The United States’ real estate market provides security and profitability like few other markets in the world. 1 Foreign capital, whether from institutional investors or high net-worth individuals, flows into the U.S. real estate market from all corners of the earth. Most of that capital washes upon the shores of the United States at such points as New York, California, and Florida, and it often fails to make its way to lesser known, but potentially more profitable markets like Colorado. Pinkston Property Investment Services (“PPIS”) serves as a guide and partner for foreign investors to enter the Colorado market.
Light Touch Regulation and Taxation
The United States, and Colorado more specifically, takes a more laissez faire approach to the regulation of investment properties and taxes than other developed countries. Investor returns often reflect this. No Restrictions on Foreign Investors: The United States imposes no restrictions on foreign investors acquiring property in the United States. No Rent Control: In 1981, Colorado enacted a state wide ban on rent control of residential property. 2 Favorable Tax Regime: The United States tax system is a Byzantine mess but, once navigated, it bestows advantages upon real estate investors. Much of the benefit comes from the number of deductions a property owner can take to offset income taxes: depreciation (27.5 years), mortgage interest, property taxes, repairs, property management expenses, legal and tax advisement expenses, and travel costs. In addition, under the new tax law, pass through entities enjoy a 20% deduction for rental income.3 The maximum long term capital gains tax is 20%. Moreover, a number of treaties exist to help foreign investors to avoid double taxation. Any investor should seek out independent tax advice to discuss the tax implications of acquiring property in the United States. Zero Effective Transfer Tax: Colorado has only a 0.01% transfer fee on the purchase price.4
Access to U.S. Financial Markets and Products
Non- U.S. domiciled investors face a myriad of hurdles in accessing the U.S. financial system. The acquisition of real property in the United States opens the door for those investors to easily access the U.S. financial system as the property provides a secured asset against which banks are willing to lend. Moreover, for investors from high inflation or unstable countries, this provides an opportunity to obtain financing in a steady currency. In addition, the United States is fairly unique in making 30 year mortgages readily available. By purchasing a property in the United States, an investor can possibly also gain access to this financial product, which provides a hedge against long-term inflation.
A currency is only as good as the government behind the currency. In a constantly changing world, the U.S. dollar has established itself as the most reliable currency. From shifting economic conditions to unstable political winds no currency is immune from fluctuations in value. By investing long term in a U.S. dollar denominated asset, investors gain a hedge against changes in the value of their home currency.
Climate Change Hedge
A clear consensus exists that world’s climate is changing: the rate and degree remain open to speculation. Regardless, coastal cities will bear most directly the consequences and those real estate markets will suffer. Those markets will suffer before the consequences are readily apparent. The United States real estate market is grounded to a large degree on home owners’ access to a 30 year mortgage. The day financial institutions recognize and account for climate change will take place well before it actually happens: when they stop issuing 30 year mortgages for those markets. The day that happens affected real estate markets will immediately lose value and their long term viability will be irreparably harmed. Foreign real estate investors have tended to focus on coastal cities that they are familiar with, e.g., New York and Miami. PPIS offers long-term investors access to an alternative market impervious to potentially rising waters and hurricanes as Denver sits at approximately 1,600 meters above sea level.
- Karsten Lieser and Alexander Peter Groh (2011) The Attractiveness of 66 Countries for Institutional Real Estate Investments. Journal of Real Estate Portfolio Management: 2011, Vol. 17, No. 3, pp. 191-211. See https://www.iese.edu/research/pdfs/di-0868-e.pdf
- https://denverite.com/2016/08/29/denver-doesnt-rent-control/; https://codes.findlaw.com/co/title-38-property-real-and-personal/co-rev-st-sect-38-12-301.html