment property for tax purposes, which means that it is taxed at a flat rate of thirty percent.
Overview
Foreign investors in real estate located in North America sometimes encounter difficulties in obtaining financing for their investments. Because real estate is so expensive, buyers usually do not have the full purchase price available in cash that they can pay all at once at the time the purchase is finalized. Instead, buyers find it necessary to borrow most of the purchase price from a bank or other financial institution, meaning that the buyer only needs to pay a small percentage of the total price—often ten or twenty percent—as a down payment. The problem for foreign investors is that it can be difficult for them to obtain these loans. This is because banks want to make sure that the money they lend will be repaid, or that if it is not repaid, they can take possession of the land that was purchased with the money, through foreclosure.
When a foreign investor plans to purchase land in the US, the investor can either approach a bank in their home country for a loan, or they can approach a bank in the US. If the investor approaches a bank in her home country, the bank may be reluctant to lend money for the purchase of land in another country because, in the event that the borrower stops paying the loan back, the only way for the bank to recover its investment would be to find a way to take possession of the land, which, because it is in a foreign country, could be complicated and time-consuming.
On the other hand, if the investor approaches a bank located in the US for the loan, then that bank might be reluctant to lend the money to a foreign person because the bank would not necessarily be able to determine how credit-worthy the investor is, as most of her credit information would be from another country. Because of these potential problems in arranging the sale, investors from other countries seeking to purchase real estate in North America tend to be financially well-established or to have the backing of major financial institutions such as banks with offices and holdings all over the world.
These types of institutions are set up to handle transactions in different countries and have little difficulty conducting business across international borders. It is expected that, in the coming decades, as more and more people find themselves relocating temporarily to other countries, there will be a greater need for entities capable of arranging the purchase of land and homes in foreign countries. This should make international real estate investment an enterprise that is not the exclusive domain of the wealthy, as people with more modest means will be able to buy real estate in locations all over the world.
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