Whether you are dreaming of being a snowbird on your favorite Mediterranean beach, retiring somewhere with a lower cost of living or just capitalizing on a hot but inexpensive housing market, investing in foreign property is a great way to diversify your financial portfolio and own a vacation home. But before you take the leap, it’s good idea to make a list of your goals and priorities, as well as plan to visit the country multiple times prior to investing.
Whatever your buying motivation, here are some other tips to think through and research before you take the plunge.
Financing
If you are planning to purchase property in a country in which you are not a legal resident, obtaining financing could be difficult. There are a few countries where non-resident financing is possible, including Mexico, Panama, France and New Zealand, but in much of the world financing isn’t an option for non-residents. Plan to pay cash in most scenarios.
Many foreign investors purchase investment properties using home equity lines of credit (HELOC) against their U.S.-based property, cashing out investments such as a 401(k) and stocks. In some countries, seller financing or developer financing is available. But in the case of all financing options, don’t be surprised to find much shorter terms. A 30-year fixed-rate loan is virtually unheard of outside of the U.S., so expect a 20- to 25-year loan with a variable rate.
You can also purchase the property using your self-directed IRA but you can’t use the property yourself for any reason and you won’t get any tax advantages as all the income the property generates goes back to your IRA.
Tax Liabilities
The tax advantages of owning a home overseas are similar to owning investment property in the U.S. If you plan to use it as a second home and not a rental, you can deduct both mortgage interest and property taxes. When you rent it for more than 14 days and use it for less that 10 percent of the days it’s rented, the IRS considers it a rental property, so you have to report all rental income to the IRS but you can also take all the deductions available to a business including additional deductions beyond mortgage interest and taxes, such as depreciation and expenses.
If you use the property for more than 10 percent of the days it’s rented, it’s considered a personal residence and the deduction rules again apply as if it were a second home that you never rented. Make sure you think these use rules through carefully before investing and talk with your tax advisor.
Title & Ownership
Before you purchase in any country, make sure to do your research. Different rules and laws apply in each country and many would be surprising to a U.S. citizen, including restrictions on the type of property than non-citizens can purchase, the proximity of the property to beaches, rural areas, protected lands, or military zones. Some countries have limits on how many permits for foreign purchases are issued per year (think of it like how cities or states might limit how many liquor permits are allowed in a municipality).
Before you get too impulsive about making a foreign property investment, check with an attorney and make sure you have the legal ability to buy in that country. When it comes to title, make sure that the person selling you a property has the full legal right to sell the property and if you are working through a company or developer, that their reputation is outstanding. Similarly, in some countries, real estate agents and brokers are not regulated or licensed and so a potential buyer should research who the reputable companies are through licensed attorneys or a consulate.
Find out what currency you can use to purchase the property and be aware of the currency exchange risks. Many times it can be difficult to sell a property, if and when you decide to, especially if the country faces financial instability or war. Plan to use a notary in many countries to help you read title reports and look for gaps in title.
Safeguarding & Security
When you aren’t at your property, how do you plan to keep it secure? Invest in a security camera system that doesn’t require a monthly fee but that you can still watch surveillance video. This way, you’ll know what is happening from anywhere you are in the world. You want the property to always look occupied, like a primary residence, so install smart plugs using a smart home system such as Amazon Echo or Google Home or simply connect various lights to appliance timers.
Security goes beyond the four walls too. What if the local government doesn’t have a history of respecting property rights? Do your homework thoroughly on the U.S. Department of State’s website and ensure the location where you are considering purchasing is a safe long-term investment.
