Does buying U.S. real estate still make any sense for Canadians?

I never thought so myself.  That’s my opinion, certainly with our Canadian dollar so low.  However, I’m willing to at least listen to someone who believes otherwise.  Enter Mike Wolf, an author and U.S. real estate investor.  When Mike reached out to me recently via a friend, and asked for some time on my site, I was very curious and very skeptical why he thought buying U.S. real estate now (with our miserably low Canadian dollar) might still make sense.  Here’s what Mike and I chatted about.

Mike, I’m very skeptical about this. I have to ask you flat out, why is U.S. real estate a good investment, at these pathetic Canadian dollar levels?

I think the U.S. real estate market is still great for several reasons:

  1. The American real estate market is much more affordable than the Canadian market – even with the currency exchange.  In places like Atlanta I can buy a property for $100,000 U.S. that would be comparable to, if not nicer than, a $500,000 CDN property in Toronto or Calgary.  At some of the auctions I attend in Houston I see single family homes selling for $10-15k and that barely buys you a shed in Canada these days.  The people I teach are picking up homes for pennies on the dollar.  I don’t know of anyone who can say that about any market in Canada.
  2. The U.S. typically has better returns on the amount of rent an investor can get in relation to the purchase price of the property.  In other words, one can get a much better return on investment in most U.S. cities.
  3. The U.S. has been recovering at a tremendous pace and should continue to see significant gains while Canada starts to head into a recession.  I do not like buying into a dropping market and I believe real estate in most of Canada is getting ready to head into a severe downward correction.
  4. The tax benefits.  Most specifically in the U.S. they have something called the 1031 exchange.  Under Section 1031 of the United States Internal Revenue Code if an investor sells a property and purchases more property they can defer the capital gains tax indefinitely.  Think about how much more quickly you can build your portfolio if you don’t have to pay capital gains after every transaction like you do in Canada?  The best part of this is that Canadians can take advantage of it too if they structure things properly which is one of the things that I teach my clients.
  5. The richest people on the planet invest in American real estate for a good reason.  In addition to buying something that can give you passive income and capital appreciation you can also ‘depreciate’ your properties for tax purposes.  Without going into a lot of detail this means people like Warren Buffet, Donald Trump, and Robert Kiyosaki are paying a lot less taxes than most middle class people.  The bottom line is that the more real estate you own the less tax you’ll pay if you set things up strategically.

Where do you hold real estate investments now? 

I control properties in Calgary, Houston, San Antonio, Las Vegas, Phoenix, Florida, Atlanta, and Kansas City.  I’ve been a real estate investor for over 25 years.

Where are you looking for new real estate investments?  Why?

My top market is Atlanta.  Why?

  1. The market must be landlord friendly.  What this means is that if I get a non-paying tenant I can get rid of them quickly.  In Atlanta I can generally get rid of a bad tenant in under 3 weeks.  In Kansas City it takes approximately a month.  If I contrast that with California it can take over a year to get rid of a bad tenant, which is exactly why I won’t invest there.
  2. Population growth and good economic fundamentals.  People are moving to places like Atlanta to find jobs.  The economy is vibrant and because the government is very business friendly (they offer tax incentives to companies who do business there) there is a large number of fortune 500 companies that call Atlanta home.  Companies such as Coca-Cola, Delta Airlines, Home Depot, Turner Broadcasting base themselves out of Atlanta.  What this means is that my tenants can afford to pay their rent and if for some reason they lose their job there are a lot of other jobs waiting for them.  Also, the industries are diversified so if we contrast that with a one industry city (e.g. Detroit) the economy doesn’t tank when that industry is failing.
  3. Return on Investment.  While most investors put this as their most important criteria I have learned that if you pick the wrong market all you’ll get is ‘paper returns’.  As an example, it’s possible to buy a very inexpensive property in a place like Detroit or Ohio that looks really good on paper.  The homes might be $20 or $30k and rent for $700 per month.  The truth of the matter is that most tenants will only make 2 or 3 rent payments then you’ll have to evict them for non-payment.  While ‘high ROI’ sounds great it can be a lot of headaches, stress, and losses of revenue over time.

I’m still not convinced Mike.  So, on that note, let’s talk about the downside.  Can you tell me about some of the challenges you’ve faced in owning U.S. properties? 

The biggest challenge was with my mindset. When I first started investing in real estate I was a control freak.  Like most entrepreneurs I felt that nobody could do the job as well as me.  When you have that mindset it really limits the ability to scale your business because there’s only one of you.  Here’s my example:  when I bought my first US property in Las Vegas about 12 years ago I was forced to get a property manager because I couldn’t collect rent in both Calgary and Las Vegas at the same time.  What I found out was even though I had to pay my property manager 10% of the rent he actually produced more revenue for me than I did.  I learned that having a team produced better results financially while giving me more spare time and freedom to do the things I love.  I’ve learned that having the right team allows you to move beyond only investing close to home.  I wish I would’ve figured that out earlier in my career.

Let’s talk tax. What are some of the tax implications for Canadians owning U.S. real estate?  Isn’t this a PITA (pain in the a$$)?

The answer to that is if done properly a Canadian can pay less tax doing a transaction in the United States than they would doing the same transaction in Canada.  This depends entirely on what type of entity or entities they are purchasing in.  The proper structure isn’t one size fits all and it’s important to talk to a cross-border accounting specialist.  Before I put any of my clients into a potential deal I always make sure that they talk to my cross-border accounting team to make sure that they can take advantage of the different options available to them that will keep their taxes to a minimum (not to mention protect their assets).  But you’re right Mark, if done wrong an investor might be subject to withholding taxes and/or double taxation.

Any final thoughts Mike?

I think there are some great opportunities out there and the biggest transfer of wealth in history is happening right now.  I believe the US real estate market will not be on sale forever.  The thing you do today will have a big impact on what your financial future.  I believe there’s always money to be made but it’s much easier when things are undervalued.

Thanks Mike.  This was interesting to learn about but I’m not convinced this is right thing for me/us.  I do agree with you with one thing:  the things you do today will help shape your financial future.  All the best to you.

Readers, what’s your take on Mike’s responses?  Would investing in U.S. real estate in certain markets make sense now?  Does it make sense going forward? 

22 Responses to "Does buying U.S. real estate still make any sense for Canadians?"

  1. It’s not for me. I have neither the time nor inclination to pursue personal purchases of U.S real estate. I’d rather just purchase stocks of companies that do as that makes more sense for my personal situation.

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  2. We purchased a Park Model trailer. It’s classified as a Trailer, more like an RV and we rent space rather than owing land. Don’t think I would be interested in owing a single property, especially in AZ where the crime rate is quite high. In the park where we rent they have 24/7 security, year round which keeps our belongings more secure.

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  3. As stated, almost all the qualities attributed to US RE can be found in stocks. Comparing bubblicious Canadian housing prices to US prices isn’t all that reasonable. There would have to be a tremendous deal in both price and income (even after FX) to make it worth the initial and ongoing effort. No mention of the shift in the mortgage era. The guest has been invest in RE for the past 25 years — a falling rate environment, which results in higher prices and higher rents. How will a stagnant/rising rate environment effect those factors?

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    1. I see this as well: “There would have to be a tremendous deal in both price and income (even after FX) to make it worth the initial and ongoing effort.”

      I just worry, and I can be a worry wort, about the headaches associated with property management; finding a good company, and making sure the place isn’t trashed by a tenant. The tax issues are concerned depending upon which state you own property in.

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  4. I wouldn’t be so quick to dismiss what Mike has to say. I realize that for many people here it’s hard to wrap you head around the idea you can reach FIRE via real estate especially as the Canadian market is so unfriendly towards investors. I encourage you to spend some time over at Bigger Pockets. You will be introduced to a completely different way of thinking. I mean can you imagine a U of W student owning 200 plus doors (their term for units by the time he graduates and earning more money that he would in his chosen field? Every week I read stories like that. The second issue is of course managing units from a distance. Arebelspy over at the MMM forums has written extensively on how he did it without ever seeing a place or meeting his team. If I was a younger man than this is the route I’d go. The opportunity to have more assets in US than Canadian dollars yeah!!! If nothing else dear reader I’d encourage you to sign up to the bigger pockets email, if for no other reason, than to broaden your horizons.

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    1. “I mean can you imagine a U of W student owning 200 plus doors (their term for units by the time he graduates and earning more money that he would in his chosen field?”
      Does this mean, in this instance, buying a university degree was a bad financial decision? Why waste the time and money on going to school if pursuing something else will provide you more time and money than the formal education would?

      ” If I was a younger man than this is the route I’d go.”
      So would I, perhaps. That’s one major factor in this scheme — time. If you have at least a good 30+ years left, then scaling RE (in any location) would be a worthwhile endeavour.

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      1. Do you really think that the only benefit of university is providing you with money? Sad…..

        My hubby knows some guys, friends of a friend, who made a lot of money buying real estate in Fort McMurray, they got in vey early. But I wonder how they are doing now, if they didn’t sell it all.

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        1. University isn’t the only path to acquire an education, social connections, or critical thinking skills. It might the most expensive, however.

          But that’s a whole other topic. 🙂

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          1. @SST no, only how different the market is in the US. For example it would be very difficult to get a 1% per month yeild on a property in Canada, yet that’s the standard for any US investment.

          2. @Rob re: “1% per month yeild on a property…that’s the standard for any US investment.”

            12%/yr gross. What’s the net return and how does it compare to an indexed stock portfolio?

    2. You raise some good points Rob. Maybe I just have a bias to the way I’m investing, since I’m in more control that way, i.e., I can manage or change my portfolio rather easily if something goes wrong. I can’t do the same (change out of the rental business) very easily.

      I do agree with you on one thing, as I get older, I want more U.S. and foreign assets for diversification. Having too much of a home bias is not good I think. Thanks for your comments.

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  5. Real estate investing in the US doesn’t really appeal to me either. For me there are too many negatives going against it even if it could be lucrative. I’ve been a landlord before and that was with rentals located only 3km away.

    At some point later in retirement we “may” consider purchasing a small US home, although my wife currently says no way. LOL Although I wouldn’t really treat this as an investment- just an expense for a chosen lifestyle.

    I would be more inclined to do something like you are Cannew and a common set up where we were in last year in Texas with a rental. My folks own a little larger unit- a mobile in south Texas in a large park and not too far off will have to make a decision on what they’re doing with it due to their ages. The unit prices are reasonable, the lot rent that includes all park facilities and activities is reasonable and the taxes, upkeep are also very reasonable.There is also strong demand for renters but that opens a new can of worms.

    We’re not at the age where that lifestyle suits us (yet or maybe never if my wife has the last word) as we want to do some more world traveling etc.

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    1. We have toyed with the idea of buying U.S. property, but haven’t pulled the trigger yet. When my wife and I look at the tax implications, rental headaches from afar, property management concerns, etc., we figure we are better off renting a place short term when travelling. Will that change for us? Maybe. I think it would be different if I had a corporation. I could likely put the condo under the corporation business structure. That would make a great deal of sense, tax-wise.

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      1. Yeah it would be a step learning curve. As mentioned you can build a team to manage it but that’s a lot of work to setup. As I mentioned Bigger Pockets is worth looking at, if for no other reason it’s no different

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  6. What I found interesting in this, was his talk about investing in places that are more landlord friendly. Such a place doesn’t exist in Canada, where tenants have all the rights.

    My son is studying in New York State and I was a bit shocked reading his lease, all 40 or so pages of it. Nothing at all for tenant protection. Renewal date is August 1 and he had to re-sign the lease in February. He chose to not re-new this year. The landlord can demand any amount of damage deposit and has no rules about returning it and can increase the rent any amount. Although my son has a good enough landlord, I met him and he gave me some tips about dealing with tenants, lol. (I own one rental townhouse)

    Many areas in the USA have cheap properties, but they will stay cheap. And the building code standards can be shocking–I never knew that wiring could be on top of the walls, until I saw it in New Jersey and New York.

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    1. As a former landlord, I found the regulations protected mostly the tenant. Interesting to hear from you Barbara on the freedom landlords have in the U.S., well, New York State anyhow.

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      1. Similar here in Germany, while rents and yeilds are lower the majority of the running costs are passed on to the tenant. As well it’s cultural for tenanats to paint and fix up a unit (including installing your own kitchen). Main negative is that rents tend to be low so yields by extention are low.

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