Buying Abroad Is En Vogue – But Should You Join The Offshore Movement?
Americans are increasingly discovering that real estate investment doesn't have to end at the U.S. border. When visitors descend on Brazil for the 2016 Summer Games in Rio, you can bet that the white sand of Copacabana Beach and the soaring rock face of Sugarloaf Mountain will spark new interest in purchasing buy-to-lease South American property – property that will also be used for future getaways.
Opportunities beckon across the globe, from traditional vacation havens dotting the Mediterranean coast to emerging rental markets in previously untapped locales as Mauritius and Montenegro. There are many reasons to invest in overseas real estate, but those in the industry believe it boils it down to portfolio diversity and that certain 'je ne sais quoi' that draws us to explore other cultures.
Vacation rentals and beach homes abroad can be a substantial earner. Image by by Neda Andel.
The timing is also excellent for investing in diverse housing markets. Most domestic markets have boomed since 2011, so it's easier than ever to keep U.S. rentals filled, lending stability to existing rental investments. That also means higher prices for new domestic properties, and American property investors can expect new competition from foreign investors following a reduction of the former high tax on U.S. real estate purchases by foreigners; Bloomberg Business forecasts that this will be a game-changer.
What do I need to consider before crossing the border?
Whether you decide to jump in with both feet or prefer to just dip a toe into the offshore market, be sure to weigh up these unique challenges to buying foreign real estate:
- What limitations does the host country set on foreign investment in real estate? For instance, Switzerland property may only be purchased by natives and European Union nationals. Elsewhere, real estate investment by a foreigner can come with an automatic residency visa.
- Determine if the country has a tax treaty with the United States. Americans must pay U.S. taxes on their income from foreign holdings but some countries have a pact with the U.S that lifts the local income and capital gains taxes on Americans paying the U.S. levies. If not, you may need an overseas property investment company to avoid 'double taxes'.
- What are the local mortgage requirements and would it be beneficial to have a local bank account? Research foreign banks' deposit requirements for expats; cash may be a vastly better option depending on mortgage rates.
- What's the bang for your U.S. buck? Exchange rates matter; property investment specialist IPIN Global recently took note of the buying trend of wealthy investors capitalizing on currency disparity. "As an illustration, a €500,000 home would have set back an American investor $683,000 in July 2014. Now, the same property has a price tag closer to $558,000 which represents a huge 19% discount in less than one year!"
- How's the local economy? Cities with rapid economic growth may look enticing, but they may also have skyrocketing real estate costs (or a bubble, for that matter). Better deals may be found in cities with strong long-term prospects but short-term economic hiccups.
Evaluate the prospect country's political stability. The World Travel and Tourism Council monitors overseas economies and events which impact the tourism economy, and is a great resource for potential overseas property investors. It predicted a 3.5 percent growth in travel and tourism in 2015 but also notes there are events which have negatively affected tourism worldwide.
One other excellent resource for beginning your research is the CIA World Factbook. Just plug in your country for a comprehensive profile on the economy, culture, transportation networks and more.
What is the long term plan?
So you've nailed down a location for property investment – now it's time to pack a bag and go explore!
Veteran investors visit prospect cities at least twice before buying – once to investigate and a second time to confirm their assessment and settle on the deal, if they still feel the investment is sound. Besides seeing properties firsthand, visiting gives you the chance to meet the locals and size up any financial or cultural challenges that may lie ahead. If necessary, hire an overseas attorney and translator to help with the purchase and arrange for property management.
If local residents are your intended renter market, understand fully what amenities they expect. Maybe you assume that each bedroom needs a bathroom, or that all living spaces be climate controlled, but the locals may have different expectations. If your target renters are tourists and other expats, make sure you understand exactly what attracts tourists to that area, and what amenities will drive more renter demand.
Sun and warmth may be the chief driver for a coastal purchase in Rio, but if the property is too far from ocean breezes, don't expect pampered tourists to be happy in that tropical setting no matter how enchanting the palm-bedecked, mosaic-tiled 'casa' may appear. And remember – a fiesta setting is exciting for a week but could quickly lose its appeal if you live there long-term.
Choosing a reliable property manager is crucial to securing your investment. Get recommendations from trusted sources and select a tested manager. One Singapore investor and blogger weighed the value of paying a property manager when he made his first overseas investment – a small office space in Cambodia. The $110,000 property is providing a 6 percent yield, which he suspected could be greater if he managed the rental himself. However, he decided that with no connections to trusted local property agents, he'd "play it safe and let the property developer manage the property" for him.
Monitor your money
Just as you should with domestic investments, track the financial health of your overseas purchases. Monitor market changes in your host country and track investment in the local infrastructure that can boost – or hurt – your property's value. Use accounting and financial tools to track your investments' performance, and know when it makes sense to move money between domestic and overseas accounts.
Foreign property is a non-traditional investment and shouldn't be your sole nest egg, but it can offer an extra income stream with potentially high performance (and enjoyment). Just as with domestic real estate investments, prepare an exit strategy in case the market changes or the headaches become unbearable. And if you've done your homework before the purchase and managed your offshore investment wisely, you'll minimize the chance of unwelcome surprises down the line.