Benefits of International Property Investing
International real estate is on the rise. It is often considered to be the right choice for portfolio risk management. But is it?
International investment can be a tricky thing. Especially for those who are unfamiliar with the intricacies of the global market. However, there is one thing most people agree on, and that is smart international property investing. If done correctly, it will bring stability to your portfolio. It can also provide capital gains down the line. But, there are a few factors you should heed before using this financial instrument. The following article aims to highlight the benefits and challenges of international property investments. It will also point out how you can prepare yourself to avoid clear losses.
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Things to Keep in Mind Before Investing
But before you move forward with any international investing, there are things you should heed. These are factors that can change the course of your investment. Yes, international property investing can open up a lot of opportunities, but there are certain hurdles one has to overcome before that.
Local Laws
Countries operate under their own laws. And if you want to invest in these countries, you’d have to comply with these laws. There might be rules and laws affecting your property ownership, so you must learn more about them before investing. If you are versed in these laws, you might be able to steer clear of disputes.
Ownership Rights
Property ownership and title laws also differ from place to place. Some countries don’t even have the concept of title laws. Before investing, you should know the property rights of the country.
Currency
Currency is always going to be tricky when dealing with any type of international investment. If you want to delve into international property investing, you have to bear those risks. The currency fluctuates according to the market conditions in both countries. Thus, even with proper planning and meticulous care, you can lose a lot due to currency fluctuations.
Eligibility
Sometimes a property might not be accessible to everyone. Either your own country or the country where you want to invest prohibits you from owning such property. Countries like Dubai have strict zoning laws that restrict the areas where you can buy real estate. Then there are countries like Thailand, which explicitly prohibits foreigners from owning property. On the other hand, some countries welcome foreign investment.
Political Stability
Your international investment is also subject to the political stability of the region. It will thrive in a stable and balanced environment, whereas constant strife will only drive its value further down.
How to Prepare For International Real Estate Investments?
Optimally, one must build an international strategy to tackle such investments. These strategies can often be the key to huge success. If not, they can at least ensure that you don’t incur any loss. But if you are new to the entire thing, surely, you must feel a little lost. You are not alone. Even experienced investors often have trouble deciding where to invest. Although stable, the international real estate market is quite dynamic, like any other typical market. So, here are a few things you should consider before investing:
- Choosing What to Buy: The very first decision you face is the most important one. You have to decide what to buy. Real estate varies. However, you have to be objective about your investment. If you find a suitable country and location, then you must go for a property with the most potential for a greater ROI. Alternatively, you can also look at properties that generate good passive income as rent. Depending on how you will use the property, your decision might change.
- Choosing The Right Country: Today, you can purchase real estate anywhere. While it may sound positive, it is a challenge for investors. With so many options, there will be confusion. One minute, you are set on Country A, and the next, you want to choose Country B. When choosing the country, you must look at the current opportunities and future potential. You can also do your research or contact an expert.
- Title Insurance: Yes or No: Title insurance protects you in case there are any discrepancies related to the title ownership. Depending on where you want to invest, title insurance can be crucial to protecting your capital. However, you should also keep in mind that title insurance isn’t available everywhere. So, in such cases, you might want to look for an alternative solution or be extra cautious with your investment.
Financial Tools That Can Help With International Property Investing
As an American citizen, you have various tools at your disposal. These tools can aid you with international property investing. If you are a beginner, then it’s worth it to give them a look:
- US-traded foreign stock: Despite most US foreign stock being American Depositary Receipts (ADRs), a few international firms do list their stocks directly in the US market. You can find a relevant real estate firm to invest in.
- American Depositary Receipts: An ADR is a negotiable security instrument issued by a US bank. They are traded as regular stocks in the market. You can use these ADRs to invest in foreign real estate.
- US-registered Exchange-traded funds: ETFs are similar to Mutual funds. Moreover, they are listed on stock exchanges and can be traded as stocks. People can invest in international real estate using ETFs.
- Trading directly in Foreign markets: People also have the option to trade directly in foreign markets. All you need to do is find a broker who can place orders for shares of such companies.
- US-registered mutual funds: Another great way for people to invest internationally is via U.S.-registered mutual funds. Mutual funds are amongst those financial tools that provide the most diversification for your investment. And since these are registered, the customer can enjoy US regulations that protect them.
Reasons to Embrace International Property Investing
Currently, the US market is not as great as it once was. It has become somewhat volatile, calling for diversification. A report from 2022 reveals that inflation is high as the market remains unpredictable. It further goes on to state why people should look towards hard assets. However, the report also cautions investors to avoid the home market. It indicates how these housing markets in rich nations are headed toward a price slump. Thus, one has to think globally.
Today, diversification is the need of the hour. And international property investing is the cornerstone of any good diversification strategy. It is not only a great backup but also a good source of passive income and potential capital growth. However, international real estate is not limited to investment. It has several other benefits. And because of such advantages, one should say yes to international property investing.
Biased In Favor of The US Dollar
Yes, most international investments are biased in favor of the American Dollar, including real estate. During such investments, payment is made in the local currency of the foreign country. The American dollar has a currency advantage over most currencies. It means you will always get to invest more than your intended budget. You can use the advantage the dollar brings you to diversify your portfolio at a great discount.
Portfolio Diversification
This brings us to the next benefit, which is diversification. It is nothing but dividing your risk across multiple investments. Diversification makes your portfolio much more stable. Real estate has always been a dynamic market. However, it is still far more rigid than something like cryptocurrency. Thus, it makes sense to invest in properties if you want to get a safety net for your capital. The optimal way to do this is to invest in the international real estate market. It has a much higher potential for capital gain. Sometimes, you can even earn more from the foreign markets than what you lose in the US.
Cheaper Alternative
Due to the purchasing power of the US dollar, you can get a lot of properties for much cheaper than you initially thought. But that’s not all. There are many countries where land is inherently cheaper than it is in the US. Countries like Greece, Columbia, Brazil, and Thailand are famous for their cheaper properties. Thus, you are almost guaranteed to earn a profit when investing in these countries.
Greater ROI
Since purchased properties are cheaper, the ROI is surely going to be much higher than you initially believed. As long as you are not limiting yourself to a singular market, the financial rewards will be worth it. But the good thing about international property investing is that it allows you to benefit from both market conditions, be they a rising economy or a falling one. Many times, the markets of two countries move in opposite directions.
Generates Passive Income
And let’s not forget, that you can also use international property investments for passive income generation. You can easily rent it out if it is a residential unit. Or you can gain additional value from your property if it is agricultural land with exotic crops or trees, like a vineyard. Most people invest in real estate for long-term capital gains. But you can easily earn more than, if not around, 10% net returns in the short term if you invest in properties that are located in tourist hubs. Countries like Spain, Portugal, Brazil, Thailand, Italy, or France can be an optimal choice if you want steady yet higher rental returns.
Tax Advantages
Lastly, there are huge tax benefits associated with international property investing. According to US laws, you do not have to disclose such assets to the IRS. Hence, you do not have to pay taxes on such properties or investments. But that’s not all. You can also show any trips you make to check on your property outside the US on your tax return as deductible. Similarly, any interest paid on your international property mortgage can also be written off.
Potential Risks and Challenges
There is always a certain risk associated with any investment. However, international property investing faces a few special risks and challenges
- Cost of investment: Real estate investments are typically more expensive than other investments.
- Changing exchange rates: The international market fluctuates a lot. As a result, the currency exchange rate can be a challenge when purchasing a property. Depending on the currency exchange rate, you may need to pay more or less than your budget.
- The ecosystem of the country: At any given time, the political, economic, or social conditions of a foreign country may change, which can affect your investment inversely. It is always challenging for an investor to track or even understand such changes.
- Different market mechanisms: Chances are the foreign country operates in a whole different way than the US. They may have different laws and regulations concerning real estate or property ownership.
- Access to information: You might not get the same level of access to information when investing overseas. This lack of information may result in a miscalculation, jeopardizing your entire investment. Another aspect is language. Even if the foreign market provides you with enough information, what should you do if the information is unavailable in English?
- Changes in the market: Markets are dynamic. A situation can change drastically at any given time. International property investments are not immune to market changes.
- Legal recourse: Typically, a US investor can rely on the government to settle any dispute. There are guidelines available, and he can avail legal remedies. However, the laws might differ, especially in a foreign land. In such cases, it becomes very hard for an investor to pursue any fraud or dispute, as he has to go through the legal system of the home country where he has invested.
- Problems with liquidity: Different markets may offer different liquidity depending on trade volume. Thus, if you are looking for a quick exit, it might be impossible in some markets.
