Whenever I travel, which is quite often, I love to look at the flyers decorating the windows of the real estate agencies. It’s interesting to see what’s available and how much or how little a local place might cost.
When visiting a place we really enjoy, and could possibly see ourselves spending a lot of time in one day, I also hit up the online listings. In the U.S., we use Zillow, but internationally, I might be looking at Idealista or Point2.
I’ve never been super serious about making an international real estate investment, but I can see the appeal. You could give yourself a landing place in a beautiful spot far away, ideally with an income-producing property for the time you’re not using it, and in some nations, spending a certain amount on real estate is a pathway to obtaining a second passport.
I thank the folks at TFX for putting together the following overview of international real estate investing.
Real estate remains an appealing tool for investors to balance their portfolios since it provides tax breaks, revenue, and expansion that other asset classes cannot always offer. While most real estate investors start by investing heavily in their backyards, there may come a time when they consider expanding their assets overseas.
International real estate investing can help diversify a portfolio and access prospects in emerging regions. An overseas property can even serve as a secondary residence, but it isn’t for everyone.
Take a look at the things to think about before investing in international real estate, the benefits and drawbacks of international real estate investment, and a few ideas on getting started.
What are the advantages of investing in international real estate?
Most investors begin their international property experience by looking for a second property in another country. When they want to be alone, they can use the estate as a personal retreat, and when they aren’t there, they can rent it out as a vacation property. However, this isn’t the sole option for international investment.
Foreign real estate may appeal to investors looking for more variety in their portfolios since it allows them to invest in rising areas with strong markets. If you live in an uncertain or stagnant economy or country, investing overseas will enable you to engage in and profit from economies that are growing faster.
Many significant investment businesses and real estate investment trusts (REITs) employ foreign real estate investing to reap the benefits of real estate growth prospects, economic opportunities, or the tax benefits of having real estate abroad.
Having real estate in another nation gives another layer of protection against political or economic unrest in your own country. Diversifying in foreign real estate allows you to protect yourself against the peaks and valleys of individual countries’ economies and cycles.
Other potential advantages of international real estate include:
- A retirement or holiday home.
- Safeguarding your money against inflation
- Creating a revenue stream in a different currency
- If you are in a higher tax bracket in your home country, having a tax haven is a good option
- Possibility of obtaining permanent residence or a second passport
What are some disadvantages of international real estate investing?
Comprehending and deeply understanding the market, especially an emerging market, is a crucial feature of effective international real estate investing. Economic weaknesses, corruption in government, and foreign investment regulations all influence the opportunity to invest, the method of investment, and the simplicity and safety of the investment.
Property ownership regulations and potential restrictions differ per country, making it challenging to purchase or sell your property depending on where it is situated. Some governments only allow land purchases and not building purchases, or vice versa. Others may only permit clients to buy real estate provided a native resident signs the deed.
You can also come into restrictions that allow you to purchase real estate but make it challenging to sell it and get your money out of the county. As a result, while investing internationally, due diligence and extensive research is essential.
Access to finances for the investment is another drawback of being an overseas investor. Many countries, including their citizens, do not provide mortgages in the same way that the United States does.
In countries where mortgages are available, the terms may be unattractive, requiring a significantly bigger down payment or higher interest rates. As a result, most investors who want to acquire real estate in another country must use private financing or pay a considerable quantity of money out of pocket.
How to invest in international real estate
Investors who want to own and operate an international real estate investment by themselves can buy residential, commercial, or agricultural land in other countries. Still, they must carefully select the location and market. Investors should seek income and growth potential, but they should also consider the country’s record of success and confirmation that the asset they buy will be a long-term investment.
Emerging economies may give the best returns, but they are not always as steady, particularly short to mid-term. Retirement sanctuaries with pleasant weather and a cheap cost of living have a modest premium on real estate. Still, they will undoubtedly provide you with a more solid financial asset in the long run.
If you want to diversify your portfolio but aren’t ready to buy and adequately manage real estate yet, international REITs could be a good option. It will still provide you with exposure to other nations’ development potential while also reducing the danger of a downturn in your primary property market. It will also eliminate the requirement to hold and maintain a foreign asset. The REIT is often identified with high-paying returns and can be purchased through a traditional brokerage business.
What are REITs?
REITs hold and operate commercial real estate that generates income. Some REITs also make loans and other debt obligations backed by real estate. The majority of large REITs in the United States are listed on the stock market. REITs have tax benefits that allow them to avoid paying corporate taxes if they transfer 90% or more of their earnings to investors. However, while REITs can avoid double taxation, their design does not imply that their tax losses are passed on to investors to be used as carry-forwards or to offset capital gains.
What are the advantages and disadvantages of foreign REITs?
Real estate is frequently seen as an inflation hedge because, despite secular currency devaluation, it tends to increase in value over time. Because tax regulations oblige firms to transfer most of their revenue, many REITs offer significant dividend returns. Because REITs must frequently disperse their earnings to shareholders, management has less money to spend on expensive pet projects.
International REITs are an excellent method to diversify a portfolio. They aren’t the same as stocks and bonds in terms of asset type. They are isolated from the United States by geography.
Despite their benefits, investing in overseas REITs carries several dangers. In many nations where real estate is less developed than in the United States, land rights and taxation can be contentious political concerns. Exchange rates can have a significant impact on any foreign stock.
REITs in foreign nations can be incredibly tax-inefficient if you’re taxed at standard income rates. Foreign real estate investment trusts (REITs) can be unstable and complex. If you have a short-term perspective, this can pose problems.
Considerations before investing in international real estate
When looking at overseas real estate, growth and industry should be top priorities. These will provide a solid foundation for long-term capital gains and asset stability. The most straightforward entrance point will be a global market with a booming middle class, a politically stable regime, and foreign investor-friendly legislation. Higher demand for your real estate investment will be seen in housing markets in enterprise zones, which are regions where tax or governmental incentives are granted to encourage development by investors.
You may not want to invest in the largest cities. Cost and demand are probably higher. Instead, you might examine locations outside of extensive metro areas that have the potential to grow over time.
Acquiring agricultural or forestry land beyond cities and leasing it as such, for example, can help you cover costs until you’re ready to construct or resell. As the middle class grows, so does the demand for more food, timber, and other luxuries. Using agriculture to satisfy food production requirements until rental surpasses it can be a great strategy..
Taxes for International Investors
Tax consequences are also a significant consideration when purchasing overseas real estate as an investment. The 1031 exchange can apply to real estate purchases outside the United States. It can be an excellent method to transfer gains earned here into a purchase made somewhere else. You don’t pay taxes until you choose not to exchange your gains from the sale of a property into a like investment. At this time, it will be subjected to capital gains taxes, just as a 1031 exchange in the United States.
Please remember that any passive income earned from leasing or renting the property while you own it counts as income from Uncle Sam’s perspective. Consult your accountant to determine the consequences and the best method to structure your acquisition, any income, and the eventual sale of the property.
If you need more information about international investing, you can visit this page where you’ll find useful resources that may answer any questions you may have.
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Have you invested in real estate outside of your home country or considered doing so? Why or why not?
3 thoughts on “Investing in International Real Estate”
My understanding is that section 1031 of the Internal Revenue Code (IRC) specifically states that property held in the U.S. is not of a like-kind with foreign-held properties. That means exchanges between a U.S. property and a foreign-based property are not allowed using a 1031. Is that incorrect?
I live overseas and unavoidably my largest real estate investment is international (my home in Tokyo). I have two precautions to add to what is written above. First, during direct ownership of foreign real estate you are very likely to find yourself in a situation where you trigger FBAR reporting requirements because the transfer of the sums of money used for down payments or outright purchase for a property will often transiently be in a foreign account over which you have signature authority. The penalties for failing to file an FBAR are potentially very draconian so you want to be very careful about missing that (easy to file) requirement. Second, if you are buying a foreign REIT make sure that the REIT itself is domiciled in the US or you risk having ownership in a PFIC which (unlike the FBAR) has very complicated tax reporting requirements and the worst possible tax rates. If it sounds like I am discouraging foreign real estate ownership based on my personal experience that is correct 🙄
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