Why Buying Property in These International Vacation Destinations Could Be a Terrible Investment
White sandy beaches, rich cultural histories, and exotic foods. When you consider purchasing an international vacation property to rent to fellow tourists, these all make it sound like an easy investment. But some destinations can be total disasters for investors, with highly-saturated rental markets, specific legal regulations for conducting business as a foreigner, and harsh taxes.
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Jay Zigmont, PhD, CFP® and founder of Childfree Wealth, said it is imperative to understand what you're taking on as an investor in a vacation property. "Each country has its own rules, restrictions, and benefits," Jay Zigmont, said. "When you buy internationally, you are also taking on currency risk. You are buying in dollars, but getting paid in their currency. As the currencies fluctuate, your returns will go up and down. What may be a good purchase now may turn into a loss just due to currency rates."
If you're considering buying a property for vacation rentals, check out these international destinations where purchasing vacation property could be a bad investment.
Tulum saw a drastic increase in Airbnb rentals during the pandemic, an already-popular city for tourists becoming a place to land for remote workers as well. Over the pandemic years, revenue for Airbnb owners in Tulum grew over 167 percent.
Neighboring city Cancun attracts more tourists each year, so Tulum could seem like a natural place to make your investment in a vacation property. However, the influx of vacation rental listings saturates the market, which could leave your rental sitting vacant. The city has also raised concerns about the increase in party tourism leading to a reputation of violent crime, which is bad for the overall image of tourism there.
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There are already a plethora of Airbnb rentals in Bangkok, but many of them are operating illegally. The Hotel Act, B.E. 2547 states that you must have a proper license to run a hotel in Thailand, defined as "an accommodation established for business purposes of providing temporary accommodation service for travelers or any other person in exchange for compensation." Yes, that includes Airbnbs.
The process to operate an Airbnb legally in Thailand requires applying and paying for the license to operate it. There are some loopholes depending on the size of the property and amount of guests it can accommodate. There are also several legal processes for hosting foreign guests and operating as a non-local host.
Jumping through all these legal hoops-and fees-make this lively city a complex one to invest in.
The historical buildings, museums, and markets make this city a cultural hub for plenty of tourists in Spain. But purchasing a vacation rental here could backfire due to the harsh regulations in the city.
Apartments in Madrid can only be rented out to tourists 90 days out of the year, and those in the central zone come with building regulations. Even if you do find a suitable property, you may not see a return on investment for a while with the 90-day rental limit.
Madrid's municipal government wants to preserve the amount of property available for residential use, which means they have cracked down on how many rental properties they allow. You would have to find a property in the city that is approved by the Madrid City Council to operate as a rental, and pay a fixed income tax rate of 24 percent on whatever cash you make.
"You need to be aware of the tax complications," Dr. Zigmont said. "Depending on what you buy and your situation, you may have to pay both US and international taxes, so be sure to check with your tax preparer."
The culinary capital of the Caribbean, the Cayman Islands are popular for tourists and honeymooners alike. But the islands are also home to a nightmare for investors - frequent tropical storms.
The Caymans are the most-affected area in the Caribbean Sea, seeing the effects of a tropical storm on average every 1.69 years. While that may not seem like much right now, forecasters at NOAA's Climate Prediction Center are saying to gear up for a more active hurricane season this year. There is a 65 percent chance of an above-normal hurricane season in 2022.
Not to rain on your parade, but more inclement weather could divert your travelers' plans, leading to more cancellations and less money in your pocket.
When buying vacation property for yourself or as a rental, it is important to remember there are inherent risks to any investment, and to prepare to take on those risks.
"We often have a different expectation for our own second house than we would for an investment," Dr. Zigmont. "Decide if it is primarily an investment or a vacation property. Be careful not to assume you can afford a bigger or better vacation home just because you may be able to rent it out."
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This article originally appeared on GOBankingRates.com: Why Buying Property in These International Vacation Destinations Could Be a Terrible Investment