Start in Property Investment Abroad

Whether you’re looking for a house in which to spend your retirement, an investment opportunity, or simply a vacation home, buying property abroad can be an exciting and lucrative form of investment. However, it can be risky for the inexperienced buyer. Someone getting their start in property investment abroad needs to know where to begin their search, how to narrow down their choice to a few possible properties, and where to go for counsel when the time comes to make a purchase.

Steps

Beginning Your Search

1. Make sure you are permitted to buy property. In some countries, foreigners aren’t permitted to buy property at all. In others, foreigners can only buy property in certain areas, or when purchased through a trust. Before you get too invested in finding your dream property, make sure you’re allowed buy, own, and sell property in the target country.
   • The Philippines, for instance, doesn’t allow foreigners to buy property at all. In Mexico, there are substantial restrictions on where property can be purchased. In Malaysia, foreigners may buy property but if they sell, they have to keep the money in a Malaysian bank.
2. Visit the area multiple times. It’s impossible to get a nuanced and textured understanding of a town or city (much less a country), in just one visit. In addition, many tourist rich areas around the world have busy seasons and slow seasons, which can dramatically affect the income potential of a rental property. Before you buy, make sure you’ve visited your target area multiple times.
3. Evaluate the political situation. The politics of a country can change in the blink of an eye, and with it, the profitability of your investment. Before you purchase property abroad, make sure you have a sophisticated understanding of the political situation in your target country.
   • In 1958, Havana, Cuba was the wealthiest tropical city in the world. It was a hotbed of foreign investment, and many investors made a great deal of money from their holdings in the city. Then, on New Year’s Day of 1959, Fidel Castro forced strongman Fulgencio Batista out of power. Shortly thereafter, Castro began to nationalize industries and confiscate the property of foreigners. Millions of investor dollars were lost in mere months.
4. Buy only what you see. A seasoned investor may have to skills and the comfort level to buy into a projected development overseas. But a buyer getting their start purchasing property abroad should steer clear. There are simply too many risks for an inexperienced buyer to measure.
   • For instance, what do you do if the developer runs out of money before the project is finished? While checking and savings accounts in the US might be insured, investments are rarely insured anywhere. You may find that you’re the owner of a very expensive piece of unimproved land.
5. Decide whether you want to rent the property. If you want to generate income from renting the property, your best bet if to buy something as the sole owner. That way, you maximize the income potential of your property.
   • While rental properties can generate income, they also require maintenance and upkeep. While deciding which direction you want to go, take into account the time commitment that goes along with rental and/or the difficulty of choosing a property manager to manage a holding half a world away.
   • Furthermore, if you plan to rent your property, the property either has to be in an areas that attracts a lot of tourists, or needs to be in an area sufficiently developed enough to attract local renters.
6. Consider the benefits of fractional ownership. A good way for a buyer to get into foreign investment with relatively little risk is to purchase a fractional share in a property. The buyer buys a percentage in a property and gains the use of it for a proportional number of weeks out of the year.
   • This is similar to a timeshare. The difference is that a timeshare only entitles a person to the use of a property—the owner of the timeshare doesn’t actually have title to the property. With fractional ownership, the buyer actually purchases a share in the property itself.

Preparing for Your Purchase

1. Find a good realtor. A good realtor is going to be crucial in navigating the local property market. Interestingly, the Multiple Listing Service (MLS) is a US idiosyncrasy. In most other countries, the realtor is going to be key in finding the kind of property you’re looking for.
   • The local expatriate community is good place to look for referrals for competent local realtors. However, if you aren’t tapped into that community, look at international properties listed on worldproperties.com. Worldproperties.com is actually the website for the International Consortium of Real Estate Associations, so it’s a great place to begin. The Association of International Property Professionals (AIPP), located at https://www.aipp.org.uk/, is another good resource.
   • The fee structure for paying realtors varies considerably from country to country. Make sure you understand how it works before you commit.
2. Make sure your budget takes all the details into account. You’ll want to speak with your realtor about the associated costs of purchasing a home in your target country. As in the US, there will be costs to purchase a home beyond the purchase price. Inquire about taxes, title search/land registry, and legal fees into account.
   • Some ongoing costs to consider are the costs of the exchange rate and the transfer fees for monthly mortgage payments.
   • If you plan on renting the property, research the rental rates for comparable properties in the area and find out how many weeks per year you should expect to be able to rent it.
3. Decide how you want to finance. Depending on your target country, a mortgage may not be available to a foreign buyer, and many US banks don’t lend for purchases of foreign property. Therefore, you should decide how you want to finance your purchase as soon as you determine the overall budget. There are a few options, including:
   • Seller financing. The availability of financing from the owner or developer is most likely going to be limited to newly built properties and properties without an outstanding mortgage. Nonetheless, this can be an attractive option if the seller is willing.
   • An IRA. There is very little restriction on the type of investment you can hold in an IRA. Therefore, if you manage your own IRA, then you can use the funds in the account to purchase property abroad.
   • Also, there are a number of niche lenders for overseas real estate of varying degrees of reputability. Speak with an attorney before contracting with any such lender.
4. Look for the right details during showings. Once you’ve zeroed in on an area and a few potential properties, you’ll want to start viewing the properties themselves. When you do, keep a few questions in mind, including:
   • Are there a lot of vacant units nearby? If there are, it could signal an area on the decline.
   • What are the infrastructural improvements like? You want to make sure the property gets reliable water, sewer, trash, and electric services, and if it doesn’t, how you might compensate (by building a well, for instance).
   • Do you need a car? If so, are the roads in traversable condition?
   • Is there a Homeowners’ Association (HOA)? Even though HOAs can be tiresome, a strong HOA usually means that the neighborhood will stay in roughly the same condition as it was when you bought it.

Finding Competent Assistance

1. Retain a lawyer you trust. A competent attorney might be the most important factor in completing the purchase of property abroad. Understanding the laws, customs, and regulations of a foreign jurisdiction is beyond the capability of all but the most seasoned purchaser.
   • Referrals can be a good source for finding attorneys, particularly if you live in a larger city with a lot of international commerce. But if you can’t find an attorney through referral, check with the International Bar Association’s listing of national bar associations at http://www.ibanet.org/barassociations/bar_associations_home.aspx.
   • Never use the lawyer the seller recommends. While they might be a good lawyer, you need to be certain your lawyer is working for you and you alone.
2. Understand the tax implications. Make sure you speak to your attorney about the tax implications of your purchase. Some countries levy larger taxes on foreign purchasers while some countries don’t tax foreigners at all. Many countries have different inheritance tax regimes than the US does. There’s as much variation in taxation as there are countries in the world.
3. Use a currency specialist. Currency brokers can help you make the most of foreign exchange rates. They are typically cheaper to use than banks, and they hold your money in an account for you so that you get the best exchange rate possible.
   • Many currency brokers will also offer to lock in an exchange rate at the time of the closing, so that the exchange rate never gets worse for you than on the day you close on the property. Conversely, the exchange rate will never improve.

References

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