Looking at buying a property abroad? Here are 10 questions you need to ask before investing in land or a house overseas.
1. Are you looking to a buy a future residence?
If you’re currently living abroad and want to buy a property in your home country that you intend to move into in the future, you’ll hopefully be familiar with the area so the weight of the decision to invest will lie with choosing somewhere you’ll be happy to make a home, that has all the practical and local amenities that are important to you. “If this is a five-year plan, family considerations will be important,” says Shane Clinton from Buying Houses Australia. “Maybe you have young children today but they will be of high school age when you return to your country of origin. You will want to select a suburb where good private schools are accessible.” It’s important not to forget that this will be an overseas investment property before you move in, so check that you can easily rent it out in the meantime.
If the property is a second home you will only visit on holidays then it’s worth considering transport links. “Be it a villa in Bali or a beachfront in Byron Bay, target great locations with direct flights and good infrastructure,” says Clinton. “These destinations will usually have the lowest vacancy rates and highest rental returns.”
2. Are you investing in property to diversify your portfolio and increase returns?
Buying a property purely for investment may be daunting but the risks involved can be managed and reduced, and the returns often make it worthwhile. You’ll want to focus on a property with an attractive yield so do your research on rents and confirm what you’re being quoted is realistic. Consider investing in countries going through upheaval where there has been significant currency depreciation. “Greece may well be a future case in point,” says Clinton, “if they leave the euro and return to the drachma. But be prepared for capital controls and foreign investment review boards.” Higher risk equals higher returns and some strategic overseas property investments have delivered 60 per cent returns over a very short period of time.
3. What is the current political climate?
The last thing you want is to find out that your investment has been wiped out by a revolution or a coup. Check how politically stable the government is and if they encourage foreign investment. Is this likely to change? Countries with significant currency depreciation may offer attractive potential returns but local political influences and financial institutions can impact on property ownership.
4. How easy is it to buy and own property there?
In Singapore foreigners aren’t allowed to own HDB apartments and require approval to purchase private landed property. Many countries have restrictions on foreign investment so you need to check with the local legal system. Some may well allow you to invest but require that you complete a series of complicated stages that take a lot of time and effort, making the purchase a prolonged and expensive project.
Tip: It’s easier down under
The Australian Government has recently announced a new visa for migrant investors. Invest a minimum of five million Australian dollars into complying investments and you won’t need to satisfy the innovation points test to qualify for the Significant Investor Visa, which also doesn’t have an upper age limit.
5. Can and should you get a local mortgage?
Banking systems and loan criteria vary from country to country. The optimum situation is to borrow in the country in which you’re buying the property and collect rent there to make repayments. This way you’ll be hedged against adverse fluctuations in currency. The potentially very high-risk alternative is to borrow in the country you earn most in and pay for the entire overseas property in cash. One of the attractions of this is that as the local economy grows, its currency will strengthen against your currency. In effect, this will increase the value in your currency even if prices don’t change locally. However, foreign currency mortgages are potentially very dangerous, and can wipe out a lifetime’s worth of savings. Even currency traders have got this one wrong. “If you own a property in one currency and a mortgage in another currency, then you have added on another level of risk,” says Colin Purchase from The Henley Group. “Currency markets can quickly move against you, and if they do, the bank will be quick to give you a margin call to protect its own position. Foreign currency mortgages should only be used in special situations.”
Whichever route you take, it’s worth taking professional advice when it comes to exchange rates. You’ll need to be clear on how you will finance and pay for the property and with which currency and why.
6.What is the local tax situation and how will it affect your personal tax liabilities?
Before you sign on the dotted line make sure you’ve checked whether there are any taxation treaties between your home country or country of residence and the country where you have made your international property investment. You’ll need to speak to an accountant that has experience with the local tax system and how it interacts with your home country or country of residence. You can expect taxes on the purchase (for example stamp duty), rent and sale. There may also be inheritance taxes so it might be worth considering owning the property through an offshore company. “Generally, although there are lots of potential taxes, you are allowed to offset expenses against these taxes,” says Chris Potter a director at Chartwell Associates. “Therefore it is important to treat your property investment as ‘a business’. Keep receipts and if you are not familiar with the tax system, pay an accountant to ensure you are not falling foul of the local tax laws and also that you are not paying too much tax.”
7. Should you invest in new property?
There are obvious benefits of investing in a new property; less maintenance (as they often come with a builder guarantee), easier to rent (as running costs can be cheaper with newer properties being more energy efficient) and they may come with fitted white goods which you won’t have to fork out for. However, “new property tends to be more expensive, as the developer is trying to get the maximum price he can,” says Potter. “Sometimes you may be able to pick up a good deal if the developer is trying to get rid of the last remaining units or is having financial difficulties – a lot are in this current economic climate. It is always worth checking out what similar size properties are going for in the local area that are a few years older.”
8. Should you invest in older property?
“Older properties generally are stronger performers in a slower market,” remarks Potter. “With older properties there is established historical data which will help with your research.” You may also be able to substantially increase the value just by updating the interior, renovating or refurbishing the property. However, managing the property might be more work as there’s a greater chance of electric and heating systems going wrong.
9. Is the investment safe?
This is one of the most important questions that you should be asking yourself if you are planning to invest in any property. “Ensure that you perform a thorough background check on the property developer, evaluate the company’s credentials and even consider taking a trip to inspect the property before making a decision,” says Christopher Gomer, CEO of Castlewood Group. “You should also request a copy of all the necessary permits and documentation that are associated with developing a property, such as a Confirmation of Title Insurance Arrangements, Land Title Deed, and a Summary of Due Diligence.”
10. How will you manage the property?
Unless you have family or friends nearby it’ll be impractical to manage the property by yourself. Before you appoint a local agent it’s a good idea to speak to other landlords in the area and find out which agents they recommend. Remember, “this will impact your cash flow as agents fees can range between 10 and 25 per cent depending upon the level of service you require and the country you buy in,” says property investor Peter Jones.
Where do you start?
As well as looking on property search engines it can also be a good idea to enlist the services of a professional search agent in the area you’re hoping to buy. “Search agents are well versed with market trends as well as being informed about local areas and locations which are favourable for the best investment, comparable prices, budgets, rental yields, tenure and solicitors,” says Anne Graham, director of Graham & Graham Property Consultants. They will also be able to provide comparisons and advice as to which opportunity would best suit your purposes.