Counting The Complete Costs Of Property Ownership Overseas
When buying property in a foreign country, you have to consider a number of expenses beyond the initial purchase and closing costs (which can be as high as 10% in some countries). You have to understand all associated carrying costs of any foreign property investment, and you want to do this before you make a purchase.
In the United States, property taxes can be a big (maybe the biggest) cost of carrying a piece of real estate, but not all countries impose property taxes. In some countries, this carrying expense is zero; in others, it is negligible, maybe US$100 or US$200 per year.
For example, Ireland, Croatia, and Buenos Aires charge no property taxes (though, the rest of Argentina does). In France, you have two annual taxes related to the ownership of property–a property tax and an occupancy tax. Combined, these two taxes are a small fraction of a property’s value, especially in Paris.
The second most important carrying cost to understand before making a purchase anywhere in the world is the associated homeowners, or HOA, fee. In some places, this can be the biggest carrying cost and even a significant part of your overall monthly budget. If you pay cash for a home or condo somewhere, thinking that, therefore, your monthly housing expense will be negligible, you can be surprised (unpleasantly) to learn that the building or development where you’re invested charges US$1,000 or more a month in HOA fees. In Panama recently a friend told me that he’d looked into buying in a new golf community. He was thinking this could be his ideal retirement location…until he discovered that the HOA fees are being projected at US$2 per square meter (this isn’t uncommon; HOA fees can be charged as a flat amount or as a per-square-meter fee). The HOA fee for the house he was considering buying, therefore, would amount to US$2,000 a month once you factored in other mandatory fees including the monthly club fee of US$300!
In Medellin, where we are traveling this week, apartments in buildings with higher HOA fees don’t sell as quickly or for as much per square meter as those in buildings with lower fees. The locals would rather pay more up front and have lower carrying costs. This seems like a sensible approach to me for a retiree looking at purchasing a place to live overseas, as well…especially if you’re on a fixed income. It’s safer to pay a bit more for a property up front than to saddle yourself with an extra US$50, US$100, or even US$2,000 a month long term.
The other danger with living in a building or a development where HOA fees are charged is special assessments. Buying into a new building or community you probably don’t have to worry too much about a special assessment anytime soon. However, if you buy in an older building or a development that was built 10 or more years ago, you should take a look at the building and the property, not only the unit you’re buying.
An apartment listed for sale in Panama last year got my attention based on the price. The sellers had a sense of humor about their situation and made a joke in their ad about the daily workout program that came free with the apartment. The elevator in the building was kaput, meaning you had to climb the 14 flights of stairs up and down every time you came and went from the place. The building management wasn’t able to replace the elevator because they didn’t have the funds. To raise the money they needed, they’d have to make a special assessment of all owners. In most of the world, that’s no easy thing.
Deferred maintenance can be a big danger in an older building, and most owners most places don’t want to pay a little extra each month to build up a contingency fund (as we’re doing for the apartment building where I own a rental in Panama City). So ask to see the financial statements of the HOA for any building where you’re considering buying an apartment. Look at what they spend each year on maintenance and how much cash they have in the bank. If you see a low bank balance and a minimal amount having been spent on maintenance annually, you should think about what your future exposure could be as an owner.