Almost everything you need to know about buying an overseas property*
*You’re on your own for deciding between tiles or hardwood.
OFX – What are the best places for international property investment? How do you get a home loan for an overseas property? What are the tax implications of investing in the global property market? How can currency rates affect your purchase? Whether you want to own a second home or diversify your investment portfolio, we’ve got the answers you need to help make your investment a success.
In this guide, you will learn:
- How to decide on a location for your investment
- What are the best international real estate companies?
- How to get a mortgage for a property abroad
- International property tax implications
- Managing International currency rate fluctuations
Where Should You Purchase Property Abroad?
Buying property abroad is a substantial, long-term investment. Therefore, it is imperative to research various overseas real estate markets before deciding upon the one that you want to invest in, because there is always an opportunity cost to allocating substantial resources to one particular investment. Purchasing an oceanfront property on an island might seem like a great idea, especially if you are looking for a vacation home, but if the market is weak, you might find it difficult to sell that property later on and get a good return on your investment.
- Start by looking into areas that you are hoping to invest in, but always make sure you’re comparing apples to apples. A swanky two-bedroom flat in central London might cost the same as a four-unit apartment complex in Latvia. One may have higher vacancy rates, while the other is in high demand. In one location, you might be able to manage the rental yourself, but with the other you may need an agency. Decide beforehand how much time you want to dedicate to your investment. If you think you’ll be using an agency to manage the property, whether commercial or residential, you’ll need to factor in the costs. While buying a residential property overseas may seem ideal, many investors broaden their scope to investing in commercial property like warehouses, office buildings, or storage centers. It’s important to put parameters in place to guide your focus, because an accurate assessment of the opportunities depends on properly controlling for the relevant risks.
- Analyze the long-term real estate trends of the past decade to see how property prices have fluctuated. Remember that different markets will have different trends during the same time period even if they’re in fairly close proximity. For example, Geneva, Zurich and Bern all have localized factors that influence the property market, so what you’ve seen in one may not apply to the others.
- Research the real estate market forecasts. Changing economic and political landscapes can have a profound effect upon the housing market especially when it comes to central bank policy and interest rates in particular.
- Look into the laws regarding your ability to hold the title of a property, and what you need to do to secure that title. The policies for foreign investment into real estate vary from country to country. Most countries allow overseas investors to purchase property, but often this will not grant you the right to live, work or stay in that country.
- Limit the foreign currency exchange rate risk you may have when purchasing property abroad. Jason Kumpf, Real Estate specialist at OFX, reminds us that; “If you are paying a mortgage, you may have payments in Euros over time, but if your income is in US Dollars, and if the EUR gains against the USD, you may end up paying more for your property than you initially thought.” Methods to manage that will be shared.
Deciding where to invest in real estate will depend on your personal financial situation and ambitions. That said, there are always some hotspots for international property investment. In an article titled “Why The Best Investment In 2016 Might Be Global Real Estate” on Forbes.com, Kenneth Repoza reports that “London, Paris, New York, San Francisco, Tokyo and Sydney are the main targets for direct cross-border real estate acquisitions over the next 12 months.” As 2017 unfolds, emerging markets have seen a lot of interest from international investors. Eastern European economies like Poland, Latvia and Estonia have attracted foreign capital and are a just a few of the interesting options for real estate as well. (You will need to check your local tax office website for more details.)
What are The Best International Real Estate Companies?
In addition to having access to the most interesting properties that are in line with your budget, the right international real estate company can guide you in terms of what areas are best for foreign investors and what risk/return profile suits your personal financial situation best. While OFX does not endorse any particular company or agency for overseas investments, here are a few to consider:
- Colliers International Property
- Sotheby’s International Real Estate
- Cushman & Wakefield
- Your Empire
- Mayfair International Realty
- Christie’s International Real Estate
- Leverage Global Partners
- The Agency
- Leading Real Estate Companies of the World
- International Consortium of Real Estate Associations
You may also want to consider hiring an independent attorney who can look out for your best interests and steer you in the right direction. Even though the majority of local real estate transactions will not need a lawyer, when it comes to buying property overseas, it is best to work with an experienced lawyer who can represent you legally and point out any flaws in your purchase contract before you sign it. Plus, the right independent real estate attorney will also be able to help you thoroughly understand every legal document that comes your way when you are ready to finalize a purchase overseas.
It almost goes without saying that if you are planning on purchasing property in an overseas market where you do not speak the local language fluently, you will need to hire a translator or work with a reputable agency who can translate all legal documents before you sign them.
How Currency Fluctuations Impact the Global Real Estate Market
As you do your research into where to buy property abroad, one of the primary factors affecting the viability of your investment will be the exchange rate. Aside from doing a quick currency conversion, you may want to review the current economic standing of a foreign currency against historical rate charts.
Keep in mind that currencies will fluctuate, sometimes quite dramatically, over time. And sometimes currency exchange rates will change rapidly over a short period of time.
After the Brexit vote in the U.K., for example, the pound’s value fell 10% against the USD in one day. On Telegraph.co.uk, Rhiannon Bury reports that in the three months following the Brexit vote, 78% of commercial property sales were paid for by foreign investors swooping in on a bargain.
In a similar way, President Trump’s policies against Mexico caused the peso to fall in value dramatically, however, real estate in tourist areas continues to attract foreign investors looking for a good deal.
Aussie real estate is another hot target for foreign investors looking to profit from exchange rate fluctuations. Because of the international demand for housing in major metropolitan areas, assets in capital cities like London, Sydney and New York may be protected to some degree from declines due to demand fostered by currency fluctuations.
Jason Kumpf, recommends keeping an eye on the currency rate of where you are thinking of buying and possibly using an FX firm like OFX to manage that exposure.
What Taxes Will You Need to Pay On an International Property Investment?
The amount of tax you’re required to pay on your international property investment should be factored into your decision-making process. Some countries do not impose property taxes; others do. Some countries or cities may levy taxes if you leave your property vacant for a certain percentage of the year.
If you are planning on renting out your property, you might be required to declare that rental income to your home country and the country where your investment is located. Unless there are double taxation treaties in place, you could be on the hook for taxes in two countries.
When you are ready to sell, you’ll need to be aware of both local and foreign taxes on capital gains.
International taxes are complicated and penalties can be steep for failing to declare assets that wouldn’t otherwise be taxed. Finding an accountant with sound international expertise could lower your your tax bill substantively.
How Can You Get an International Mortgage?
When purchasing real estate in another country, it could be difficult to find the appropriate financing option, especially since some countries might not have any financing options for foreign buyers at all. In some countries, banks cannot take a foreign asset as a security for the loan, so you may not be able to get a standard mortgage from your domestic bank the way you would for a local purchase. Still other international regulations may prohibit banks from even initiating a conversation to a client about a mortgage if the client is based overseas–even if you’re a citizen of the country in which you want to buy. So how can you get a mortgage for an overseas property purchase?
While traditional bank financing might not be available for overseas assets like it is in your home country, developer financing may be available when there aren’t any other options for foreign investors.
Other payment methods might include using the funds in your retirement account or pulling equity from your primary residence in your home country. You may qualify for business or personal loans that you can use to pay for your down payment overseas. Certain banks, like HSBC, offer mortgages for international borrowers, if you can maintain a minimum bank balance at a designated threshold.
Here is a breakdown of some banking policies related to international mortgages in Australia, the United Kingdom and the U.S.A.
As of April 2016, two major home lenders in Australia have opted out of offering mortgages for non-residents. Westpac and the Commonwealth Bank no longer accept mortgage applications from foreigners. Other banks have also reviewed foreign lending policies and, in some cases, reduced loan sizes and borrowing limits.
- United Kingdom
There are a number of things to consider if interested in purchasing a property in the UK as a foreigner. For example, Australia’s Corporations Act creates barriers for Australians looking to purchase in the U.K. which can be surprisingly difficult to overcome. Some lenders base their decision on visas, including spouse visas. Not having credit in the U.K. can also hinder the process.
- United States of America
In the United States of America, getting a mortgage can be influenced by:
- Availability of property in the region
- Plans for the property
- If the borrower has an accessible credit history
- The type of visa the foreign buyer has in the United States
- The loan size requested
- Available funds for a down payment.
Once you have determined where you would like to purchase your international property and you are ready to buy, it will be time to set up your payment method in the appropriate foreign currency. Whether you are planning on making your payment in one lump sum or you are planning on making mortgage payments, your currency will need to be converted every time a payment is made. Do be aware that many banks charge a 5% margin on the daily exchange rate, so to send $100,000 overseas, you could be paying as much as $5,000 (on top of hefty fees) every time you make that transfer.
With a good FX Platform you can:
- Lock in an exchange rate for up to 12 months, so you always know what you’ll be paying no matter how the currency markets move.
- Use a Limit Order to set a target exchange rate, so you won’t miss out on profitable exchange rate fluctuations.
- Save substantially on bank margins and fees.
- Set up recurring payments to make monthly mortgage payments simple.
Are You Ready to Buy Property in a Foreign Country?
As with all investment opportunities, to make the wisest financial investment into foreign real estate, you will need to do your research and speak to your advisors. Locations, currencies, taxes and political environment can all have profound effects on your bottom line. With the right advice from professionals, you’ll be able to diversify your portfolio and maybe even sip a mai-tai while you do it.
Post by Jason Kumpf OFX