So what should you consider before buying overseas?My experience continues to affirm that the best investment decisions are those that are well planned. When you first consider buying a property overseas ask yourself why, where and how?
Get these 3 questions sorted before buying and you’re more likely to get a more profitable and enjoyable outcome.
1. Why?Every successful investment decision starts with asking the initial question of why invest in overseas property?
- Is it a purchase for a future residence in your country of origin?
- Are you looking for a lifestyle holiday destination for the family?
- Do you need diversification of property investment driven by considerations of investment returns and capital growth?
- Are you a group of speculative investors looking for property and countries under stress for a currency generated return.
So having identified the key motivation of why you want to invest in an overseas property, you must be clear on where. The simplest decision is obviously a purchase of an overseas property for future residence in your country of origin. But again I emphasize planning is essential. If this is a 5-year plan, family considerations will be important. Maybe you have young children today but when you return to your country of origin, they might be approaching secondary school. You will want to select a suburb where good private schools are accessible. But in the meantime this will be an overseas investment property, so check out the rental yield and demand for rental properties in your chosen area.
If you have identified your property investment decision on a lifestyle destination, you will need to consider ease of getting there. We all know the difficulty of moving families through airports, making connecting flights and then arranging cars to get to destinations. Be it a villa in Bali or a beachfront in Byron Bay, target great locations with direct flights and good infrastructure. These destinations will usually have the lowest vacancy rates and highest rental returns.
Finally check which countries are more restrictive with regard to foreign investors buying property. Australia has rolled out a new Significant Investor Visa in late November 2012 to attract foreign investors with the lure of residency status. Many countries have different approaches but most can be negotiated through local company structures.
With a solid plan now taking shape you need to get down to the nuts and bolts of the decision. How are you going to make the purchase? Paying cash is obviously a simple decision but this is not always the best way to maximize investment returns. Again you have to revisit your earlier questions of why and where?
If you have identified that your purchase of an overseas property is for diversification and investment return, gearing levels will be important. Some countries allow interest offset, while others have interest withholding tax implications. You may need to establish a locally domiciled company to purchase property but will you be able to borrow money in that new entity without long-term financial statements?
As a general rule I would always caution against taking on foreign currency risk for purchasing your overseas investment property unless as discussed earlier you are the speculative investor. Foreign currency mortgages are potentially very dangerous. Just ask the Australian Farmers who took out Swiss loans back in the 1980”s. Attracted by 2% Swiss interest rates they took out foreign currency loans when the Australian Dollar was strong. Unfortunately this didn’t last and the Australian Dollar started to move quickly lower leaving these farmers with borrowing costs of 150%. Many were wiped out.
If you are the speculative and opportunistic investor, foreign currency risk will be a key driver of your return. You will be looking for countries going through upheaval where there has been significant currency depreciation. Greece may well be a future case in point if they leave the Euro and return to the Drachma. But be prepared for capital controls and foreign investment review boards. Again local joint venture companies are one way around this but do your research. Higher risk equals higher returns and some strategic plays have delivered 60% over a very short period of time.
The bottom line in buying an overseas Investment property is methodical planning and good research.
“By Shane Clinton”