A cliché used by property experts is that the three most important factors in determining the desirability of a property are “location, location, location”. This tricolon appears in print as early as 1926, though it is often incorrectly attributed to the real estate magnate Harold Samuel.
You may have heard this mantra when talking to an agent about the home values. In a nutshell, it means homes can vary widely in value due to their location. Appraisers consider a property's location when they determine property values.
Maria Iotova, a Greek expat living in Rwanda, writing in Things to keep in mind when renting or buying property amid the crisis, asks what you should keep in mind if you're a property owner or you're looking to buy or rent a property as an expat amid the crisis?
Look at the considerations you should make before jumping into an international real estate investment, the pros and cons of investing in foreign real estate, and a few ways you might invest in global real estate.
Can you buy real estate overseas?
Investopedia says mortgages aren't available to U.S. buyers overseas—and most U.S. banks won't lend for purchases abroad.
Are there some alternatives if you want to buy a home in a foreign country? Yes, and here are three ways to finance your foreign real estate purchase.
Cash
Cash is still king, and this can certainly be true for buying property abroad. Not only will you be able to close the deal faster, but you will also likely get the best price through discounts or upgrades—or both.
Paying cash is recommended only if the property in question is already built—and not in the pre-construction stage. If you pay cash upfront for something that's not built yet, there is always the risk that the developer could run out of money or have some other problem that would either delay or prevent project completion. In these situations, it could be tough, or at least time-consuming, to get your money back.
Developer financing
Depending on the country, you may qualify for developer financing if you purchase a lot, home site, or pre-construction property in a development. Developer financing typically involves little paperwork, and there are no age restrictions or life insurance requirements. Another perk is that sometimes developer financing is interest-free.
With one type of developer financing, you make payments on fixed dates, such as 10% when you sign the purchase agreement, 10% after six months, another 10% after 12 months, and the balance when the project is complete. Rather than fixed dates, another arrangement has you make payments according to construction stages, such as paying 10% down, 20% when the foundation is complete, 20% after the first floor is complete, etc. With another type of developer financing, you make regular payments each month. If you purchase a $50,000 lot in Costa Rica, for example, you might pay something like $1,200 each month for four years, depending on the interest rate, if applicable.
Self-Directed IRA
If you have your sights set on a house overseas and plan on using it solely as a rental or investment property, you may be able to use funds from your self-directed IRA to make the purchase. The IRS does not specify which types of investments are allowed in a self-directed IRA and states only what is not allowed, including collectibles (e.g., artwork, stamps, and antiques), certain coins, and life insurance.
Unlike traditional IRAs, wherein investment options are typically limited to stocks, bonds, and mutual funds, funds from a self-directed IRA can be invested in a broader set of assets, including real estate – either at home or abroad. Because the property must be treated as a real estate investment, you won't be able to live in the home until you are old enough to start receiving distributions from the account. You can't use it for vacations either, and if you try to circumvent the law by renting it to yourself, the IRS will not be happy. While you're waiting for retirement, however, you can use your self-directed IRA funds to pay for the property and any expenses related to maintenance.
Is international real estate a good investment?
Most investors start their international real estate journey initially seeking a secondary home in a foreign country, using the property as a personal retreat when desired and renting the home as a vacation rental when they are not there.
According to MillionAcres.com, investing in overseas real estate can help primarily in four ways:
- Protecting your money from inflation.
- Generating an income stream in another currency.
- Tax havens if you are in a high tax bracket at home.
- Opportunity to obtain residency or a second passport.
What is the best way to buy property abroad?
David Wang, a low-cost real estate investor in Japan, suggests weighing the risks and rewards. David writes: "A good economic framework: Imagine that you invest in a foreign country with an unstable currency. Right now, rental incomes are great. Maybe you invested $100,000, and you're getting $10,000 a year in rental income. You're making a 10% ROI (Return On Investment) However, next year, there's an economic crisis. There's hyperinflation, and the currency drops to 1/10th of its value the previous year. Your tenants are still paying you the same rent in the local currency, but now, it's only worth $1,000, not $10,000. Your ROI has just gone from 10% to 1%!"
“A good legal framework: First of all, not all countries allow foreigners to buy land and buildings there. Indonesia doesn't, and neither does China. In Indonesia, you only have the “Right To Use” and not freehold, on either land or buildings. In China, you can own an apartment or house, but not the land underneath it. You also aren't allowed to rent it out.
Second, Imagine that someone causes severe damage to your building, or even completely destroys it. Will the police help you? Will the courts side with you and award you compensation? Or will the police and courts just look the other way, or worse, bend over backwards to defend the person who ruined your property, maybe even making it your fault?
“Rewards: I used to live in Taiwan. Great place. Friendly, outgoing people. Tropical beaches. A developed economy with high technology (free broadband available in many places, good cell phone coverage, etc.), yet low cost of living (when I lived there, you could eat a full meal for US$1 or $2). Oh, and the rents there are also really, really cheap, which is great if you're a tenant, not so great if you're a landlord because the Return On Investment (ROI) is only about 2%! In other words, if you invest $100,000 in real estate there, only expect to generate about $2,000 per year from it.
“In Japan, on the other hand, the average ROI in the 23 Special Wards of Tokyo is 5.5%. In the outlying areas, it's more like 6.5%. In specialty areas such as the Niseko ski resort zone, 7%.
“The rewards are much better there.
“Once you have evaluated the risks and the rewards of several countries and decided which one to go with for real estate investment, then contact a licensed real estate broker there. Ask him or her to provide you with a list of properties. You can even ask about rates of return.
How to get an overseas loan to buy real estate
Re/Max Chay Realty in West Alliston, Canada, helps foreigners find financing for their dream home.
They write:
“The lender who finances the loan to purchase an overseas property need not be based in the country in which the property is located. If you do use a lender in a foreign country, you must meet qualifications similar to those required by U.S.-based lenders.
“You'll need to complete an official loan application. The lender requires a legal description of the property and passports for the property buyers. You must also show proof of your income to qualify and show you have the cash for a down payment. Lenders look for clear credit reports that show a history of meeting payments. Applying for loans in non-English speaking countries when you don't have language skills to complete the paperwork and required interviews means hiring a local lawyer or accountant.”
