Do’s and Dont’s in Buying a Foreign Property
Have you ever dreamt of owning an apartment in New York? How about that beach cottage in the Bahamas? Or that cozy, 3 bedroom house overlooking the Swiss Alps?
We’ve all had that dream of living somewhere other than your current home, albeit our reasons may vary. Some may just want to diversify their assets to give them a certain sense of financial freedom, others may dislike the climate in their home country on certain parts of the year and wants to avoid it completely, and there are others who simply want a change in scenery and experience different cultures.
I must admit, I’ve caught myself one-too-many times procrastinating about living somewhere a lot closer to the beach and waking up to the sound of waves crashing away from the big city. Being able to take a sip of my morning coffee and taking a whiff of that fresh ocean breeze, and call it my home.
But how exactly does anybody own a foreign property?
Well, there are a lot of steps, both legally and logistically, that goes into an international property purchase before you can call that dream home yours.
Here is a list of Do’s and Don’ts in Buying a Foreign Property
Do a research about Foreign Ownership Laws
Before you take a serious look at that 3 bedroom unit in Switzerland, you need to know the legal details if you can actually own it.
Some countries like Malaysia will allow you to own a landed property depending on a minimum purchase price that usually depends per state. Let me show you something.
As well most of us know, there are other circumstances in different countries. Let’s take the Philippines for example. Foreigners are not permitted to own land, except in cases of hereditary succession. However, foreigners investing in the Philippines are allowed to lease private land for 50 years, renewable once for a maximum period of 25 years.
Researching about every legal aspect of owning a house is essential to the whole buying process. Advisably, you can seek the help of a real estate lawyer that is both adept and knowledgeable about the terms and conditions of a foreigner owning a property.
Don’t Just Make a Deposit
I think most of us are smart enough to not just spend on something without fully understanding what and why we’re buying it. The same is especially true in buying real estate, whether locally or in a foreign country.
That said, I still acknowledge the fact that sales agents and brokers have leveled up their game and can influence us in the buying process way more than we want to admit. So before any of us can be persuaded, step back and assess things first. Ask questions like ‘Can I actually afford this?’, ‘Are there any rules and regulations regarding foreigners taking up financing?’, ‘What are the other costs that I should be aware of?’
Once you think you’ve answered all the questions you can come up with. Talk to professionals, especially the ones not associated with the developer you’re planning to buy the property from.
Do as the locals do
Okay, I know what most of us are thinking.
Let’s say if you’re currently using USD, GBP, or CAD in your daily lives and are moving to a Southeast Asian country, chances are, you’ll have more bang for your buck. But unfortunately, the cost to live in another country goes far more than just groceries and utility bills.
If you’re seeking better healthcare, better transportation system or overall convenience, then moving to another country that has them might be more expensive than where you are and that it wouldn’t make sense.
To get a feel of living in the country where you’re planning to buy that property, it will be wise if you plan a vacation there first. Stay for a couple of weeks to months on end and try to immerse yourself. Stay away from tourist activities and try to do what the locals do. Ride that City Bus, Stand in line on the train station, Get that bike going.
It’s also a plus if you can find Expats or an Expat community that can tell you first-hand stories about their different experiences living there. They can accelerate your learning about the in’s-and-out’s of the community as well as help you with the adjusting phase.
Also, try to learn a little bit about the local dialect. I’m sure it’ll help you a lot.
Don’t Look for Short Term Gain
Before going any further, let me clarify that this is no way intended to be an investment advice.
However, we can all agree that a huge chunk of the foreign property buyers pie are investors, and as such, are looking for gains in their investments. Fortunately, unlike the recent cryptocurrency craze that swept the world, the increase and/or decrease in a property’s value doesn’t go wildly up and down and is affected by more variables other than hype.
Even though the real estate market has pretty much bounced back from the horrific 2008 financial crisis, brought about by the subprime mortgage loans, the rate of appreciation for real estate has always been a slow, steady, increase.
Let’s take the Philippines as an example.
The Philippines’ residential real estate market has seen a steady increase due to a new wave of property buyers stemming from the benefits of having a good Philippine-China relationship.
An estimated 3M Chinese citizens came to the Philippines from 2016 to May 2018. Along with this surge is the demand for residential estate.
Don’t Forget about Taxes
I personally think that this is one aspect of buying a foreign property that gets overlooked. Especially before seeking any professional advice, taxes are one of those things that normally don’t pop up in the heads of first time or inexperienced property buyers and investors. But make no mistake, it is an intricate part in owning that dream home overseas.
There are a lot of rules and regulations to consider when it comes to real estate tax for foreign property owners, and of course, even though it may have similarities, it differs country per country. Let’s take the USA for example, let me give you some examples of the taxes you need to worry about:
- Income Tax
The IRS (Internal Revenue Service), the governing body in-charge of taxes in the US, requires foreigners to pay taxes to a flat 30% withholding tax if you’re receiving rental income. This plays a big part if you don’t plan on living full time there and would want to rent it out for the rest of the year.
This figure can still be reduced, but not eliminated, through any applicable income tax treaty.
- Capital Gains Tax
If you’ve invested your hard earned money in real estate, down the line, you will want to at least have the option to cash out and gain profits from your investment. This is where Capital Gains Taxes come in.
When a foreigner has successfully sold a property in the US, the IRS will withhold 10% of the gross purchase price of the property. When a US Tax Return is submitted reporting the capital gains tax, if there is any refund due, the money will be refunded to the seller. This said the capital gains tax for direct foreign ownership is 30%.
Do a research about trusted property marketplaces
There are certainly a huge number of listing sites and property marketplaces right now, and all of them might have that dream home you’ve been looking for. Unfortunately, even with vast numbers of units listed on their sites, a majority of these websites are highly localized. Very few, if any, are truly offering a global platform.
As a foreigner looking for units on the other side of the globe, knowing about these sites will require some serious work and time that might be better spent researching about all the other reasons I’ve enumerated.
Finding a secure, trusted property marketplace site is crucial to finding the best deals that are suited for you.
A word of caution, as with all the things I’ve mentioned here, it is important to really have an informed decision-making process before diving into owning a foreign property. I cannot emphasize enough the amount of research needed before signing your name on that dotted line and making your first deposit.
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