International real estate is a diversified way to make money.
As with buying a home, choosing real estate investments is all about location. Investing in real estate overseas is a way to diversify beyond the U.S. markets. "Foreign real estate can be a very profitable long-term venture and can generate passive income," says Alex Lavrenov, an agent at Warburg Realty in New York. He says a common mistake investors make when adding foreign properties to their portfolio is skipping due diligence. "You have to be able to understand things that can affect real estate prices and values, such as tourism, transportation, culture, etc. that can greatly affect your return on investment." Here are eight rules experts recommend for investing in overseas real estate.
Minimize culture shock.
Investing in a foreign country without understanding anything about the geography, culture or customs could lead to a rude awakening. Lavrenov recommends that investors spend time in the area where they plan to buy first to get a sense of what drives local life. It's also an opportunity to get the lay of the land, in terms of how profitable an investment is likely to be for the long term. "You want to see the potential for future development and for improvement, as this can likely affect the profitability and future value of your investment," Lavrenov says.
Keep it legal.
Before buying overseas real estate, it's critical to understand the legal guidelines for doing so. "Know the rules of foreign land ownership in another country," says Martin Eiden, a licensed associate real estate broker at Compass Real Estate in New York. "Each country is different and it's important to know if there are any restrictions as to the type and location of the property you can buy." For example, a country may allow foreigners to buy land, but not buildings or vice versa. Or special permission from the government may be needed to purchase property over a certain acreage. Understanding the law can help avoid missteps in securing a foreign property investment.
It may be tempting to make a large investment based on return potential, but less may be more when buying overseas real estate for the first time. "While there may be great comparative value in foreign countries, start small," Eiden says. "If you make a mistake, and mistakes do happen, your loss won't be dramatic." He says making a smaller investment is a good way to test the waters. If the initial investment is successful, making a larger investment is the next step. Remember to keep asset allocation in perspective to avoid becoming too heavily weighted toward overseas real estate.
Avoid tunnel vision.
Foreign real estate can enhance an investor's asset mix, but it's important to look through a broad lens when choosing properties. "Focusing on one country or region limits you to a narrow window of the real estate cycle and subjects your portfolio to unnecessary risk, particularly from unforeseen natural or political circumstances," says Corrado Russo, senior managing director of investments and global head of securities at Timbercreek. Russo says having exposure to multiple geographies instead of a single-country concentration can help smooth out bumps in global real estate and economic cycles.
Weigh financing options.
A key decision that can affect overseas real estate investment outcomes revolves around where the capital will come from to purchase property. For Eiden, cash is king. "Each country will have its own laws as to how much you can mortgage," he says. Additionally, the banking rules for getting a loan may differ greatly from banking rules in the U.S., and it's possible to pay a much higher interest rate for a foreign mortgage, depending on the interest rate environment in that country. Eiden says paying cash for a property purchase can avoid those types of headaches, which could hinder the investment process.
Gauge the tax impact.
Adding foreign real estate to a portfolio can potentially add new wrinkles at tax time when reporting investment gains. "Always go into the transaction with a crystal-clear understanding of the tax implications concerning the investment itself, specifically in terms of transfer, income and capital gains taxes, as those may vary greatly from one country to another," says Andrea Pedicini, a licensed real estate salesperson at Citi Habitats in New York. "Fiscal planning is key and not doing it properly can take a major toll on the total return of your international investment."
Consider liquidity needs.
Real estate is a nonliquid asset by nature. If having access to investment capital is an important criteria for adding foreign real estate to a portfolio, consider a real estate investment trust in place of direct ownership. REITs enable investors to have liquidity similar to what they would have with equities, Russo says. Investing in REITs can provide the same tax benefits as owning property directly, without the additional burdens of managing the property. One of the best international REITs to consider for global exposure is the Vanguard Global Ex-U.S. Real Estate ETF (ticker: VNQI), which has large concentrations in Europe, the Pacific and emerging markets and a three-year return of 8.18%.
Invest with a team.
Purchasing property overseas to invest in can be a complicated process and experts agree it's best not to go it alone. "You need to have guidance from a local real estate professional who's credible, well-reviewed and has done business in the locale of your interest," Lavrenov says. It's also helpful to recruit contractors, mortgage experts and property managers who are familiar with the area where the property is located. Pedicini says a certified public accountant who knows the area and its tax laws for investing is the final piece of the puzzle. "When buying real estate in an unfamiliar country, it pays to lean on local professionals," he says. "Let them be your guide."
Eight rules to follow for overseas real estate investing.
-- Minimize culture shock
-- Keep it legal
-- Allocate wisely
-- Avoid tunnel vision
-- Weigh financing options
-- Gauge the tax impact
-- Consider liquidity needs
-- Invest with a team
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