Can I do the brrrr-strategy as a non US Citizen?

Question

Hey, I am a complete beginner in real estate investing but really keen on doing the brrrr-strategy. As I live in Germany and don‘t have a residency in the US, I‘ll have to become a long distance investor. Until now, I have only seen out-of-state investing but never out-of-country investing. Does anybody have experience in this and can share their story? Especially tax and business wise, as well as the whole financing topic. Can I get a mortgage as a foreigner? What do I have to be aware of?

Thank you so much in advance, hope you‘re all staying safe!

Jan

Thank you so much in advance, hope you‘re all staying safe!

Jan

Yoann Dorat · Answer

Hi Account Closed, I've been in your position a few years ago when I was still living in France.

It's definitely tough to find good lending terms when you're not a US citizen, there are few lenders willing to do it and usually, the high-interest rate and the points they're charging will swallow all of your cash flow.

My suggestion would be to raise the debt in Europe (the interest rates are pretty low right now), your bank won't finance a US property directly, but you might still be able to get a loan or a line of credit by giving them a lien on another asset you may own in your country.

Feel free to reach out if you have any questions

Stephen Brown · Answer

Hello Andre, there's a company that works with international investors in Detroit that helps them get financing to invest in the USA. Send me a message if you're interested.

André Rairan Zacchi Pereira · Answer

Hi, Account Closed I also live in Germany and would be interested in that. Have you got more info already? Let's chat and share the experience!

@Stephen Brown, if you have knowledge about refinancing for foreigners, I'd love to hear about it.

Thanks,

André.

Drew Sygit · Answer

Foreign Owners of U.S. Rental Property
All foreign investors owning U.S. rental property are responsible for paying taxes on any and all rental income they earn in the U.S. regardless of any tax treaties that may exist.

Since some of the regulations and requirements can be confusing, Logical Property Management (LPM) has created this document to summarize the options for a foreign investor. 

Foreigner investors can either pay a flat tax of 30% of their gross rental income or elect to file an annual US tax return and reduce their taxes by claiming deductions relating to ownership and managing the property. (i.e. Property Taxes, Insurance, Management Costs, etc.)

With either method of taxation, foreigner investors must have an Individual Taxpayer Identification Number (ITIN).

Obtaining A Taxpayer ID
As soon as possible, foreigner investors need to obtain a U.S. 'Individual Taxpayer Identification Number' (ITIN) for each owner of the property (Each person listed on the property deed). The application is done with IRS Form W-7, and foreigners must provide original certified identification documents.

IRS Form W-7
IRS Form W-7 Instructions

The IRS has 'Certified Acceptance Agents' who are authorized to certify foreigner investors’ original documents and process the application. The W-7 form may look easy to complete, but we highly recommend finding a certified agent to handle it. Certified Acceptance Agents are located worldwide. It normally takes 4-6 weeks for a W-7 to be processed by the IRS.

Here is a link to the IRS website, listing Certified Acceptance Agents by Country:
IRS Certified Acceptance Agents

Upon receiving an ITIN number from the IRS, a copy of the IRS letter showing the new Individual Taxpayer Identification Number (ITIN) must be sent to LPM.

Note: LPM will not manage rental property for foreign owners who do not acquire an ITIN number.

Form W-8ECI
The Internal Revenue Service (IRS) requires property managers to withhold 30% of gross rents to ensure foreigner investors will file a tax return at year end. This is obviously very costly and cumbersome for a property manager and Logical Property Management will not do it.

However, there is an alternative that will exempt a foreign investor from the mandatory 30% withholding.

After obtaining an Individual Taxpayer Identification Number (ITIN), submit a completed IRS Form W-8ECI to Logical Property Management.

Note: Do not send the Form W-8ECI to the IRS. You send it to your property manager.

IRS Form W-8ECI
IRS Form W-8ECI Instructions

By filing Form W-8ECI foreign investors eliminate the mandatory 30% tax withholding as it notifies the property manager (and the IRS) the foreign investor will be filing annual tax returns to report their income and expenses related to the rental property. Most generally, Form 1040NR (Non-Resident Tax Return) is filed with the IRS. Those tax returns are due by June 15th of each year and you should consult with your tax professional.

W-8ECI Form remains in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any of the information on the form incorrect. For example, a Form W-8ECI signed on September 30, 2020, remains valid through December 31, 2023. Upon expiration of the 3-year period, you must provide a new Form W-8ECI.

If you do not file a form W-8ECI with your property manager, your property manager is REQUIRED by law to withhold 30% of your income from the rental and forward the funds to the IRS.

Note: LPM will not manage properties for owners who do not file the W-8ECI form with us.
Our business is property management and we do not choose to become tax
collectors and have to administer sending 30% of your funds to the IRS.

Form 1099

At the end of each year your property manager should provide you with a year-end statement of your income and your expenses related to the management of your property. Along with the year-end statement you will receive a copy of IRS Form 1099 that reports your income to the IRS. You will then use your copy of Form 1099 to file taxes through your tax professional.

Legal Disclaimer: The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney and/or tax professional to obtain advice with respect to any particular issue or problem. Applicability of the tax or legal principles discussed in this material may differ substantially in individual situations.

Stephen Brown · Answer

Hello Jan. In our market here we have some investors from outside the USA doing BRRRR's. I believe it is possible although I'll have to ask around for how the financing works. Let me know if you'd like to chat about it!