Every winter, we gaze lustily south. As darkness, snow, ice, and extreme cold take their toll on our psyche, we dream of Florida and Arizona. For most of our life, we can only visit briefly before returning to our frozen purgatory.
As retirement approaches, though, a tantalizing possibility crosses our minds. What if we could spend the ENTIRE winter down south? As Montreal gets buried under metres of snow, you sip a mojito in Miami. As Calgary freezes solid, courtesy -40c windchills, you tee off in Scottsdale.
Of course, none of this is new. Every year, millions make the trip south. Hundreds of thousands, enamoured with their new winter home, buy property.
Are you thinking of doing the same? It isn’t as simple as writing a down payment cheque. It’s a process fraught with hurdles – if you make a misstep, you could end in trouble with the IRS.
In this blog post, we’ll go over the pros and cons of investing in US property. If you decide to go for it, we’ll walk you through the process from start to finish.
American Real Estate Offers Diversification Opportunities
It’s tough to make money in today’s economy. The stock market appears to be near its top. Interest rates are abysmally low, making saving accounts impotent. And throughout much of Canada, real estate is horrendously expensive. And if you live in Toronto or Vancouver? If you’re not already a millionaire, wealthy investors have locked you out of the market.
With conditions like this, how are fiscally-responsible Canadians like yourself supposed to save up a nest egg? To beat the odds, you’ll need to get creative. The fundamentals haven’t changed: Traditional wealth-building tools still function as they always have.
However, as we pointed out, there are serious barriers to entry here at home. Why not look abroad? Thankfully, with the world’s biggest economy on our doorstep, we needn’t look far. From Maine to Miami, the savvy Canadian investor can find real estate opportunities.
Priced Out At Home? Get On The Investing Ladder In America.
Canada is seriously short on lucrative, ACCESSIBLE real estate markets. You can count the desirable ones – those with healthy economic/population growth – on two hands. Most are prohibitively expensive. Others do have lower prices, but usually, there’s a reason for that. Often, their economy is struggling, or the population is stagnant/declining. Often, it’s both.
It’s a different story south of the border. Yes, there are pricey markets that are as bad as Toronto/Vancouver. But, we aren’t interested in markets like NYC, Chicago, or most of California.
Instead, we’re interested in its inexpensive (or at least AFFORDABLE) markets. As in Canada, some markets are cheap for a reason – the economy, income levels, and crime rates are all factors. However, some of these will intersect with areas of economic prosperity. Some have a favourable climate. And others resonate with cost-conscious Millennials who can’t afford to live elsewhere.
All represent a buying opportunity. Let’s take a look at a few spots in America that illustrate our point. According to Zillow.com, the average home in Phoenix costs about 260,000 USD – or 343,000 CAD.
A short trip down I-10 takes you to Tucson, a college town blessed with the same warmth as Phoenix. Here, you can snag houses for about 212,000 USD, or 280,000 CAD.
What about Florida? Fort Myers, a long-time snowbird nest, has homes that average 218,000 USD, or 288,000 CAD. The Atlantic Coast is a bit pricier – still, Cocoa Beach comes in at a reasonable 327,000 USD, or 431,000 CAD.
Compared to rickety bungalows that are selling for around a million at home, these deals can be saliva-inducing. However, know that investing in American real estate isn’t a layup – many pitfalls can snare the unprepared.
Investing in America Comes With Pitfalls
To the untrained eye, America can feel the same as Canada – only warmer. However, its laws, tax rules, regulations, and other intangibles are like hornet’s nests on the ground. Step on one, and it can ruin your WHOLE day. Let’s review a few problem areas.
The Law
A number of legal statutes can complicate your life, should they apply to your situation. For instance, if a property is in your name AND your spouse, their or your death will trigger probate. Probate is the legal procedure that governs the transfer of assets from a deceased stakeholder to a beneficiary.
In Florida, the law allows your lawyer to charge a fee as high as 3% the value of your property. On a house worth 300,000 USD, that’s an expense of more than 10,000 CAD, straight out of your pocket.
Do you want to be a landlord? Should your tenant bring a suit against you – and WIN – the courts could take part or ALL your assets.
Taxes
And then, there’s the IRS. They’re just like the CRA – except on steroids. Without fail, tax issues for Canadians buying USA property are a perennial source of woe on snowbird internet forums.
Do you rent out your property when you aren’t there? If so, you’re on the hook for a 30% withholding tax – and NO, the Canada/US tax treaty does NOT cover this. About to sell your condo? Don’t forget to pay capital gains. According to the IRS, you are subject to a withholding tax of roughly 10%-15% on the proceeds.
Back home in Canada, homeowners pay property tax. In the US, similar rules apply. Fail to pay the state, and they can – and WILL – seize your assets.
Brokers
Buying without a broker is an ill-advised move, even when you “know” a market. A professional real estate broker knows their region inside and out, as well as local laws and regulations. Yes, you do have to pay them a commission (how DARE they make a living!) However, they can save you from making a terrible buy, or can find deals you don’t know about.
That said, don’t just go with anybody, There are a lot of unethical agents (or straight-up con artists) out there. Ask fellow snowbirds who they trust. Check out brokers on review sites – repeated bad experiences are a definite RED FLAG.
Insurance Issues
American neighborhoods can seem as peaceful as those back home. However, a host of issues – from burglars to hurricanes – can put your investment at risk. Insurance laws in America reflect this.
For example, FEMA (Federal Emergency Management Agency) requires flood insurance if your home sits in a high-risk area. Some areas require windstorm insurance, while others mandate hurricane insurance (flood + wind bundled together.)
Also, home warranty is not a home insurance. While they resemble homeowners insurance in how they are structured, they aren’t beholden to the same regulations. As a result, many providers engage in shady practices. Do you plan on getting a home warranty? Rigorously vet firms using a site like ReviewHomeWarranties.com – you can thank us later!
Currency Exchange
Should you go through your bank, or through money transfer websites? Many Canadians do the former – and in doing so, they light their money on FIRE. The fees and exchange rates that Canadian banks are darn near CRIMINAL.
Let’s say you have an account through TD Bank. At press time, their CAD/USD rate was 0.7387. To buy a 300,000 USD home, you need to send a 10% down payment. To send 30,000 USD, you’ll need to come up with 40,612 CAD.
However, online money transfer firms, like OFX, offer FAR better rates. Because of their streamlined nature (they are primarily web-based), there are often NO fees. Even better, their exchange rate runs close to the interbank, or the wholesale price of exchange.
According to XE.com, the interbank rate was 0.7583 when we wrote this article. At that time, OFX was offering 0.7550 – a margin of only 0.4%! At that rate, you’d only need to send 39,736 CAD – almost 1,000 CAD less!
How many green fees or beachside margaritas could 1,000 CAD buy?
Is Investing In American Real Estate Worth The Hassle?
All these factors can be headache-inducing on their own. So, is American real estate worth the hassle? Financially, it can be – so long as you choose your market wisely. Currency exchange is your most significant consideration – but that’s an unavoidable aspect of investing in international real estate. Hurricane insurance is another expense – if you choose to live near the beach in Florida. Note that Arizona doesn’t suffer from this problem.
The other primary concern – following rules & regulations. So long as you follow IRS rules, respect your tenants, and the like – this shouldn’t be an issue.
The rest of the question is market dependent. Some places have inherent value, like a condo in Pompano Beach. Others are built like a house of cards – as such, they may collapse in the next downturn.
In other words: Do your research. There are no shortcuts to wealth – only those prepared to endure the downsides stand a good chance at profiting in the long run.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.