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:
- 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.
- 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.
- 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.
- The tax benefits. Most specifically in the U.S. they have something called the 1031 exchange* *All investors are encouraged to review detailed tax consequences before making any major investment decisions – taxation issues can and do change. *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.
- 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?
- 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.
- 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.
- 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?