Buying a second home in the U.S. as an international buyer

With the ongoing instability in housing markets in Canada and the U.K., many investors are looking for an exit strategy. The U.S. real estate market offers a viable option for those seeking security and accessibility. Despite rising costs in the U.S., properties are still more accessible than in many parts of Canada and the U.K. The pandemic has exacerbated housing instability in these regions, pricing many out of the market. By purchasing a property in the U.S. now, investors can rent it out and use it as a vacation home, with the potential to move in full-time once the right documents are acquired. This long-term game plan shapes the buying process, emphasizing the importance of understanding occupancy types.

Understanding the Concept of a Second Home

The IRS defines a second home as a property that you personally use for more than 14 days per year or 10% of the days it is rented out at a fair rental price, whichever is greater. An investment property, on the other hand, is purchased solely for generating rental income or for resale at a profit.

Why international investors should purchase property as an investment property:

• Occupancy: Owners can occupy their investment property on a short-term basis without violating the terms of their financing or tax treatments.
• Legal Use: International investors can legally use their investment property as a vacation home on a limited basis. However, purchasing a property under the guise of a 'second home' and using it primarily for rental purposes can lead to legal ramifications, including penalties and changes in mortgage terms. Thus, it often makes more sense to purchase a property as an investment property if you plan to rent it out frequently until you're ready to make it your primary residence.
• Tax Treatments: The IRS allows deductions on mortgage interest and property taxes for second homes, but investment properties offer potential deductions for expenses related to property maintenance and management. This can provide greater tax benefits if the property is primarily used for rental purposes.
• Flexibility in Usage: While second homes offer personal use flexibility, investment properties allow for a clear rental income strategy with potential personal use. This dual approach aligns better with long-term plans to move in full-time eventually.

Why International Buyers are Turning to U.S. Real Estate

The U.S. real estate market has seen growing interest from international buyers. According to the National Association of Realtors, the U.K. ranks among the top 10 international countries investing in U.S. real estate. Although their share of foreign buyer purchases declined from 12% in 2007 to 2% in 2022, it has rebounded to 4% in 2024, tying with Colombia and Brazil. Canadian investors also continue to show strong interest in U.S. properties.

Case Studies:

• Canadian Market: The Canadian housing market has been impacted by stringent mortgage stress tests, foreign buyer taxes, and rising property prices. According to the Canadian Real Estate Association, home sales dropped by 11% in 2023 compared to the previous year, indicating a cooling market. These factors make it difficult for investors to find affordable and profitable properties domestically. The average price per square meter in Canada is $12,504, while the average in premium areas of U.S. range from $3,620 - $10,650, making U.S. properties more attractive by comparison (NAR Realtors' Association).
• U.K. Market: The U.K. housing market has faced post-Brexit uncertainties, regulatory changes, and economic challenges. The Office for National Statistics reported that average house price growth slowed to 3.1% in 2023 from 7.6% in 2022. This slowdown affects investor confidence and potential returns on investment in the U.K. market. The cost per square meter in London is $10,806, significantly higher than premium areas in the U.S. such as Miami ($3,620) and Los Angeles ($4,760) (NAR Realtors' Association).

Benefits of the U.S. Market

• Economic Stability: The U.S. economy has shown robust recovery post-pandemic, providing a strong foundation for real estate investments.
• Currency Advantage: For Canadian investors, earning rental income in U.S. dollars can be beneficial due to the stronger U.S. dollar. For U.K. investors, the stronger British pound provides higher purchasing power in the relatively less expensive U.S. market.
• Market Resilience: Consistent appreciation in U.S. home prices and favorable tax treatments make it an attractive option for international investors.

Best Areas in the U.S. to Purchase a Second Home

• Miami, Florida: Known for its vibrant culture, beaches, and favorable climate. Miami offers attractive real estate opportunities with a high potential for rental income.
• Phoenix, Arizona: Boasting a warm climate and affordable living, Phoenix is a top choice for vacation homes.
• Orlando, Florida: Popular for its theme parks and tourist attractions, Orlando offers great investment opportunities for short-term rentals.
• Aspen, Colorado: Ideal for those looking for a luxury retreat in a scenic mountain setting, Aspen provides excellent property appreciation potential.
• Nashville, Tennessee: With a booming economy and rich cultural scene, Nashville is an emerging market for second home investments.

To summarize Investing in a second home in the U.S. offers numerous benefits, from portfolio diversification to potential rental income and vacation convenience. With the current stability and opportunities in the U.S. real estate market, now is an opportune time for U.K. and Canadian investors to explore this option. By understanding the market differences and targeting prime locations, you can make a sound investment that aligns with your financial goals.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.