Pitfalls and problems - invest with real care in US real estate
Currently, you are a Bermuda resident thinking of strategies to earn additional cash, while generating a decent chance to earn your way to financial success.
Why not consider buying that rundown (or foreclosed) Bermuda house, fix it up, and flip it on. The concept should be quite successful if any of the reality shows on flipping houses are to be believed. After all, we Bermudians are obsessed with owning property, plus we know it is the dream — everyone wants a home of their own.
However, the current Bermuda economic environment is very challenging. Limitations and hurdles loom:
• a floating line of credit to purchase the soon-to-be flipped property may be harder to obtain and you may to have to collateralise your homestead as security, plus generate a down payment of as much as 20 percent (or possibly more) of the purchase price;
• with a significant number of local properties for sale already, there is no guarantee that the property will sell immediately after its tune-up;
• there are hundreds, possibly thousands of domestic Bermuda rental units empty already, so the contingency plan to rent if you cannot immediately flip is not very viable.
Instead, you are considering investing abroad probably the United States, buying distressed real estate property, flipping houses, and/or renting them out. You have seen those reality shows. They make it look easy — and fun, but investing in houses, or stocks or just about anything using your hard-earned money, means doing hardnose realistic homework, first.
Here is a brief summary of some information under the six basic constructions rules.
Warning! This list is not inclusive. Editorial space cannot begin to cover all the substantive operations needed to conduct construction business in the United States, a complicated industry whose processes and pitfalls can easily fill several major books.
1. Know your demographics — even if your brother-in-law is a US citizen in the construction business, for instance, find out for yourself. What are the constraints/restraints of the area you have chosen? Is it economically successful or depressed? Are residents moving in or tracking out? Check out the geography (mud slides, water tables, environmental hazards, such as old toxic dumps). Review management of the town/city finances (good, bad, indifferent) meaning propensity to property tax increases, viability of adjoining housing projects, proximity to good schools, access to commuting links and a metropolitan area, unemployment data, community involvement, adjacent to natural assets, and so on. Interview real estate agencies, mortgage officers in the area and go online to ascertain the average shelf life of a home listed for sale, and average rental rates for single family/duplex homes.
2. Understand your non-residency constraints. It appears rather easy to walk into the United States and set up a business. But, this is the hidden bear lock that may come to trap you if you are not careful in documenting your time spent in the United States.
Let's assume that you are a Bermudian, and a foreign national visiting the United States, at least initially.
Over stepping the substantial presence regulations (generally thought of as the 183-day rule) under the US Internal Revenue Service will take you into the realm of being considered a United States tax resident (because of your days of physical presence in the United States). US residents for income tax purposes (US tax residents) are subject to United States income tax on their worldwide income regardless of what that income is, where it is, or where you reside or may work. While often dismissed as a rather easy to follow simple requirement, this regulation is very complicated, particularly if you plan on conducting trade and businesses in the United States.
Bermuda has no income tax, unemployment tax, nor little other compliance reporting to various state, governmental, and federal agencies. You will be a neophyte in a world of experienced savvy US construction competitors. You cannot begin to comprehend in a one-off real estate promoter meeting or seeing a one-hour reality show, the complexity that you will be required to deal with.
Investing in US property — Part 1 was published February 22, 2014. Full article series will be published at www.marthamyron.com at end of March 2014.
Next: Part 3 — Basic construction rules 3-6: Plus, have a contingency plan in place, because if you step off the compliance bandwagon, you could lose everything.
Disclaimer: This article is for general information only, and does not begin to cover in any depth the detailed regulatory requirements for business operations in the United States. This information cannot be relied upon for any specific individual business or financial plan. Any individual thinking of investing his/her money in another country is forewarned; always consult with knowledgeable licensed qualified professionals with expertise in those industries, immigration, tax and US laws who understand the ramifications of foreign investment in the United States. The author worked in United States construction industry.
PondStraddler* Life™ Consultancy
Focused Cross Border Financial Planning Publications & Integrative Presentations for individuals and businesses with emphasis on international tax, immigration, investments, retirement, legacy, and related financial risk challenges to the lifestyles of internationally mobile citizens residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre.
Pondstraddler. A person with one foot on each shore whose heart resides in both countries.