Many Canadians are interested in diversifying their portfolios with U.S. real estate. Whether it’s a vacation rental property on the sunny beaches of Florida or a furnished executive rental in busy New York, the U.S. offers a diverse range of investment opportunities.
However, diving into cross-border real estate comes with its unique set of challenges and considerations. Understanding these can make the difference between a successful investment and a costly mistake.
Why U.S. Real Estate Is Appealing for Canadians
U.S. real estate offers several advantages to Canadian investors, including a diverse range of property types, potentially higher returns, and a robust rental market. Reflecting this interest, Canadians invested approximately $5.9 billion USD in U.S. residential properties between April 2023 and March 2024, making them a significant presence in the foreign investment landscape for their neighbours to the south.
Legal and Tax Considerations
One of the first steps in cross-border real estate investment is understanding the legal and tax implications. Unlike in Canada, the U.S. has a different set of property laws that vary significantly from state to state.
As a Canadian purchasing U.S. property, you’ll need to navigate both Canadian and U.S. tax laws. The U.S. imposes a capital gains tax on the sale of property, and you may also be subject to the Foreign Investment in Real Property Tax Act (FIRPTA). U.S. rental income is subject to U.S. federal and state taxes, and investors must file a U.S. tax return. Additionally, Canada taxes worldwide income. However, under the Canada-U.S. Tax Treaty, Canadian investors can claim a foreign tax credit for taxes paid in the U.S., reducing their Canadian tax liability.
You’ll need to consider how your U.S. property income and gains will be taxed when filing your Canadian tax return. Seeking advice from a cross-border tax expert can help you navigate these complexities and potentially avoid double taxation. RBC U.S. has an extensive network of cross-border tax, legal, and immigration experts who can help Canadians create a sound financial strategy. It’s a good idea to consult with one before purchasing, to ensure you fully understand all impacts before committing, as well as when filing taxes.
Financing Your U.S. Investment
Financing is often the most stressful aspect for Canadians looking to invest in U.S. real estate. Unlike in Canada, most U.S. lenders require a U.S. credit history, which many Canadian investors lack. This can make securing a mortgage difficult and often more expensive, as some lenders charge a foreign national premium an additional 1.5% to 2% on top of the interest rate due to the perceived risk of lending to non-U.S. residents.
This is where RBC U.S. cross-border mortgage solutions come into play. RBC U.S., a subsidiary of RBC Royal Bank of Canada, specializes in serving Canadians with a cross-border lifestyle. They offer a unique advantage by using your Canadian credit history to qualify you for a U.S. mortgage, eliminating the need for a U.S. credit score. RBC also offers adjustable-rate mortgages with various terms and a 30-year amortization, making it easier to manage your monthly payments. With no pre-payment penalty fees, you can pay down your loan when the exchange rate is favourable, offering greater flexibility. Additionally, they offer financing in all 50 states.
Currency Exchange Considerations
Fluctuations in currency exchange rates can significantly impact the affordability of U.S. real estate investments for Canadians. A strong Canadian dollar makes U.S. property more affordable, while a weaker dollar can increase costs. To mitigate currency risk, investors may consider locking in exchange rates through forward contracts or working with a currency exchange specialist.
Additionally, homebuyers can work with a U.S. lender like RBC U.S., which can reduce the upfront impact of foreign exchange (FX) costs by financing a portion of the property with a mortgage, such as through a 20% down payment. This approach allows investors to limit the immediate effect of currency fluctuations by spreading out payments over time.
Property Management
Investing in U.S. real estate doesn’t end with the purchase. Managing a U.S. property from Canada presents logistical challenges, particularly if the property is used as a rental. Hiring a local property management company can help handle day-to-day operations, including tenant screening, maintenance, and rent collection, ensuring the investment runs smoothly. It’s essential to factor in these expenses when calculating your return on investment.
Navigating the Buying Process
The U.S. process differs from what you may be used to in Canada. From negotiating purchase agreements to dealing with escrow accounts, the process can be complex and overwhelming. A real estate agent who is well-versed in cross-border transactions can provide critical support.
RBC’s HomePlus™ Advantage program, connects you with U.S.-based real estate agents who understand the unique needs of Canadian buyers. These agents can help you navigate the U.S. market, find properties that meet your criteria, and negotiate deals that align with your investment goals. Additionally, when you enroll in the RBC program, you can receive a cash reward of up to $9,50038.
Furthermore, RBC U.S. offers a free U.S. home-buying e-guide that outlines every step of the process, from house hunting to closing. This guide, coupled with the support of RBC’s Cross-Border Mortgage Advisors, ensures you have all the tools and resources needed to make informed decisions.
RBC’s cross-border mortgage services provide Canadian investors with the tools and support needed to navigate the buying process, making the dream of U.S. property ownership a reality.