You know, of course, that you can gain from your property purchase when there’s a strong currency advantage. But this also has the power to work against you, depending on your plans.
So, today, we’re going to look at currency considerations and their impact on buying, holding, renting, and selling your overseas property. (Note: I’ll assume your base currency is the U.S. dollar, so everything here will be expressed in dollar terms. But the same principles will apply no matter what your base currency is.)
Exchange Rates Will Affect More Than Just The Purchase Price
When buying a property in a foreign currency, the local currency’s exchange rate will affect the sales price in dollar terms.
For example, a house costing 100,000 euros may have cost you US$133,000 at an exchange rate of US$1.33 to the euro back in 2013… and only US$120,934 at US$1.21 per euro (today’s rate). That’s a dramatic difference.
But there’s more to your overall currency exposure than this. Here are three things to consider when assessing your overall currency risk.
1. What Currency Is Being Used For The Property Transaction?
When properties trade in the local currency, the most obvious effect of exchange rates is the cost of your property in dollars. A strong dollar will buy more of the local currency, so you’ll need fewer dollars to come up with the purchase price.
When it’s time to sell, a weak dollar is your friend, because the price you get (in the local currency) will buy more dollars back home.
But not all properties in foreign countries trade in the local currency. Sometimes they trade in dollars.
Of course, this is true in countries that use the U.S. dollar like Ecuador, El Salvador, Panama, British Virgin Islands, or Turks and Caicos. But it’s also true for countries that have their own currency, yet still trade real estate in U.S. dollars. You’ll find this practice in Uruguay, Peru, Nicaragua, Costa Rica, and sometimes Mexico… although there are many others.
If your foreign property transaction is in dollars, then the exchange rate will have no direct effect on the purchase or sales price.
2. Do You Plan To Live Or Spend Significant Time In-Country?
If you live in the country where your property is located, you’ll find that the exchange rate has the opposite effect on your cost of living as it does on the property value.
So, while a strong dollar will lower your eventual resale profit in dollar terms, it will also lower your cost of living, since your dollars are buying more of the local currency. Depending on how much time you spend in the country, your lowered cost of living could completely offset any depreciation in resale price caused by a strengthening dollar.
Of course, if you’re renting, a strong dollar will lower your rental cost in a non-dollar country.
The thing to remember here is that a strong dollar lowers your local expenses; a weak dollar raises them.
3. Are You Managing The Property As A Rental?
Like the local cost of living, your operating expenses for managing a rental will go down as the dollar strengthens. Your utilities, homeowner association fees, and taxes will all cost less in dollar terms.
If you rent your property in dollars, then your rental income will buy more of the local currency. So, a strengthening dollar gives you a “raise,” helping with your local expenses. A weakening dollar gives you a pay cut… even though it’s raising the dollar value of your property at resale time.
A Local Bank Account Can Provide A Partial Hedge
No sane person will move to another country just to hedge a foreign currency transaction. But simply having a local bank account can do some of that hedging for you. You can store the local currency in your bank and use it to pay local expenses… and then you can exchange it for dollars when you feel the rates are in your favor.
A Few Simple Axioms To Remember
When considering currency, here are a few basic things to keep in mind.
- You can avoid all currency risk by purchasing property and living in a dollar-based market (Panama is a top option)…
- A strong dollar is always good when buying in a foreign currency (this is especially true for Colombia and Brazil right now)… and a weak dollar is always good when you’re selling… assuming your plan is to repatriate the proceeds of the sale rather than reinvesting in the same country/currency…
- If you live or spend time in the country where your property is located, the exchange rate has the opposite effect on your cost of living as it does on the property’s value…
- If you’re operating a rental (in dollars) in the country where your property is located, your overall risk (or reward) to the property’s value is partially offset by your increased rental returns in local currency…
- A local bank account can provide you a reserve in the local currency to use for hedging.
Finally, while it’s helpful to understand the ups and downs of currency fluctuation, don’t get bogged down in trying to beat the system.
A good deal is a good deal. Wait too long and the property you want could be gone. Or, if property prices go up, any savings you may have made on the exchange rate are mitigated.
Bottom line, there is no final whistle to wait for. You are both player and referee. You have to manage your own actions… and know when to call time.
Lief Simon
Editorial Director, Overseas Property Alert
