How Foreign National Buyers Of U.S. Real Estate Manage Currency Risks

July 15, 2015 - 4 min read

Foreign National Investors: 7% Of U.S. Home Sales

According to the National Association of REALTORS®, foreign national home buyers accounted for more than $92 billion in sales between March 2013 and March 2014, representing 7% of the overall U.S. housing market.

These foreign buyers of U.S. homes were represented by nations including Canada, Europe, China, India, Mexico, and the U.K. — countries which do not use the U.S. dollar as their base currency.

Therefore, when currency exchange rates move, so does the value of a foreign national’s investment in U.S. housing.

This introduces the idea of currency risk.

If you’re a foreign national investor in the U.S. real estate market or plan to be, therefore, read on. You’ll learn ways to manage your investments risks — including your currency risk — in order to protect your long-term returns.

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Successful Investors Think Like Multi-Nationals

The most successful foreign national investors in U.S. housing think about their investment in broader terms than simply “will U.S. housing increase in value in the future?”

Successful investors understand the affect of U.S. dollar volatility on their investment.

Recent dollar strength has given many foreign buyers confidence to purchase U.S. real estate and, in some instances, the double impact of a strong U.S. dollar and has made investors feel invulnerable.

Many investors have been smart, employing well-planned, well-researched investment research for their holdings. Many others have been plain lucky.

The smart investors know that assuming international risks requires a change in thinking from “individual investor” to “global company”.

For example, seasoned global companies don’t commit significant resources to an international market without a plan. Such an investment plan includes the anticipated return on investment, as well as an assessment of foreign currency movements on that investment.

Should the currency-related components of the investment be material, hedging strategies would be used to reduce, or mitigate, such risk.

This way, when an investment is successful and returns are strong, an investor can attribute the gains to a strong, thorough, and repeatable process — not just luck.

Luck is tough to repeat.

Currency Fluctuations Affect Foreign Buyers

Among the biggest risks to of U.S. real estate is currency risk.

Currency risk is rooted in a currency’s change in value over time and, as a foreign national buyer, your currency risk begins the moment you sign a contract to purchase a home at a particular price.

As an illustration, let’s assume that a Canadian foreign national buyer is purchasing a home in Florida for $1 million; and that the exchange rate on the date of contract ratification is 1 U.S. dollar = 1 Canadian dollar.

The real estate closing has been set for 45 days from today and the buyer is making a downpayment of thirty percent on the home, or USD$300,000. Because of exchange rate parity, this is also equal to CAD$300,000.

However, over the next 45 days, the Canadian dollar weakens against the U.S. dollar, losing 25% of its value.

This means that the Canadian foreign national buyer will be required to bring CAD$375,000 to closing in order to satisfy the thirty percent downpayment requirement.

This risk is commonly referred to as Transactional Risk.

Of course, the math can work in the opposite direction, too. Had the Canadian dollar appreciated 25% versus the U.S. dollar, the buyer would only have been required to bring CAD$225,000 to closing.

Translation Risks For Foreign National Buyers

For a foreign national buyer, currency risks don’t end at the date of purchase — they remain so long as the home is under ownership.

What’s different, though, is that a buyer’s foreign currency risk shifts from a transactional risk to a translational one. The effects of currency movements are now reflected in real terms on an individual’s personal balance sheet or statement of net worth.

In our example of the Canadian foreign national buyer purchasing a $1 million home in the United States, let’s assume that the currency exchange rate held at 1 U.S. dollar = 1 Canadian dollar during the 45 days between the contract signing and closing.

After closing, the Canadian buyer will own a U.S. home worth $1 million, which will appear on the buyer’s statement of net worth, irrespective of the mortgage placed on the home.

If, over the next six weeks or six months or longer, the value of the U.S. dollar appreciates 20 percent relative to the Canadian dollar, the Canadian investor’s net worth will increase by the same twenty percent.

Even if the home’s value has stayed flat at $1,000,000, the investor will see the gains on a net worth statement. This is because the gains are linked to currency exchange rates between the U.S. and Canada — even if they’re unrealized.

Get A Mortgage Rate Quote

Foreign national buyers account for a large percentage of U.S. home buyers and, with U.S. mortgage rates low, it’s an excellent time for non-U.S. citizens to make a plan for purchasing U.S. real estate.

Get started with a rate quote and a plan today. Rates are available online at no cost, with no obligation to proceed, and with no social security number or ITIN required to get started.

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Larry Kirschner
Authored By: Larry Kirschner
The Mortgage Reports contributor
Larry Kirschner is with the Compardo Team at Moneta Group. Larry lives in Naples, Florida.