In the past, buying multifamily properties in the United States was a no-brainer for foreign investors if they could afford it. The selling point: stability. With political and economic stability, foreign investors can feel secure about putting their money in American apartments, according to Wayne Vandenburg, chairman of TVO Groupe, a Chicago-based firm that acquires, develops, and manages apartment communities internationally.
That stability still can be a draw for foreign investors. Tax advantages, stricter laws, and the diversity of the American markets also attract them. But there's another side to the story. Brokers in many markets report very little foreign interest in multifamily properties. And when they do come over, foreign investors often need a good partner to guide them.
Coming to America
Though Vandenburg says investors are now more comfortable putting their money in other parts of the world than they used to be, there are some trouble spots. In some countries, for example, there's a concern over the government seizing properties. "If you're comparing the U.S. with Russia, you'll go to the U.S. because you know it's stable with respect to your currency," he says. "I'll go to Russia and I can probably get a 15 or a 14% yield on cash-on-cash, but I may never get my money back."
There are no such surprises in the United States. "We feel very comfortable with the U.S. market," says Bernhard Köhler, CEO of European Property Consulting, a Switzerland-based firm that brings European multifamily investors together with American operating partners. "It's very professional and very transparent."
And there's variety, too. In a smaller country, one market could go bad and the others could follow. By contrast, each American market is a unique animal. Those differences can insulate a geographically diversified investor. "The U.S. is such a big country and has so many microclimates that are different from others," Köhler says. "San Francisco is different from Atlanta."
Regardless of the American markets' location, they all seem to protect owners and investors better than in many of the other industrialized countries around the world. "In Germany, the residential sector tenants are very well protected by law," Köhler says. "It's very hard to get them out if they don't pay. That could be a nightmare for an investor. In the U.S., if you don't pay, you have to move out."
Japan, too, protects tenants strongly. "In Japan, tenants' rights are a lot stronger than in the U.S.," says Eric Clauson, president of Lexington Corp., a Tokyo-based company that invests Japanese money in American apartments. "As a landlord or investor, we think the U.S. is an easier place to buy, run, and maintain apartment buildings."
Another reason the Germans like the United States is the tax break they get for investing in properties here. If private German organizations invest here and have a transparent limited liability structure, the individual investors get a break on taxes. "The private individual gets a tax break of approximately $3,000 off his earnings," Köhler says. "He doesn't have to pay taxes on dividends, but he does have to pay taxes on capital gains."
The Japanese used to get accelerated depreciation by investing in older American multifamily properties. New laws make it more difficult for Japanese investors to receive pass-through treatment of the depreciation, though. "They get accelerated depreciation if they can find a property that meets certain criteria," says Stephen Duffy, COO of Western National, an apartment firm based in Irvine, Calif., that has partnered with Japanese investors. "We could identify apartments that meet criteria, and they were very interested in partnering with us."