International Real Estate As An Investment
A piece of real estate anywhere in the world is a real asset that you control and that, barring some act of God, can’t disappear altogether. Further, buy right, and your property investment can grow in value and deliver reliable cash flow. Certainly, if you’ve bought right, with an eye to intrinsic value, your asset should hold its value. It can also be productive, growing things— teak trees, for example—that provide additional value of their own. Plus, real estate is an asset you can use. Depending what you buy, you could vacation to it, retire in it, or lend it out to your children and your friends.
All things considered, as investors have understood for centuries, real estate is one of the soundest investment strategies you can pursue.
The current opportunity, though, is bigger. In the current global financial climate, not real estate in general, but international real estate, specifically, is the smartest thing you can do with your capital, be it ear-marked for investment or retirement.
The Ultimate Diversification Strategy
Real estate overseas is the ultimate diversification strategy at a time when diversification beyond U.S. markets and outside the U.S. dollar is more important than ever before in our history and certainly more important than ever before in our lifetimes. No matter how many kinds of investments you hold, if they’re all U.S.-based or all U.S. dollar-denominated, you are not diversified. You are at the mercy of U.S. markets and events, and that’s a dangerous place to be right now.
The Current Cycle Of Crisis
The current global climate of crisis that is creating the urgent need for the investor to diversify, across asset types, across markets, and across currencies, is creating opportunity, as well. U.S. property markets aren’t the only ones collapsing. Real estate values in Ireland, Spain, and Nicaragua, to name three dramatic examples, are, too. Other markets, including Greece, are building to coming collapses. Crisis creates opportunity, and, right now, the crisis opportunities are many and global.
Not All Markets Are Collapsing
On the other hand, the investor in search of global diversification (this should include all investors right now) would do well to remember that not all world markets are struggling or in recession. Certain places today present opportunity, especially for the investor in search of a yield (in the form of cash flow from rental income), thanks to expanding end-user markets—expanding local middle classes, for example, or growing numbers of international executives, foreign investors, global entrepreneurs, or expat retirees taking up residence. It’s not only savvy property investors who are taking their agenda global.
Entrepreneurs, investors of all kinds, and retirees, too, are moving their capital, basing their activities, and relaunching their lives in places where they have reason to believe they’ll be well treated. These migrating money-makers bolster economies and expand markets wherever they settle.
No One Needs To Know (Not Even The IRS)
Another, more practical reason why international real estate is the smartest thing to do with your money right now has to do with privacy. If you’re an American, no matter where you live (that is, whether you’re resident in the United States or not), you are required to report all foreign financial assets to Uncle Sam each year on what is referred to as Form 8938 if you meet the reporting criteria. However, there are two exceptions to the 8938 filing requirement, two foreign assets that the IRS doesn’t insist on knowing about. One is gold and other precious metals (held in physical form). The other is real estate if it is held in your personal name (that is, not held in a foreign corporation or foreign LLC). This means that foreign real estate is one of but two remaining assets that allow the American to retain some level of privacy of ownership, not only with Uncle Sam but with potential U.S. plaintiffs or creditors, as well. How is a U.S. plaintiff going to seize your condo in Panama City or your beachfront lot in Belize? He’s not.
Potentially Tax-Deductible
Another practical benefit for an American owning real estate outside the United States has to do with his annual tax bill. The travel associated with scouting for, purchasing, and then managing (in the case of a rental) a real estate investment overseas is tax-deductible.
How To Get Started With International Real Estate
If you are new to buying and investing in international real estate you are likely to have a lot of questions. The first might be, “how in the world do I get started?” Even seasoned real estate investors can have trouble deciding where and when to buy in international markets. The reason is that like many other forms of investing, real estate can be a moving target. By that we meant that foreign ownership laws, political swings, and property rights can all change the scope of what is and isn’t a smart international real estate investment.
Here’s are some things you should consider while you are looking at buying real estate in a foreign country:
1. How Do You Choose What To Buy?
The answer may not be clear-cut. The best case is when you find a piece of real estate in a place where you want to spend time that also holds out the potential for an investment return (in the form of capital appreciation and/or a yield from rental).
State your objectives and exit strategy expectations clearly for yourself and for anyone else buying with you. Every decision you make related to the eventual purchase is affected by the property’s intended use.
If you’re buying, straight-up, for profit, every decision is based on the numbers. If you’re buying for personal use, even part time, you’ll make your choices based on many things, including some that can’t be quantified in a spreadsheet.
2. Where In The World Should You Focus?
Opportunities are popping up all of the place, from crisis markets to rapidly developing countries there are so many options to consider. But how do you focus and find the right ones in the right locations? We frequently make specific recommendations in the Offshore Living Letter as to some of the best opportunity markets. As you consider them (and the rest of the globe), think about:
This is a key factor when buying for investment, but important if you’re buying a retirement or second home abroad as well. What infrastructure improvements are planned? A new airport, new train station, new highway, new hospital, etc., can mean a new universe of potential buyers… which is good news if you’re buying as an investor looking to develop or to flip. These things, though, also translate to better living.
In some places right now, a glut of high-rise condos is coming online. Units were launched and sold pre-construction over the past years. Once they’re delivered, the sheer volume of available units will likely cause the market to soften.
Having an idea of the general market conditions in terms of supply and demand will give you a better idea of what is and isn’t a good deal in that market.
Remember that the costs of acquisition go beyond agent commissions. Depending on the market, they can also include: legal fees, notary fees, registration fees, title insurance (we strongly recommend it in the developing world), and transfer taxes (sometimes called “stamp duty”).
In Ireland, for example, stamp duty can be as much as 9% of the purchase price.
It is important to know the full scope and financial impact that a international real estate purchase will have. Some of these costs you may have considered, others you might not have thought about.
Carrying costs can include: maintenance (a house on the beach requires a lot of it, for example); a caretaker (if you won’t be in residence full time yourself); property taxes (not every country charges them, and, in some countries, they’re negligible); income taxes (if you’ll be earning rental income); capital gains taxes (when you eventually resell… again, not every country charges them); other local taxes; property management expense (you’ll need a property manager if you intend to rent); rental management expense (separate from property management and, again, necessary unless you’re going to manage all the details of your rental investment yourself… something I don’t advise); and homeowner’s association/building/condo fees.
Knowing the market’s economic outlook is critical if you’re buying for investment, but you don’t want to ignore the market climate even if you’re buying purely for personal use. Markets move up and down… and then up again. At what point in this cycle is the market where you’re thinking about buying right now? In which direction is it moving?
An important part of purchasing international real estate is looking at the diversification that it adds to your portfolio. Is the property making you more or less risk-averse? Think in terms of market, type of investment, type of property, and currency.
3. What Kind Of International Property Should You Be Shopping For?
Have you given consideration to the type of property that you should be searching for? It can seem like a no-brainer, but often people don’t spend enough time considering the type of property they should be searching for and rather go off the recommendation of someone who may or may not have considered your needs. Think of these in terms of musts and wants.
If you intend to rent the place out when you’re not using it, understand what rents best on the local market. Apartment or house? One bedroom or two? Think in terms of cost per square meter when making comparisons.
In the heart of downtown… or out in the country? On the coast or overlooking a river? In a gated community, a local neighborhood, or off on your own with undeveloped acres between you and your nearest neighbor? Consider climate, traffic patterns, transportation (where you settle determines whether you’ll need to invest in a car, for example), the convenience factor, and nearby amenities (shopping, restaurants, nightlife, parking, etc.).
If you buy unfurnished, where and how will you source furniture?
Everything follows from this. Be clear on it before you start shopping. Don’t forget closing costs, attorney review, other due diligence costs, and title insurance.
4. Should You Get Title Insurance?
Depends on where you are buying. If you’re buying in Europe, there’s really no need. In Latin America, though, don’t take clean title for granted… invest in title insurance where it’s available (we recommend Stewart Title Insurance). Title insurance is not available everywhere, so you’ll have to be vigilant in some areas.
5. What Are Your Options For Borrowing To Buy International Real Estate?
Borrowing options are better than they were several years ago, but more limited and more complicated than the average would-be foreign buyer is probably prepared for.
First, if local funding is available, it won’t be for 100%, and certainly not for greater than 100% of the purchase price. Up to 70% loan-to-value (LTV) is typical outside the States.
Second, local funding won’t be amortized over 30 years. The best you can hope for, typically, is a 20-year term.
Third, fixed-rate mortgages are virtually nonexistent outside the States. In the rest of the world, you’re going to have to agree to pay a rate of interest that will adjust (up) over the lifetime of the loan.
Fourth, your local financing is likely going to come with a local life insurance requirement, which is likely to come with a full physical exam requirement. This can be a deal breaker depending on your age. Typically, you aren’t going to be able to buy life insurance anywhere in the world beyond age 70. This means that, if you’re 60 years old today, you’ll be limited to borrowing for a term of up to 10 years maximum.
Given all that, it’s relatively easy for a foreigner, especially a legally resident foreigner, to borrow conventionally to buy real estate in the U.K. and Europe. We’ve arranged financing through local banks in Ireland, the U.K., and France. While, in each case, it wasn’t as straightforward as borrowing in the States, the point is, it was possible. And, looking back, it wasn’t horribly painful. Lenders in the U.K. and Ireland, like their counterparts in the United States, are increasingly nervous these days, which probably isn’t a problem, as I don’t know why you’d want to buy a piece of real estate in either of those places right now.
Finally, a distinction: A foreign buyer is not the same as a resident buyer who happens to be foreign. In other words, some markets that don’t lend to foreigners do lend to foreigners who can prove legal residency.
6. What Are The Best International Property Investments Right Now?
If you’re an American, you should know that real estate is one of two assets you can hold offshore without triggering a reporting requirement to Uncle Sam (the other is precious metals). The international real estate you hold outside the U.S. is your own business.
Plus, it’s unseizable. How is the IRS going to take your condo in the Philippines?
You don’t have to be super rich to take up the idea of buying real estate offshore as a means of protecting your wealth. Opportunities to buy land, houses, and apartments, for both investment and personal use, exist at all price levels. However, you do need a strategy for where to buy, when to exit, and how to take your profits.
