The Pro And Cons Of Starting A Real Estate Business On An E2 Visa
This article focuses on the real estate industry and how foreign treaty investors can start a real estate business in the United States on an E2 Visa. It gives information on the industry, the different types of real estate, the pros and cons of starting a real estate business, and how it can achieve a competitive advantage. Vital information on the E2 requirements is also discussed.
The Real Estate Industry
The $225.8 Billion Market
The Real Estate business refers to the practice of buying and selling real properties, such as lands and buildings. As real property, it differs from personal property, which is not permanently attached to the land, such as vehicles, jewelry, and furniture. Instead, the real estate comprises real properties attached permanently to the land, whether man-made or natural.
Examples include permanent structures such as residential homes or commercial buildings, like offices, hotels, malls, and hospitals. Investing in real estate would entail purchasing real properties. The idea is to purchase a property to sell and profit from the price difference, especially when the property is first improved (i.e., attractive additions or changes to the property positively affecting its value). Real estate businesses often engage in buying and selling properties as well as offering extra services, such as property management.
The global real estate market was valued at US$3.69 trillion in 2021 and is expected to rise further at a compound annual growth rate of 5.2 percent from 2022 to 2030. The U.S. real estate market will be valued at $225.8 billion in 2023. A compound annual growth rate of 2.15 percent is expected from 2023 to 2025.
In 2021, the residential real estate space dominated the market with a revenue share of 35.5 percent. The growth is driven mainly by millennials, who have been more inclined toward home ownership in recent years. According to the Apartment List’s home-ownership report, the home-ownership rate among millennials has increased from forty percent to 47.9 percent in 2020.
The COVID-19 pandemic has negatively impacted the growth of the real estate market, especially in its beginning stages, as strict lockdown measures and movement restrictions were put in place, thus delaying new construction projects and spurning sluggish industry growth. However, after the initial pandemic-caused reduction in home sales, the market experienced a quick rebound, returning to pre-pandemic levels.
This recovery was caused by potential buyers who ramped up their search for and purchase of homes—especially second or vacation homes—due to the pandemic’s effects on the housing market prices and mortgage rates, which at some point was rock-bottom, coupled with pent-up Americans wanting to upgrade from small homes or apartments to bigger homes after being isolated indoors for an extended period of time, thus increasing the growth of the real estate market leading to its quick recovery.
On the other hand, the Real Estate Services market saw increased demand for facility management. As technology is increasing, people are now looking for instant access, maintenance, and other services, also leading to an increase in outsourcing these services. A survey stated that forty-two percent of property managers are now adopting new technologies (i.e., smart locker storage and automated bills) to keep their operations efficient.
As such, the real estate services market is forecasted to register a compound annual growth rate of approximately seven percent from 2022 to 2027. It maintains a favorable outlook for the economy and commercial real estate. Property managers and real estate agents are focusing on leveraging property management software’s benefits to increase their client base by following a unified technology platform.
Demand for real estate and, subsequently, real estate services is spurned on by population growth, the population’s personal income, employment rates, interest rates, and people’s access to capital. The profitability of individual companies depends on property values and demand, both of which are impacted by general economic conditions.
Real estate businesses also rely on the supply of investment capital. Large companies can have a competitive advantage over smaller companies solely based on their larger financial resources and broader geographic reach. Meanwhile, smaller companies can still compete effectively by focusing on local or regional markets and thriving on niches.
What is the different type of real estate business?
Four Main Types of Real Estate Business
Investors planning to start a real estate business must first look at the main types of real estate businesses to choose from:
Commercial
Commercial real estate refers to any property used exclusively for business purposes, such as restaurants, stores, shopping centers, hospitals, supermarkets, gas stations, hotels, offices, etc. Since 2010, the commercial construction industry in the U.S. has been steadily expanding. In 2012, $91 billion worth of commercial real estate was built in the U.S. However, due to the COVID-19 pandemic, the commercial property sector suffered a temporary decline, thus causing major shifts in demand and supply. Offices are one of the largest segments of commercial real estate.
Residential
Residential real estate refers to any property used for residential purposes, such as single-family homes, condos, duplexes, cooperatives, townhouses, etc. The residential real estate market in the U.S. is forecasted to register a compound annual growth rate of 5.77 percent from 2023 to 2028. At the beginning of the COVID-19 pandemic, the market suffered. However, it bounced back as soon as health and business restrictions brought on by the virus were loosened.
In fact, since the beginning of the COVID-19 pandemic, the property market in the United States has been on the rise. Real estate purchasers took advantage of the low-interest rates, restructured their mortgages, relocated, and purchased their first homes. Some even purchased a second or vacation home due to the abundance of good deals. Thus, residential property sales sharply increased in the second half of 2020 and stayed higher than before the pandemic. Before the pandemic, home prices were on the rise, but the sudden increase in demand in 2020 has pushed the price increase to a sharp 11.3 percent, as recorded by the Freddie Mac House Price Index.
Industrial
Industrial real estate refers to any property used for the purpose of manufacturing, production, storage, research and development, and distribution. This includes warehouses and factories. The industrial real estate market performed well in 2022, registering record-high rent growth and record-low vacancy levels. The $5 trillion in stimulus funding from the U.S. government increased household consumer spending, positively affecting the industrial market’s growth. Rent growth is 11.9 percent yearly, and 844-million square-foot industrial space is under construction, up seventy percent from pre-pandemic numbers. Amazon is the industrial market’s largest tenant.
Land
Land refers to any undeveloped property or vacant land, including agricultural lands. Examples include farms, timberland, ranches, and orchards. In 2021, land sales rose six percent, and the underlying value of the land real estate owned by households totaled $15 trillion, up from $13 trillion in 2020.
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What are the pro and cons of starting a real estate business?
The High Risk and High Return
Pros of Investing in Real Estate Business
Return on Investment (ROI) – well-chosen real estate properties appreciate over time, generally at a rate that outpaces inflation, since quality properties can be bought at a discount, and their value can be increased with improvements before selling for a profit. If an investor purchases real estate in up-and-coming markets, the potential for appreciation goes up further.
Unique tax advantages – depreciation is the advantage most investors know. The IRS allows investors to deduct the cost of the property over 27.5 years. Thus properties can be depreciated despite not often losing value. Property values tend to go up over time.
Provides a steady cash flow – rental properties create a steady flow of monthly income that is mostly passive, allowing the investor to spend their time building their other businesses, spending time with family, or investing in other properties.
Provides a hedge against inflation – inflation erodes many investments’ value, but real estate investments keep pace with inflation and can be an excellent hedge. As food prices go up, so do rent and property values. Meanwhile, the monthly cost of a fixed-rate mortgage payment stays the same. Thus, the annual rental income increases, but the cost of ownership does not.
Cons of Investing in Real Estate Business
Capital – while you can buy stock with a minimal cash outlay, real estate investing requires a lot of capital. To get started, a large amount of money for the down payment plus closing costs, repairs, and updates to the property will be costly to maximize the rental income. There will also be ongoing expenses like taxes, insurance, mortgage, and maintenance.
Time-consuming – real estate management can be time-consuming, especially for first-time investors. Projects can take time the more extensive they are, so the investor will need different sources of income during those times.
Long-term investment – real estate is not easy to back out of since it involves long-term decisions. It is a tangible asset not quickly liquidated for cash during emergencies. It also takes time to sell properties. Planning ahead is crucial.
Risks – it is possible to face risks such as buying the wrong property at the wrong time, and multiple accidents could occur to the property.
Real estate is a critical driver of economic growth for the United States market. As such, foreign investors must note the number of new construction projects in any given month as it can be a powerful and key economic indicator for the U.S. market since it indicates growth and expansion, the lack of which would signify a decline or economic hardship. The type of real estate surge can also explain how the economy is developing. For example, if housing statistics start leaning towards single-family homes, it could signal an upcoming supply shortage for single-family homes, thereby driving up prices. It is also highly affected by other factors, such as crime rates, local economy, employment rates, property taxes, facilities, etc.
The E2 Visa Overview
The Best Investor Visa Available
The E2 visa is a non-immigrant visa for investors who enter the United States under a treaty of commerce and navigation between the country of which they are a national or a citizen and the United States. It also applies to countries with which the United States maintains an international qualifying agreement or has been decided to be a qualifying country via legislation. The full list of qualifying treaty countries can be found on the U.S. Department of State – Bureau of Consular Affairs website.
E2 visas grant individuals the right to start or purchase a bona fide U.S. business and work for their business. However, it is a non-immigrant visa, thus not allowing the visa holder to gain a Green Card or permanently immigrate to the U.S. It does, however, allow the visa holder and its dependants to come to the U.S. to live and work. Spouses and children over 21 are welcome to join the principal applicant. The visa will renew indefinitely as long as they qualify for the E2 requirement and the E2 business continues to operate and remain profitable.
The maximum two years of initial stay can be extended or granted a change in status in increments of two years each. The treaty investor or E2 employee and their dependants can keep extending but must maintain the intention to depart the U.S. when their status expires or is terminated.
What are the E2 visa requirements?
Qualifications of a U.S. E2 Treaty Investor
In order to be eligible for the E2 visa, the treaty investor must meet the following criteria:
1. Nationality: They must be a citizen of a country that has a treaty of commerce and navigation with the United States, or a country that qualifies under specific legislation or agreements with the U.S.
2. Investment: The investor must have already made a significant capital investment or be in the process of investing a substantial amount of capital in a genuine enterprise in the United States. The capital must be obtained through legal means, and appropriate evidence must be provided. The term “substantial amount” refers to the overall cost associated with establishing the business or acquiring an existing enterprise in the U.S. If the total cost is lower, the investment must be proportionally higher to be considered substantial enough to support the investor’s successful management and operation of the enterprise. The enterprise itself must be a legitimate business that is actively operational, providing services or products, generating profits, and complying with local legal requirements.
3. Purpose of Entry: The primary purpose of the investor’s entry into the U.S. must be to develop and operate a legitimate enterprise. Additionally, they must either own at least fifty percent of the enterprise or exercise substantial control over its operations through a managerial position or other corporate mechanisms.
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Why invest in a real estate business?
Competitive Advantage for Real Estate Businesses
A Real Estate business should differentiate itself and find its advantage over others in the market by leveraging technology to work in its favor. For instance, automating lengthy processes, such as property searches. For real estate companies offering property management, smart solutions can help cut costs and boost efficiency. Installing CCTVs and alarm systems and using smart-home applications can save costs in the long run and prevent damages and accidents from occurring.
Additionally, the business should employ software that powers machine learning and data analytics to store and evaluate market data. Data refers to asset pricing, broker contacts, rent roll, tenancy, property locations, occupancy and vacancy rate, etc. Access to data is not typically the problem; rather, deriving true value or insight from the available information is the real challenge. Thus, utilizing software that could provide data analysis for market data can shorten an otherwise lengthy and challenging process for starting a real estate business.
Lastly, finding a niche would serve as a big advantage that could narrow down a real estate business’s interests and allow for developing a profitable specialty. For example, suppose the company only goes after contaminated properties because it knows how to rehabilitate them cheaply. In that case, it will have a specific niche to make it stand out as a company specializing in successful improvements. Furthermore, it also whittles down the competition as not every real estate business specializes in contaminated homes.
Conclusion
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Real estate is always going to be relevant. Overall, earnings from investments in real estate are through revenue from leases, appreciation of a property’s value, and profit from property management services. For example, ATTOM (a property database curator) reports that U.S. real estate home sellers nationwide gained a profit of $94,092.00 on a typical sale in 2021, signifying a 45.3 percent return on investment, up from forty-five percent in 2020, and up seventy-one percent from 2019.
Thus, when executed well, starting a real estate business can be a lucrative route for a foreign treaty investor looking into starting an enterprise in the United States through an E2 visa, as long as the investor knows how to plan and make long-term decisions since real estate can be a time-consuming business. If you want real estate business ideas or franchises, click here for a free consultation with our expert team today.
