Can Foreigners Buy Property in California?

Yes, foreigners can buy property in California. A large percentage of property in California is owned by foreigners, who deem it an excellent investment strategy.

Buying property in the third largest state of America, California, is a significant financial decision. Questions and apprehensions like whether it is the best place to buy a property? What type of properties are available? Where to get the required finances from? Will the returns be worth the investment? etc., often keep the mind racing for answers and solutions.

In this article, we will answer all these questions and more to help you make progress in the right direction and buy a property in California at the earliest. So, let’s begin with our primary question, “Can foreigners buy property in California?” without delay!

Can Foreigners Buy Property in California?

There are no restrictions on foreign ownership of property in California, which makes it possible for foreigners to buy property here. However, you must obtain a foreign investment permit from the US Department of State if you are a non-US citizen or permanent resident. Also, you need to be aware of some foreign nationals’ processes and property tax implications like,

• When buying property in California, foreigners will be subject to the same taxes as US citizens. This includes the mortgage interest deduction, property tax, and capital gains tax.
• In addition, foreigners will also be required to obtain a social security number or an Individual Taxpayer Identification Number (ITIN) to buy property in California.
• Finally, it is essential to note that foreign investors will be subject to US estate taxes when buying property in California. So, if you’re thinking of buying property in California as a foreigner, it is essential to seek professional advice from a CIPS agent(Certified International Property Specialist) to ensure that you are aware of all the implications.

What is a Foreign Investment Permit?

A Foreign Investment Permit (FIP) is required for any foreigner who wants to purchase California property. The FIP is obtained through the California Department of Real Estate (DRE).

There are a few requirements that must be met to be eligible for a FIP.

• The first is that the foreign investor must have a valid passport.
• The second is that the investor must have proof of financial capability, such as bank statements or investment portfolios.
• Lastly, the investor must be able to show that the purchase of property in California is for investment purposes only and not for personal use.

If all requirements are met, the foreign investor will then need to submit an application to the DRE, along with the required documentation. Once the application is approved, the investor will be issued a FIP, allowing them to purchase property in California.

It is important to note that the FIP is only valid for two years, after which it will need to be renewed. Additionally, the FIP only allows the investor to purchase one property in California. Therefore, investors who wish to purchase additional properties will need to apply for additional FIPs.

The Foreign Investment Permit is a valuable tool for foreign investors purchasing property in California. It ensures that the investor is financially capable and that the purchase is for investment purposes only. It also allows the investor to buy multiple properties as long as they obtain the proper permits.

If you are a foreign investor interested in purchasing property in California, speak with a certified international property specialist to learn more about the foreign investment permit and how it can benefit you. But before you begin with the purchase process, let’s analyze why you should purchase a property in California.

Why Buy Property in California?

To answer this, let’s look at the statistics first. According to a 2022 report released by the National Association of Realtors(NAR), residential purchases by foreign buyers touched a whopping $59 billion between April 2021 and March 2022. Foreign investors were mainly from Canada, Mexico, China, India, Brazil, and Columbia. California was ranked as the second-best destination for foreign investments, with 11% of the 57% of foreign investments in real estate purchases made across the USA.

The median home value of all homes in California has reached $474,500, nearly double the national average. And despite being one of the most populous states in America, California’s population growth rate is still higher than the national average. The state has a population of over 39 million, which is projected to reach 50 million by 2049. So, there’s no doubt that buying property in California is a good decision from an investment point of view.

Some of the other reasons why buying a property in California is a good idea are:

The State has a Strong Economy

California’s economy is the largest in the United States and the fifth largest in the world. California’s gross state product (GSP) is $2.7 trillion, more than France and Brazil’s.

The Real Estate Market is Stable

The real estate market in California is relatively stable, thanks to the state’s strong economy. In addition, the prices of properties in California have been increasing steadily for the past few years.

There is a Massive Demand for Rental Properties

With the increasing population and the high cost of living in California, there is a growing demand for rental properties. This makes buying a property in California a good investment for those looking to generate rental income.

The State has a Great Climate

California has a Mediterranean climate, which is ideal for those who love sunny weather. In addition, the state experiences warm summers and mild winters.

There are Plenty of Job Opportunities

California is home to some of the biggest companies in the world, such as Apple, Google, and Facebook. This provides plenty of job opportunities for moving to the state.

Therefore, it is a good idea if you’re considering buying property in California. But how to go about it? let’s find that out in the next section.

How to Buy Property in California as a Foreigner

Step 1: Research the Market

You need to be sure that you are getting a good deal on the property you purchase. Look at trends in the area to see if prices are increasing, decreasing or staying the same. This will help you determine whether now is a good time to buy or if you should wait for a better market.

Step 2: Find a Good Real Estate Agent

An experienced CIPS agent will be familiar with the market and can help you find the right property. Reach out to Homeabroad to get in touch with an expert CIPS agent. He or she will also be able to negotiate on your behalf and help you through the purchasing process effectively and quickly.

Step 3: Get Financing in Place

You will need to get a mortgage unless you are paying cash for the property. HomeAbroad has a network of mortgage lenders who can assist foreign buyers with no US credit history get the desired mortgage amount and expedite the purchase process. However, you may need to get pre-approved for a loan before making an offer on a property.

Step 4: Make an Offer on the Property

Once you have found the perfect property, it is time to make an offer. Your CIPS agent will help you with this. Be sure to consider the current market conditions when making your offer.

Step 5: Have a Home Inspection Done

Once your offer is accepted, you should have a professional inspector come and check out the property. This is to ensure that no major problems could cost you money down the road.

Step 6: Close on the Property

Once everything has been inspected, and you are satisfied with the condition of the property, it is time to close on the purchase. You are expected to stay patient, as this step may take time.

To follow these steps and make the best property deal, you first need to have some critical documents in place.

Documents Required for Buying Property in California as a Foreigner

Foreigners can purchase property in California, but some special considerations and requirements must be met. Here are some of the key things you’ll need to know as a foreigner looking to buy property in California:

Valid Passport

This is perhaps the most obvious requirement, but reiterating nonetheless is important. You’ll need a valid passport to purchase property in California as a foreigner. Make sure your passport is up-to-date and will remain valid for the duration of your stay in California.

Social Security Number or an Individual Taxpayer Identification Number

In order to buy property in California, you’ll need to have a Social Security number or an Individual Taxpayer Identification Number (ITIN). You can apply for a Social Security number through the Social Security Administration, and you can apply for an ITIN through the Internal Revenue Service.

Proof of Funds

When you’re buying property in California as a foreigner, you’ll need to show proof of funds. This is to ensure that you have the financial ability to purchase the property and that you’re not using illegal or suspect funding sources. You can typically provide bank statements or wire transfer records as proof of funds. If you don’t have any US credit history, you can still get a mortgage in the USA. So, don’t worry about the financing.

U.S.-Based Mortgage

If you’re financing the purchase of your California property with a mortgage, you may need to get a U.S.-based mortgage. This is because many foreign banks will not finance properties in the United States. Therefore, it is best to speak with a mortgage lender to determine your options.

Insurance for Your Property

If you’re buying property in California as a foreigner, you may need to get insurance for your property. This is because most lenders will require that you have property insurance to get a loan. Homeowner’s insurance typically covers the home’s structure and your personal belongings inside the home. You may also want insurance for earthquakes or floods, depending on the property’s location.

Now that you know what documents you would need in place, let’s move forward and find out more about the ongoing market rates of properties in California.

What is the Ongoing Mortage Rate in California?

The average mortgage rate in California is 4.08%, which is lower than the national average of 4.54%. However, rates can vary depending on your loan type, credit score, and other factors.

If you’re a foreigner looking to buy property in California, it’s important to compare mortgage rates from different lenders to find the best deal. You can use various mortgage rate comparison tools to compare rates from multiple lenders in California.
Most foreigners don’t have a US credit history, and if this is the case with you, then you can still get a mortgage with no US credit history.

Average Cost of Buying a Property in California

The median home value in California is $474,500, which is nearly double the national average. However, the cost of living in California is also high. The state has a cost of living index of 138.3, which is higher than the national average of 100.

So, if you’re a foreign investor considering buying property in California, you must be prepared to pay more for your home than the average US citizen. However, if your home country has a tax treaty with the US, you can enjoy reduced taxes levied on the income you may earn from your property in the USA.

How to Get a Mortgage for Buying Property in California 

When you are ready to buy a property in California, you must have your finances in order. The first step is to, towards it is,

Step 1: Estimate the Affordability

Before considering how much a mortgage can get, calculate the maximum monthly payment you will be paying towards the mortgage. Usually, mortgage lenders calculate the maximum monthly payment in two ways the front-end and back-end.

• The front-end: It includes your housing costs, property taxes, homeowner’s association dues, etc.
• Back-end: The amount does not include these additional fees.

Therefore, while estimating affordability, you must consider the following,

• Mortgage principal and interest 
• Property taxes
• Homeowners insurance premiums 
• Homeowner’s association dues (if applicable) 

Step 2: Obtain Mortgage Pre-approval

Obtaining a pre-approval helps you know your standing and get a mortgage loan. For pre-approval, the lender will review your financial information, including your employment history, credit score, and debts. The lender will also verify your income and assets. Once approved for a mortgage loan, you’ll receive a letter stating the amount you’re approved to borrow. It will also help real estate agents understand your budget and requirements, and the search for a property can proceed accordingly. As a foreigner you’ll need a lender that works with expats and provide mortgage with no US credit.

Step 3: Prepare Your Documents

To obtain the pre-approval, you must have

• Copy of passport 
• You might need to complete International Credit Report Form provided by the lender. 
• Income statements as proof to make maximum monthly payments.
• Proof of assets such as stocks or savings accounts.

Step 4: International Credit Report  

US lenders use an International Credit Report (ICR) to determine a foreign investor’s eligibility for an international mortgage, especially if they have no US credit history. International credit reports are compiled by a third party and include information like,

• Credit history of the foreign investor
• Property tax amounts
• Insurance amounts 
• Property ownership inside and outside America. 

Step 5: Shop for the Home and Make an Offer 

After getting Pre-approved and setting your mortgage estimate, you can find a suitable property and draft an agreement of purchase with the help of your CIPS agent.

Step 6: Finalize Loan Application 

After you have worked on the purchase agreement, you can begin the mortgage application with the lender specializing in foreign national US mortgages. while finalizing the terms of the agreement, keep the following in mind,

1. Types of mortgages

• Fixed-rate mortgages have interest rates that remain the same for the life of the loan.
• Adjustable-rate mortgages have interest rates that can change over time.
• Government-backed loans, such as those offered by the Federal Housing Administration (FHA), have special features that can make them more affordable.

2. Down payment amount: The minimum down payment in California is 3 percent (for FHA loans) of the purchase price. If you have no/thin US credit, you can opt for a foreign national mortgage with a down payment of 20%.

3. Loan-term length

Step 7: Freeze the Interest Rate

Freezing your mortgage rate will ensure that you stay unaffected by the fluctuations on the bond market, and your interest rate remains the same during the loan’s term length. Your loan officer can help you with the same.

Step 8: Mortgage Loan Processing and Underwriting 

A loan processor will prepare your mortgage loan information and application for the underwriter. He/She will ensure that your applications and documents are all in place and present them to the underwriter. This will help catalyze the loan procedure.

Buying a house is a big decision, but it doesn’t have to be overwhelming. You can make the process go smoothly with careful planning, the right assistance, and preparation.

Also read: Guide to Foreign National Mortgage Loans with No US Credit

Types of Property Ownership

The first step for a foreigner looking to invest in California real estate is understanding what types of property ownership are available. The most common forms of ownership are:

1. Fee Simple Ownership

2. Leasehold Ownership

3. Cooperative Ownership

4. Condominium Ownership

5. Timeshare Ownership

Each type of ownership has rules and regulations that must be followed for the ownership to be valid. Let’s glance through each type individually.

Fee Simple Ownership

Fee simple ownership is the most common and straightforward form of ownership. In fee simple ownership, the owner has complete and exclusive rights to the property. This includes the right to sell, lease, or develop the property as they see fit.

Leasehold Ownership

Leasehold ownership is a type of ownership where the owner does not have complete and exclusive rights to the property. Instead, the owner has the right to use the property for a specific period of time, as specified in the lease agreement.

Cooperative Ownership

Cooperative ownership is a type of ownership where each owner has a share in the property. The cooperative owns the property, and all owners have the right to use it. However, each owner is only responsible for their share of the property, not the entire property.

Condominium Ownership

Condominium ownership is a type of ownership where each unit in a multi-unit building is individually owned. The owner has exclusive rights to their unit but shares common areas with the other owners in the building, such as the lobby, halls, and recreation facilities.

Timeshare Ownership

Timeshare ownership is a type of ownership where each owner has the right to use the property for a specific period of time. The property is typically divided into units, and each owner has a deed or contract for their specific unit. Timeshare ownership is a popular option for vacation properties.

Each type of property ownership has its own set of benefits and drawbacks that should be considered before investing in California real estate. It is important to consult a certified international property specialist to ensure that you buy the property that gives you the maximum returns and optimum benefits.

Types of Properties Foreigners Can Invest In California

There are many types of properties that foreigners can invest in California, including:

Residential property

This includes single-family homes, multi-family homes, condos, and townhomes. Foreign investors may choose to purchase a primary residence, a second home, or an investment property.

Commercial property

This can include office buildings, retail stores, warehouses, and other types of businesses.

Industrial property

This can include factories, storage units, and other types of industrial buildings.

Agricultural proper

This can include farmland, vineyards, orchards, and other types of agricultural land.

No matter what type of property you’re interested in, it’s important to consult a CIPS agent to gain clarity and guidance about the purchase process and various types of property ownership to find out the right fit for you.

Property Taxation for Foreign Investors

Foreign investors in California real estate are subject to the same taxation rules as residents. This means you’ll be responsible for paying property taxes, income taxes, and capital gains taxes on any profits you make from selling your investment property.

The good news is that California has some of the most generous tax laws for homeowners in the US. Property taxes are relatively low, and there are several deductions and credits that can help offset the cost of owning a home.

If you’re thinking of investing in California real estate, it’s important to consult with a tax advisor to make sure you understand all of the implications of ownership.

Capital Gains Taxes

When you sell an investment property, you will be subject to capital gains taxes on any profits you earn. In California, the capital gains tax rate is 14.3% for properties held for more than one year.

This high tax rate makes it important to consider other ways to minimize your tax liability when selling an investment property.

• One way to do this is to exchange the property for another investment property of equal or greater value. This is known as a 1031 exchange, and it can allow you to defer paying capital gains taxes on your sale.
• Another way to minimize your capital gains tax liability is to invest in a property that is eligible for the federal Low-Income Housing Tax Credit (LIHTC). This credit can reduce your capital gains tax liability by up to 50%.
• To be eligible for the LIHTC, the property must be used for low-income housing and meet certain other requirements. Consult with a tax advisor to see if your property qualifies.

Income Taxes

If you rent out your investment property, you will be required to pay income taxes on the rent you receive. The good news is that you can deduct a variety of expenses from your rental income, including mortgage interest, property taxes, insurance, and repairs.

• You take advantage of the depreciation deduction to reduce your taxable income. The depreciation deduction allows you to deduct a portion of the cost of your property over its useful life.
• This deduction can be taken even if you don’t actually incur any expenses in a given year.

Property Taxes

Property taxes in California are relatively low compared to other states. The statewide average effective property tax rate is 0.72%. This means that the owner of a $200,000 home would pay an annual property tax bill of $1,440.

There are a few ways to reduce your property tax bill in California.

• One is to apply for the Homeowners’ Exemption, which can exempt up to $7,000 of the value of your home from property taxes.
• Another way to reduce your property tax bill is to participate in the Calvert County Property Tax Deferral Program. This program allows qualifying homeowners to defer their property taxes until they sell or transfer the property.

Advantages of Buying Property in California as a Foreigner

There are numerous benefits of buying property in California as a foreigner. Perhaps the most obvious benefit is the investment potential. California has long been considered a desirable location for real estate investment, especially for foreign investors. The state’s strong economy and growing population make it an attractive market for those looking to invest in a rental property or flipping houses.

Additionally, California offers many tax advantages for those who purchase property here. For instance,

• The state has no personal income tax, which can save investors a significant amount of money.
• If you’re looking to purchase a vacation home in California, you may be able to take advantage of the state’s low property tax rates.
• As a foreigner, you will find buying property in California simpler than in other parts of the United States.
• The state has some of the most lenient laws in the country regarding purchasing property. For instance, there is no limitation on the minimum investment amount, and you will not be subjected to any additional fees.
• Purchasing property in California as a foreigner is a great way to invest in your future and take advantage of all the state has to offer. With its strong economy, growing population, and numerous tax advantages, California is an ideal place to invest in real estate.

Conclusion

Buying property in California as a foreigner is an excellent idea, as you can expect great returns from your investment. However, given the nature of international transactions, taxation and regulations, it is advisable that you seek the help of a certified international property specialist to ensure a smooth experience.

HomeAbroad can help you connect with a CIPS agent who can catalyze the process of buying property in California for you with proper planning and guidance. HomeAbroad also helps you get in touch with lenders providing mortgages to foreigners who don’t have a U.S. credit history.

Frequently Asked Questions