What to Consider Before Buying Foreign Real Estate
There are many reasons why you might consider buying a property in another country. Maybe you’ve discovered the get-away spot of your dreams and want to be able to return whenever you desire. Or perhaps the thought of retiring in a beachfront villa excites you. Whatever the reasons are, investing in international real estate is an exciting way to diversify your portfolio and build wealth. However, the process of buying property abroad will be different than buying at home. Here are a few things to consider before pulling the trigger on that romantic Spanish piso or Costa Rican beach house.
Legality
Each country has different laws regarding noncitizens owning real estate. In the United States, anyone can own property, regardless of citizenship. However, in places like New Zealand, property ownership for non-residents has been banned. Even if the country you are considering allows foreigners to purchase homes, there may be a special permit or registration with a government agency required first. It is important to do the proper research beforehand to make sure you are complying with the laws. Getting in touch with a real estate attorney who specializes in foreign transactions can be helpful if there are any uncertainties.
Cost of Living
Your money will go a lot further if you purchase a home in an area with a low cost of living. For many, buying overseas is what allows them to afford a second house at all. Imagine retiring in a paradise like Bali and living comfortably off of $1,000 a month or less. On the other hand, if you are looking at a location where necessities such as food and transportation are more costly than in your current city, you may want to consider another location. Be sure to research how the cost of living compares to your current location.
Financing
Determining how you will finance the purchase can be one of the biggest hurdles of the process. Here are the four most common strategies for financing a house overseas:
Foreign Bank Financing: Most U.S. banks won’t lend for purchases made overseas so you may have to go through a foreign bank to get a mortgage. Be prepared to make a large down payment and for the possibility of high interest rates.
Cash: Paying in cash is another option. It will allow you to take advantage of any cash discounts available and you will be able to close the deal faster. A home equity line of credit on your current house can be used as a source of cash.
Developer Financing: You may qualify for developer financing if you buy property in a development. Developer financing is more common today than it has ever been because builders in emerging markets understand that Americans, one of their biggest pools of potential buyers, may have trouble securing financing for foreign real estate. The method usually requires little paperwork and is sometimes interest-free. It’s actually a general practice in Mexico, Brazil, Nicaragua, Belize, Costa Rica, and Panama, to mention a few. Check and see if this method is available for the home you are purchasing.
Self-Directed IRA: Using funds from a self-directed IRA is also a possibility. Unlike traditional IRAs, the money from a self-directed IRA can be invested in assets like real estate. However, the property would have to be treated as a real estate investment, so you wouldn’t be able to live or vacation in the home until you are old enough to begin receiving contributions from the account.
Renting out the Property
If you’re not living at the property year-round, renting out the unit can be a great way to help cover associated costs. Consider these three things if you plan on renting out your foreign property.
- Be sure you are complying with local laws and tax regulations to make sure you are able to rent out your home. In some countries, there are certain laws that place limits on rentals.
- Hire a reputable company to manage the property since you will not be present.
- Properly insure your home to protect from damage caused by renters or natural disasters when you’re not there. For instance, you will need to purchase windstorm insurance if you own a home in an area prone to hurricanes.
Taxes
Foreign countries will have their own tax rules that may apply to your purchase. There can be taxes for buying a home and re-selling it in the future. Additionally, there are likely property taxes you will have to pay throughout the year. Before you make your purchase, be sure to fully understand the tax situation.
Final Thoughts
Many people who have traveled abroad have felt the temptation to buy a house in a foreign country. Investing in foreign real estate can be a great way to achieve investment diversity, live for pennies on the dollar, and experience a new lifestyle. However, it is a lengthy process that requires a lot of planning. Do the proper research beforehand to make sure it is the right investment for you.
