Buying a new property away from your home may sound like an exciting prospect, but it’s not as easy as it sounds. To ensure that the investment move is an excellent one, the concerned individual needs to make an informed decision based on factors like the target country’s property tax and mortgage laws.
In short, investing in a property in another nation is like investing in the stock market, where the updated knowledge of the market dynamics makes the difference.
It’s not a bad move either
Once you acquire the property ownership, you have to ensure that the property is properly maintained and administered (including paying taxes and mortgages on time). Yes, there will be challenges, but the incentive here is that having an overseas property may increase your net worth.
Another incentive here is the opportunity to retire and spend the rest of your life abroad. There are countries with ultra-low cost of living. Buying properties there will be an investment with long-term gains, as you can spend your post-retirement years cheaply.
Also, if you have invested in the stock market and you already own a property, then owning another property abroad will diversify your portfolio further. Also, if you are investing in a property abroad, you are also going to gain benefits from that particular nation’s currency. So you are taking your portfolio diversification game to the next level by investing in more than one currency.
You can also rent your property out via Airbnb, to get tenants into the premises and earn income from them via rent. Having a secondary and steady income source abroad is always a good option. Also, if you have overseas investments, you can reduce the travelling cost to those properties from your taxes. Also, you can get the money back from your taxes later.
“Buying real estate in Ireland would be a good investment if you love spending your time off in the British Isles or Europe. You can buy 12-25k an acre for land that can turn into a residential or long-term vacation rental,” stated the International Business Magazine.
“No matter how long you stay in a foreign country to take everything in, you won’t spend as much on accommodations. You always have a place to go home, so rushing to events wouldn’t be a chore. All you need is to maintain a livable property throughout the year. You can either hire a property manager or visit the country regularly to maintain your foreign home,” it added further.
Yes, you can rent the property out, in case you are not staying in that country. Also, you can wait for the property’s value to increase and then sell it, earning handsome cash from the whole process. However, there is a rider here.
Properties in ‘Developed Nations’ don’t meet the above scenario easily. You have the ongoing mortgage crisis in the United Kingdom, a phenomenon which is hammering the housing market there, as property prices are witnessing record-breaking drops. Remember, factors like interest rates, geopolitical scenarios and the pace of economic activities dominate the economies in places like Europe or the United States.
Also, properties are considered as hard/physical assets, as their value never falls to zero, unlike stock market investments. Don’t forget the fact that your property is a performing asset too, as it can secure a steady income for you through rents, thus providing financial security and profitability in the long run.
Take the United States as an example. If you are an American citizen, you need to report all of your income and assets to the country’s Internal Revenue Service (IRS), except the overseas properties, as per the rules. The IRS can’t force you to sell these properties, and neither can they seize them. Also, you can benefit in the form of a tax return, as you can deduct your trip costs for visiting the nation where your real estate property is located. Your taxable income can also pay the interest on your foreign property’s mortgage.
Master the finance game
Another crucial aspect during property dealing is the game called ‘Finance’. Having hard cash always works to close the deal faster and generate the best price through discounts/upgrades. For this, the prerequisite is that the property has to be fully built. Don’t take the risk of paying in cash in advance and then wait for the project to get completed, because the process called ‘Housing Construction’ always comes with the risk called ‘Delay’. If you pay your cash to the property developer in advance, and the project runs into a roadblock, it will be your invested cash, which will be under a massive risk.
Also, some nations provide ‘Developer Financing’ for property buyers. The process involves little paperwork, with equally fewer restrictions. Sometimes, it is interest-free too.
One type of developer financing allows you to pay on fixed dates. You can pay 10% while signing the purchase agreement, 10% after six months of buying the property, and another 10% after a year, followed by the payment of the remaining balance after the project is completed.
The second type of arrangement allows you to make payments according to construction stages, like paying 10% down, 20% when the foundation is complete, and 20% after the first floor is complete.
In the third type, the property buyer needs to make monthly payments.
If you are an American resident, have an overseas property and are attempting to use it for rental/investment purposes, you can use your self-directed IRA to make the purchase.
“The IRS does not specify which types of investments are allowed in a self-directed IRA and only states what is not, including collectables (e.g., artwork, stamps, and antiques), certain coins, and life insurance,” stated Investopedia.
“Unlike traditional IRAs, wherein investment options are typically limited to stocks, bonds, and mutual funds, funds from a self-directed IRA can be invested in a broader set of assets, including real estate—either at home or abroad. Because the property must be treated as a real estate investment, you won’t be able to live in the home until you are old enough to start receiving distributions from the account. You can’t use it for vacations either, and if you try to circumvent the law by renting it to yourself, the IRS will not be happy. While waiting for retirement, however, you can use your self-directed IRA funds to pay for the property and any expenses related to maintenance,” it stated further.
To decode this IRA game, try to hire a qualified tax specialist and/or real estate attorney.
Be mindful of the transfer fee/stamp duty, which is a tax levied by countries and adds over 10% to the sales price.
Also, stay updated with the particular country’s property transaction rules. For example, the Philippines allows foreign buyers to purchase a unit in a real estate project, provided 60% of the units are owned by Filipinos. In Malaysia, if foreigners want to sell their properties, the money has to be kept in a Malaysian bank account.
“A reverse mortgage can be a good way for seniors to access equity invested in a home, but the rules and regulations can vary based on your geography. With a reverse mortgage, a homeowner who is age 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit,” remarked Investopedia.
As it has been earlier in the article, buying property overseas is not everyone’s cup of tea. You need to know the nation’s property tax and mortgage laws, apart from staying updated with the constantly changing market dynamics there. Also, a sound knowledge of regulations related to property transactions helps to ease things further. While there are plenty of incentives for owning a property in another country, there are considerable risks too. So, getting professional help in this matter is a must.