International real estate investing diversifies your investment portfolio, potentially earning you higher returns. However, it’s important to conduct thorough research and seek professional advice before making investment decisions—allowing you to make informed decisions and minimize the risks. This guide offers insights on how to invest in international real estate, including the pros and cons, the factors you must consider, differences in property rights, tax implications, financing options, and the best places for international real estate investing.
What Is International Real Estate Investing?
International real estate investing is a type of investment that involves acquiring and managing real estate properties outside the investor’s country of origin. This investment can take many forms, including residential, commercial, or industrial properties. Real estate investors may acquire these assets through direct ownership, partnerships, or investment trusts, depending on their preference and investment goals.
Pros & Cons of International Real Estate Investment
Investing in international real estate can offer attractive returns and diversify an investor’s portfolio, but it also comes with risks, such as regulatory hurdles, currency fluctuations, and cultural differences. Check the table for more information about the advantages and risks of investing in real estate internationally.
| Pros | Cons |
|---|---|
| Portfolio and currency diversification | Legal and regulatory complexities |
| High potential returns | Cultural differences and political instability |
| Tax benefits (e.g., tax incentives and lower property taxes or capital gains taxes) | Fluctuations in economic growth, employment, and inflation |
| Can bring residency perks (e.g., obtain a permanent residence permit or citizenship) | Currency risks and fluctuations |
| Portfolio growth | Distance makes it hard to conduct thorough due diligence |
Factors You Must Consider When Investing Internationally
Investing in real estate in a foreign country can be a lucrative opportunity. However, it comes with its challenges that make it more complex than investing in local real estate. If you’re considering investing in property abroad, the following are several factors you must keep in mind:
Market Analysis & Research
Investors should conduct comprehensive market research to make informed real estate investment decisions. This includes analyzing local real estate markets, economic indicators, demographic trends, and infrastructure development.
Local Rules & Laws
Foreign real estate investors must familiarize themselves with local laws and regulations that can significantly impact property acquisition, management, and sale. This includes property laws, zoning regulations, taxes, and other legal requirements. By understanding these, investors can feel prepared and knowledgeable, reducing the risk of legal complications.
Eligibility
Buying property in certain countries can be complex due to explicit prohibitions or severe restrictions on foreign nationals. For example, owning land in Thailand is not possible for foreigners, unlike in Italy, where there are no restrictions on property ownership. For more information about global property rights, read the section below, which discusses the differences in property rights internationally.
Financing Options
Obtaining financing for international real estate investments can be complex due to the reluctance of local banks to lend to foreign investors and the strict lending requirements of international banks. To overcome this challenge, investors should consider exploring various financing options, such as international lenders or private financing. To learn more about the financing options, check out our Ways of Financing Your International Real Estate Investments discussion below.
Currency
Knowing the risks of currency fluctuations between two economies when purchasing property in another country is important. Every real estate transaction abroad can result in significant losses or gains. Therefore, staying informed about the exchange rate from U.S. dollars to the local currency is vital, making foreign investors cautious and aware of the potential risks. Read our discussion on the Effects of Foreign or Currency Exchange below to learn how currency rate fluctuations affect international real estate investment.
Political Stability
Investing in physical assets outside of your home country may expose you to political risk, also known as geopolitical risk. You might suffer damages or losses if your property is located in a country with an unstable economy or due to changes within a country.
Property Management
Investors looking to invest in foreign real estate must understand that effective property management is critical for their investment’s success. Consider how the property will be managed, including tenant relations, maintenance, and legal compliance.
Differences in Property Rights Internationally
Understanding how property rights vary worldwide is essential when searching for international real estate investment opportunities. It’s not just about knowing but also researching the laws that govern private property, especially for non-citizens. This is critical because it determines what you’re buying.
For instance, some countries allow foreign property ownership, but there may be limits on the type or location of properties available for purchase. Several countries also require foreigners to obtain special permits or undergo additional legal procedures. Therefore, it is vital to consult with qualified real estate professionals and legal advisers familiar with the specific country’s property laws.
Below are some examples of different types of ownership rights in other countries:
- Owning land in the Philippines: In the Philippines, foreigners cannot own land but can own a residence, such as in a condominium complex, provided Filipino citizens or companies own 60% of the building or project.
- Leaseholding in the United Kingdom and Singapore: A significant portion of real estate is sold as leasehold in these countries. This implies that the buyer owns the property, not the land it is built on. The lease is valid for a specific period, ranging from decades to centuries. After the lease expires, ownership of the property returns to the landowner. In the United States, most real estate is sold as freehold, which grants permanent ownership of the land and its buildings.
- Mexico’s restricted zone: Foreigners are not allowed to own land within 100 kilometers of the Mexican border and 50 kilometers of the coast directly. However, they can invest in nonresidential properties by holding the property through a fideicomiso, a trust held by a Mexican bank or a Mexican corporation.
Tax Implications for International Real Estate Investing
For U.S. citizens who purchase real estate in foreign countries, it’s important to be aware of the tax implications that come with it. You’ll be required to pay property and capital gains taxes in the foreign country where the property is located and report any foreign property you own on your U.S. tax returns. This may also subject you to the Foreign Account Tax Compliance Act (FATCA) requirements. The following are the FATCA requirements for individuals:
- Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS generally using Form 8938, Statement of Specified Foreign Financial Assets. The aggregate value of these assets must exceed $50,000 to be reportable, in general, but in some cases, the threshold may be higher.
- The Form 8938 must be attached to the taxpayer’s annual tax return.
- U.S. taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
- You may also have to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) PDF.
- This comparison table will help you figure out whether you need to file Form 8938, the FBAR, or both.
- You should review the instructions for Form 8938 to determine if an exception to the reporting requirement applies.
- Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty of up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%. Criminal penalties may also apply.
- See frequently asked questions (FAQs) for Form 8938 for information on real estate, foreign assets held in U.S.-based financial accounts, foreign pensions, valuing certain assets, and more.
To avoid any potential changes in your tax obligations, it’s highly recommended that you consult with a tax professional who fully understands the tax laws of both the foreign country and the U.S. For more information about FATCA requirements for institutions and governments, check out the Internal Revenue Service (IRS) website.
Effects of Foreign or Currency Exchange
Currency exchange rate fluctuations can greatly impact the profit or expenses involved in owning a property in a foreign country. The change in exchange rates between your home currency and the foreign currency will influence the initial purchase price, maintenance expenses, taxes you pay as an owner, and the profit you make from selling or renting the property. A stronger home currency can make the investment more affordable, but if the value of the home currency drops against the foreign currency, your expenses will increase.
US Dollar | 1.00 USD | Inv. 1.00 USD |
|---|---|---|
Euro | 0.937418 | 1.066760 |
British Pound | 0.803082 | 1.245203 |
Indian Rupee | 83.560499 | 0.011967 |
Australian Dollar | 1.553696 | 0.643626 |
Canadian Dollar | 1.376980 | 0.726227 |
Singapore Dollar | 1.360395 | 0.735081 |
Swiss Franc | 0.910398 | 1.098421 |
Malaysian Ringgit | 4.787198 | 0.208890 |
Japanese Yen | 154.238677 | 0.006483 |
Chinese Yuan Renminbi | 7.235684 | 0.138204 |
As of April 18, 2024, 01:33 UTC from x-rates |
Ways of Financing Your International Real Estate Investments
If you have set your sights on investing in real estate abroad, it is crucial to understand the various financing options available to you. Depending on your financial objectives, there are several ways to fund your international real estate investments. Here are some of the most widely used methods of financing your overseas property ventures:
Paying in cash can speed up the process of buying a home and sometimes result in cost savings. It may also lead to discounts and upgrades for the homebuyer. For instance, buying a property in the Philippines with cash eliminates foreclosure risk, interest payments, and credit checks. It allows immediate ownership and faster title acquisition. Buyers receive a Deed of Absolute Sale upon full payment.
However, it is important to remember the country’s exchange rate where the transaction occurs. The exchange rate can impact several costs associated with the real estate transaction, including the home’s sale price.
Working with a lender from the country you plan to invest a property in can be advantageous, as they are usually more knowledgeable about the mortgage market and homebuying laws. Additionally, they might offer better deals and lower interest rates. However, there are risks involved, such as potentially paying higher mortgage rates and foreign lenders having specific rules for non-citizen homebuyers, such as income requirements, residency rights, or proof of sponsorship.
If you want to invest in a property before it is built, a developer loan might suit you. These loans can assist you in financing the purchase of a home site, lot, or property still under development. One of the main benefits of developer loans is that they usually require minimal paperwork. Additionally, this type of loan has no age restrictions or life insurance requirements. In some cases, you can obtain interest-free financing through a developer loan.
If you’re considering buying an investment property abroad to generate income or diversify your investment portfolio, a self-directed IRA (SDIRA) is a good option. It is an individual retirement account (IRA) that lets you control your investments. You can open it as a traditional IRA or a Roth IRA, which works like a regular IRA. It’s a great choice if you want to invest in overseas properties because it doesn’t limit the investments you can make.
However, risks are involved in using an SDIRA to buy a property abroad. It’s not a way to use the property as a primary residence while still considering it an investment. The IRS pays attention to these transactions, so it’s essential to refer to the Approved Nonbank Trustees and Custodians list maintained by the IRS to avoid any problems. Some nonbank trustees approved are the following:
- AB Trust Company, LLC
- Acclaris, Inc.
- Brethren in Christ Foundation, Inc.
- Cetera Investment Services LLC
- Citigroup Global Markets, Inc.
- D. A. Davidson & Co.
- Deutsche Bank Securities Inc.
- E*TRADE Securities LLC
- J.P. Morgan Securities LLC
- Oppenheimer & Co., Inc.
For the full list of nonbank trustees and custodians, check out the file made available by the IRS website.
Another excellent financing option for international real estate investors who want to generate income is country-sponsored programs. Some nations provide specialized initiatives known as Golden Visa programs. These initiatives encourage foreigners to purchase real estate in specific countries.
In exchange for buying property, these programs frequently offer perks, such as automatic citizenship, to make the offer more attractive to potential purchasers. Spain is one such country that launched a Golden Visa program in 2013. The Spain Golden Visa Program only necessitates a minimum €500,000 investment.
How to Invest in International Real Estate in 5 Steps
Investing in international real estate can be a smart move to diversify your portfolio and generate higher returns. Here are some important steps to follow on how to invest in international real estate:
- Step 1—Research the market: Extensive research is essential before investing in international real estate. The key is to find stable, growing real estate markets that offer good prospects for rental income or capital appreciation.
- Step 2—Find a local partner: Consider finding a local partner who can help you navigate legal or cultural barriers when investing in foreign countries.
- Step 3—Consider your financing options: Financing options vary from country to country. Research local banks and lenders and government programs that may be available. Read our discussion on financing options above for more information.
- Step 4—Hire a reputable local real estate agent: To find the perfect property and get a fair deal, consider hiring an agent. Look for a local agent with a successful track record and experience in the local market.
- Step 5—Consider tax implications: It’s important to be aware that investing in overseas real estate can result in tax obligations in the country where you’re investing and your home country. To fully understand your responsibilities and any possible advantages, it’s recommended that you consult with a tax expert.
Always exercise caution and conduct due diligence when investing in international real estate. Be aware of any risks and pitfalls before making investment decisions.
Best Places for International Real Estate Investing
Looking for an optimal place to invest in international real estate? We’ve listed below some suggestions on the best places to consider. These locations offer great potential for high returns on investment, stable political environments, and growing economies. With careful research and guidance from a trusted real estate adviser, you can make a wise and profitable investment in international real estate.
Continent | Best Places | Reasons |
|---|---|---|
Asia | Bali, Indonesia, Japan, South Korea, Singapore, Hong Kong, Thailand, and Philippines |
|
Europe | Portugal, Greece, Spain, Turkey, Great Britain, Germany, and France |
|
South America | Brazil, Argentina, and Colombia |
|
North America | United States and Canada |
|
Frequently Asked Questions (FAQs)
The first step in international real estate investing is to define your goals and conduct a detailed analysis of potential markets, considering economic, legal, and market factors.
You should assess your desired country’s interest rates, loan terms, and legal and tax requirements.
To make informed decisions, it’s crucial to assess different aspects, such as the stability of the nation’s politics and economy, demographic patterns, rates of economic growth, and policies on foreign investment.
Bottom Line
Investing in real estate outside your country can be a profitable opportunity, but it also comes with risks. Currency values can change, and the laws and regulations you must follow can be complex. Before you decide to invest, it’s essential to evaluate the potential benefits and risks carefully. It is best to also consider seeking advice from a local finance or real estate expert with experience in international investing. Their guidance can help you navigate this market’s complexities and ever-changing dynamics.
