The Four Pillars of Foreign Investment
There are abundant rewards to investing in real estate overseas: The opportunity to immerse yourself in a foreign culture, diversify your investment portfolio, and perhaps see substantial returns over time, to name a few.
But as complex as purchasing domestically can be, investors should anticipate that buying a home in a foreign market will be even more complicated, given that there are unfamiliar property ownership laws, tax codes, and cultural norms to navigate.
“We’re a little spoiled in the U.S. We have a system of transparency in terms of the prices, taxes and history of properties,” said Nela Richardson, chief economist at Redfin. “Those things may be missing in other parts of the world. You need to be very clued in and do your due diligence.”
Regardless of what country you reside in, before you purchase overseas, you’ll want to weigh several critical factors to take the temperature of foreign markets and rest assured that your investment is a smart and safe one. Here are four pillars to smart foreign investing, according to experts.
Laws on Foreign Ownership
The first and arguably most important step for buyers looking to invest in foreign markets is to understand the local laws regarding foreign purchases.
“Make sure you can buy and sell very easily. Housing is the most liquid asset there is, and any constraints to purchasing or selling might be a barrier,” Ms. Richardson said. “The last thing you want to do is buy something and not actually own it.”
Foreign ownership regulations can run the gamut, from actively encouraging foreign investment, to restricting home buying to citizens only.
Michael Valdes, global vice president of international servicing for Sotheby’s International Realty Affiliates LLC, pointed to several markets that are out of reach to foreigners, like Kuwait, Bahrain, and Oman.
Laws can also vary within countries, from one region to the next.
In Switzerland, for instance, there are very few cantons-—Swiss member states—in which foreign investors can purchase property, Mr. Valdes said.
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And other nations may permit purchases from non-citizens but impose tight restrictions on the types and locations of properties they can buy. In Bermuda, Mr. Valdes explained, foreigners who purchase property are known as “non-belongers”; the real estate market in the island nation is separated into homes that can be purchased by locals, and those open to foreign investment. Foreign buyers are also not permitted to purchase undeveloped land, and face additional acquisition and approval fees to the Bermudian government.
And navigating these complex and wide-ranging regulations requires working with an expert with deep local knowledge.
“Consulting with a foreign real estate attorney who knows the laws in that country is the first thing a person who is looking to buy overseas should do,” advised Ms. Richardson.
“Without a doubt, you should consider the stability of the government and whether or not a country’s economy is growing in a measurable way,” said Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors.
Mr. Yun characterized Western Europe, Japan, and Canada as regions where foreign investment should be “very safe,” thanks to their political stability and government policies that assure private property rights.
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One way to take the temperature of local governments’ stability is by consulting the U.S. State Department, which offers detailed climate investment statements for a number of regions culled from embassy and consulate research. Consider not only the current political climate of a country but also its recent history.
“Focus on those places that have had fairly consistent stability,” Mr. Valdes said. “Cuba is very in vogue now, but the risk/reward scenario may not make that a viable investment. There’s risk involved politically and economically.”
Another factor to weigh is the stability not only of the market you’re interested in investing in, but those of bordering regions.
“Panama and Costa Rica are safer investments, but the adjacent countries may be more risky,” Mr. Yun said. “In Central America, Nicaragua may try to emulate what Costa Rica has been doing to attract tourism and money, but it’s all about the stability of the government. The current government may be able to provide assurance, but what about the next one?”
Of course, investors’ comfort level with political changes can vary from one individual to the next, and in some cases stability is in the eye of the beholder. Chinese investors, for instance, approach foreign investment with a somewhat different perspective than that of many Westerners.
“Many liberal Americans and Europeans might call the presidency of Donald Trump a sign of governmental instability. But that’s not really the case for most Chinese,” said Carrie Law, CEO of Chinese international real estate site Juwai.com. “In their eyes, the U.S. is the world’s largest and most advanced economy, a place of opportunity and freedom, and the home of many of the world’s best universities. They have an attitude much closer to that of Warren Buffett, who reckons the United States economy is an excellent long-term bet.”
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Both a buyer’s country of origin and the country he or she is purchasing in will impact the tax consequences of the investment, so this is another factor well worth researching ahead of time.
“If you’re a U.S. citizen purchasing foreign property in another country, if we don’t have tax reciprocity, you could face double taxation,” Mr. Valdes said.
The United States has tax treaties with many nations in order to prevent American citizens who have invested in foreign property from double taxation; the Internal Revenue Service maintains a list of those treaties here.
U.S. citizens must pay American taxes on earnings from foreign investment properties, and, depending on where they have invested, may face local taxes there as well. It’s also likely that foreign investors will have bank accounts abroad, which the Internal Revenue Service requires you to report.
“You have to think about the tax implications of your purchase both domestically and overseas,” Ms. Richardson said. “In the U.S., we’re seeing the biggest changes in tax policy in a generation, both at the federal and state level, so adding investments in another country could be complicated.”
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As with other considerations for foreign investment, it’s critical that buyers consult with someone who has local expertise.
“Make sure you’re dealing with a tax adviser who specializes in global transactions, from a firm that has representatives in various countries,” Mr. Valdes pointed out.
Long-term Outlook for Real Estate
Economic forecasting is in order, too, to ensure that buyers are making smart-investment decisions that will pay off in the long-term.
“Look at whether or not that country’s economy is growing in a measurable way,” Mr. Yun said. “For example, a decade ago, investors might not have considered a place like Colombia, but it has become more stable and is now one of fastest rising economies in South America and provides good returns. The demand for real estate there will be rising from locals as well as foreigners.”
Chinese buyers are taking the long view when it comes to investing in places like the U.K., Ms. Law said, even given the uncertainty introduced by Brexit, which caused the pound to plummet in relation to the Chinese yuan.
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“That made U.K. property 10% cheaper for Chinese buyers, but did not affect their faith in the long-term prospects in the U.K. market,” Ms. Law said. “Chinese buyer inquiries in the UK surged as much as 191% in the months following as a result.” Ms. Law said.
Finally, buyers should keep in mind that they won’t be alone in seeking out promising overseas markets to invest in—and brace themselves for some competition.
“Look at what the global economy is doing this year, after being stagnant for a few years,” Ms. Richardson said. “If you’re locked into a good investment location, expect to see other buyers, too.”