When people think of buying their first property, they typically think of buying something in their own country. However, there is nothing to stop you from buying your first property in a foreign country.
If the foreign country is your country of birth and you have hopes of returning there at some point, it is something which may be sensible and cost effective – especially if prices are relatively low.
Buying abroad appeals to many kinds of people and there can be something exciting and appealing about owning a property hundreds of miles away in another country.
I am writing out of the UK and this blog is targeted accordingly. However, the rules and caveats when buying a property abroad are pretty much the same the world over.
There are some fundamental principles, some must-follow rules, and it is on these that I will focus.
1. Why buy abroad?
Why would you buy abroad at all? What’s wrong with buying at home? A big reason why people look to buy abroad is the investment opportunity; the chance to make good rental return or capital uplift in a country which is a good performer historically.
Falling into that category are countries like Australia, Spain, Portugal, USA, Canada and France.
It is also a chance to diversify your property investments – hedging against inevitable price falls in your own country from time to time.
A very popular reason to buy is for holiday purposes – although that can be a purchase laden with risks and difficulties if not thoroughly thought through.
2. Which countries should you look at?
There are numerous factors which may attract you to buy a property in a particular country, including:
- Political, economic, financial, legal or currency stability or reliability
- Low affordable prices – although that should never be the sole factor
- “Up and coming” status in terms of property investing
- Long history of being a good performer in terms of income and/or capital growth
- Favourable policies on matters such as regulation and taxation
- Your connections or familiarity with the country.
Traditional countries for UK buyers looking to invest include: Ireland, France, Spain, Portugal, Italy, Greece, Turkey, Cyprus, USA, Canada and Australia.
Newer or up and coming countries include Dubai, Panama, Brazil, Mexico, Nigeria, South Africa, India, Pakistan, Dominican Republic, Barbados, Cape Verde, Hungary, Bulgaria and Croatia.
3. Are you legally able to buy?
An important preliminary step is to find out if you are legally entitled to buy in the country of your choice.
Most countries allow non-residents or non-citizens to purchase real estate. However, there may be qualifications, exceptions or criteria to be met – such as a residency permit – and you should always check that you specifically qualify, and not just rely on the general rules.
At the time of writing (September 2018), the New Zealand government has announced plans to ban foreigners from buying existing homes with the stated intention of cooling rampant house price inflation.
In Australia, foreigners cannot buy existing homes but they can buy new flats, off-plan homes and vacant land. Non-resident foreigners need to get the prior approval of the Foreign Investment Review Board (FIRB) to be able to buy any residential property.
In Dubai, foreigners are only entitled to purchase freehold land, as distinct from leasehold, in designated parts of the country.
To buy in the USA you do not need a green card, visa or US citizenship; however you will need an individual tax identification number.
4. What are the ongoing costs of ownership?
When deciding to purchase you should not just look at the likely income or capital growth. You also need to carefully consider things such as:
- Purchase costs including taxes
- Management fees
- Insurance costs
- Maintenance charges
- Sale costs including taxes.
You should take into account the legal and related charges of buying and selling, as well as finance costs if you are to buy with the aid of a mortgage.
Remember to factor in annual property taxes, the equivalent of council tax in the UK.
5. What are the risks of ownership?
Buying abroad carries a wide range of risks which you should carefully assess prior to making the decision to buy.
There are always political risks. British Columbia, Canada, has imposed a “foreign buyers’ tax” equal to 20% of the fair market value of a property – with the policy intention of cooling demand and bringing down prices.
Foreign buyers buying in the UK have seen the imposition of a 3% stamp duty levy for investment property, a policy contributing to substantial price falls at the top end of the property market in London.
You should be aware of currency risks – a rise or fall in currency values may be to your detriment or benefit when you buy or sell.
There may be weather risks. The property could be in an area affected by extreme weather – like Florida or the Caribbean.
You will need to weigh up the risks against the benefits you stand to gain by buying in a particular country or region – with your decision dependent on your tolerance to risk.
6. What are the tax implications?
Getting the tax position right is essential if your foreign purchase is to deliver the benefits you expect. Taxes, of the income or capital kind, could wipe out the gains or benefits of buying abroad.
It is vital therefore that you fully explore the tax position in advance, seeking expert advice where necessary.
If you are a UK “resident” you will normally have to pay income tax on any foreign rental income. However if your permanent home or “domicile” is abroad, that may not be the case.
If you pay tax in the foreign country, you may be able to get a credit for that – reducing or wiping out your UK liability.
The rules are similar if you sell a foreign property and make a capital gain. If you are resident in the UK you may have to pay capital gains tax on any gain.
If you are also liable to tax in the foreign country you will be at risk of double taxation – unless you can achieve a set-off.
When selling in the US, you will be liable to tax on any capital gain and the IRS will typically withhold 10% of the gross purchase price pending assessment of the tax due.
Tax is of course an extremely important and complex matter and it is highly recommended that you take advice prior to any foreign purchase.
You may think you know the law after a few hours research on the internet; however, that would be a foolish conclusion. It is especially important to seek advice from an expert with specific expertise of the law in the foreign country where you intend to buy.
EASY WAYS TO SECURE A HOUSE DEPOSIT
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7. Buying as a holiday home
One of the main reasons why people buy abroad is to have a holiday home in a favoured destination enabling them to enjoy relatively cheap holidays over many years.
But buying a foreign holiday home comes with many challenges and issues and it is vital to thoroughly assess and address them prior to going ahead.
The two key questions are:
- How often are you going to use the property?
- What is going to happen to it when you are not using it?
Perhaps the ideal property is one where you are guaranteed use as you wish during the year, with the property let to holiday makers and professionally managed when you are not using it.
If you have competent, trustworthy family or friends who can manage the property for you, that could be a bonus in terms of minimising costs.
If you buy a property which is not suitable for tourists or you simply do not want others to use it when you are not in residence, the expense of holding such a property may ultimately prove prohibitive – since you will need to ensure that it is secured and maintained during your absence, without any rental income to set against any mortgage or your running costs.
8. Importance of a good lawyer
Given the high value of a property, the importance of ensuring nothing goes wrong during the buying process cannot be overstated.
You should take great care to engage a qualified, knowledgeable, experienced, trustworthy and duly regulated lawyer to correctly convey the legal title of the property to you and bring to your attention and resolve any legal problem or difficulty.
Ideally you should hire a lawyer who comes highly recommended by someone you know and trust and who has personally used that lawyer recently.
If you have to engage an interpreter, ensure that they are independent of your lawyer and the seller.
A particular danger for foreign buyers arises in relation to off-plan property where the purchase price is sought in instalments. Often the first instalment, which could be 25-30% of the purchase price, is sought before a single brick has been laid.
Such methods of purchase carry very high level of risk even if a bank guarantee is in place to protect your instalments in the event of builder failure or wrongdoing.
You may decide to opt for a ready-built property on grounds that it is a less risky purchase.
Perhaps the two biggest hurdles to buying a property abroad is risk and lack of knowledge. If you are thinking of buying abroad, it is vitally important to fully address both matters before taking the plunge.
Have you bought a property in a foreign country? What has been your experience? Positive or negative? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com