What You Need To Know Before Making Your First Foreign Real Estate Purchase
Down markets worldwide continue to create interesting buy opportunities for both personal use and investment.
But invest in a piece of real estate in another country? What should you buy and where? These questions can seem intimidating if you’re considering them for the first time.
Start by understanding why you’re buying–for investment or for personal use?
The answer may not be clear-cut. And the best case is when you find a piece of real estate in a place where you want to spend time that also holds out the potential for an investment return (in the form of capital appreciation and/or a yield from rental).
State your objectives and exit strategy expectations clearly for yourself and for anyone else buying with you. Every decision you make related to the eventual purchase is affected by the property’s intended use. If you’re buying straight up for profit, every decision is based on the numbers. If you’re buying for personal use, even part-time, you’ll make your choices based on many things, including some that can’t be quantified in a spreadsheet.
Now that you understand why you’re buying, you need to decide where you want to buy what. I’ve been making specific “recession-market” recommendations in recent weeks (and will continue to do so). As you consider them (and the rest of the globe), think about:
- The Path of Progress. This is a key factor when buying for investment but important if you’re buying a retirement or second home abroad, as well. What infrastructure improvements are planned? A new airport, new train station, new highway, new hospital, etc., can mean a new universe of potential buyers…which is good news if you’re buying as an investor looking to develop or to flip. These things, though, also translate to better living.
- Inventory Supply and Demand. In Panama City, right now, for example, a glut of high-rise condos is coming online. These units were launched and sold pre-construction over the past two-plus years. Now they’re being delivered…and their volume is one reason Panama’s capital market continues to soften.
- Costs of Acquisition. Remember that they go beyond agent commissions. Depending on the market, they can also include: legal fees, notary fees, registration fees, title insurance (we strongly recommend it), and transfer taxes (sometimes called “stamp duty”). In Ireland, for example, stamp duty can be as much as 9% of the purchase price.
- Carrying Costs. Including: maintenance (a house on the beach requires a lot of it, for example); a caretaker (if you won’t be in residence full-time yourself); property taxes (not every country charges them, and, in some countries, they’re negligible); income taxes (if you’ll be earning rental income); capital gains taxes (when you eventually resell…again, not every country charges them); other local taxes; property management expense (you’ll need a property manager if you intend to rent); rental management expense (separate from property management and, again, necessary unless you’re going to manage all the details of your rental investment yourself…something I don’t advise); and homeowner’s association/building/condo fees.
- Economic Outlook. Critical if you’re buying for investment, but you don’t want to ignore the market climate even if you’re buying purely for personal use. Markets move up and down…and then up again. At what point in this cycle is the market where you’re thinking about buying right now? In which direction is it moving?
- Opportunity for Diversification. In terms of market, type of investment, type of property, and currency.
What kind of property should you be shopping for? Again, consider why you’re buying. If it’s for personal use, how much space do you need? If you intend to rent the place out when you’re not using it, understand what rents best on the local market. An apartment or a house? One bedroom or two? Think in terms of cost per square meter when making comparisons.
Where do you want to be? In the heart of downtown…or out in the country? On the coast or overlooking a river? In a gated community, a local neighborhood, or off on your own with undeveloped acres between you and your nearest neighbor? Consider climate, traffic patterns, transportation (where you settle determines whether you’ll need to invest in a car, for example), the convenience factor, and nearby amenities (shopping, restaurants, nightlife, parking, etc.).
Furnished or unfurnished? If you buy unfurnished, where and how will your source furniture?
Finally, what’s your budget? Everything follows from this. Have clear budget parameters in mind before you start shopping, and don’t forget to include the costs of closing, attorney review, other due diligence, and title insurance.
Lief Simon
P.S. If you aren’t already holding a sizeable portion of your assets outside your home country, I strongly recommend that you make this a priority agenda. And a portfolio of international real estate holdings should be an important part of your going-offshore strategy.
First, if you’re an American, real estate is one of two assets you can hold offshore without triggering a reporting requirement to Uncle Sam (the other is gold). The real estate you hold in another country is your own business.
Plus, it’s unseizable. How is the IRS going to take your condo in the Philippines?
You don’t have to be super rich to take up the idea of buying real estate offshore as a means of protecting your wealth. Opportunities to buy land, houses, and apartments, for both investment and personal use, exist at all price levels.
Building a portfolio of foreign real estate as part of a strategic offshore diversification agenda will be an important part of the program for the Emergency Offshore Summit we’re planning for December in Panama City. For this, we’re convening top tax, banking, asset-protection, and global investing experts from around the world.
