The Australian property market is an investor’s paradise thanks to robust house prices that are likely to continue to grow over the next few years.
For investors though, it’s not hard to wonder if and when the good times will come to an end. Rather than trying to choose the right time to pull up stumps and checking out a new suburb, putting your money to work in overseas property markets is a strategy employed by many professional investors.
It’s an attractive idea, especially when you start daydreaming about a beachfront villa in Crete or a studio apartment in New York or London. In fact, many people considering purchasing an investment property outside of Australia also have plans to eventually use the property as a holiday home or a place to retire.
Overseas investing can be a bumpy ride though so it’s essential that you do your homework and get expert advice before allowing your hard-earned money to wander.
6 ways to fail at investing abroad
The best way to avoid or at least minimise the following is to plan ahead and seek out appropriate advice from a professional team including an accountant, lawyer and a property manager.
Do you understand their mortgage industry?
First and foremost, there are some nations that won’t even let you buy property unless you’re a citizen. Those that do will not approve you for a mortgage because you’re a non-resident, meaning you will have to come up with the funds to complete the purchase yourself.
In addition, some countries require you to set up a company in order to purchase real estate, meaning that your investment is owned through a trust and not in your name.
Setting up a trust is a tough exercise if you’re looking to buy property locally, so trying to to do it for property abroad is even more complex. Specifically, selling property and transferring the funds to Australia can be tough, particularly in the United States.
In cases like this, it helps if you have family or relatives in the country you’re looking to purchase property who can take ownership.
In some countries, you don’t really own the property at all but rather you purchase the property via a lease arrangement.
“This is similar to properties in Canberra, which have a 99-year lease term,” Home Loan Experts senior mortgage broker Tina Pham said.
“Although you can do whatever you wish with the property and earn an investment income, the property can be subject to changes in zoning by a government and they can buy it back from you at any time.”
You’re not in Australia anymore
Not all property markets are created equal so don’t make assumptions about overseas markets based on an Australian outlook.
If you’re a seasoned investor in Australia, you have to compete with a lot of media commentary and analysis about the state of the real estate market.
Most of it is white noise but you can generally make better decisions if you make yourself aware of planned infrastructure projects such as the development of roads and motorways, airports, mines and overall urban renewal schemes. It’s very difficult to keep track of this if you’re buying international real estate.
Taking the US as an example, Tina said the rate of vandalism has exploded since the global financial crisis, creating neighbourhoods of renters.
There are even entire suburbs that are now ghost towns as a result of the closure of particular businesses or industries that the town was reliant upon, such as car manufacturing.
“When people are renting, they don’t look after their houses and they tend not to look after the neighbourhood well,” she said.
On that note, it’s important to research the state of supply and demand in a country. Oversupply is not a good thing if your strategy is to make money!
Managing a property abroad can be tough
Travelling overseas costs money and time.
You may well be able to make the initial trip to locate and purchase a house or apartment overseas but if the property requires sudden repairs or you plan to renovate, undertaking such work is risky if you’re not actually in the country to manage it.
“If there’s something wrong with the property, you wouldn’t know about it and even if you did, you can’t be there in time to resolve it, unless it’s your home country and you go back every year,” Tina said.
“Worst still, unscrupulous real estate agents won’t tell you about this so unless you can fly over and buy near a major city, it’s a massive risk.”
Beware of exchange rates
Speculating on currency exchange is so tricky that even experience economists often get it wrong. The risks involved with speculating is perhaps the biggest case against overseas investment.
Let’s say you invest AUD $400,000 into a property costing EUR 300,000 (at the rate of 0.75 EUR).
Over the next 5 years the property goes up as expected – 5% per year. That is EUR 15,000 per year or $75,000. You then sell the property and bring back EUR $375,000.
Unfortunately the AUD has strengthened to $0.95 EUR. Your proceeds are now AUD $394,737 (375/0.95) as opposed to AUD $500,000 (at the rate of 0.75)
All your gains are wiped out because of the exchange rate and these estimates don’t even take into any taxes and legal and real estate fees you might be expected to pay.
Any rental income you’ll earn will also be subject to fluctuating exchange rates so choosing the right time to transfer money to your account is essential.
Double tax attack
Yes, there is the potential to pay less on your investment gains but this can be undone by double taxation.
To explain, as an individual in one country you may make a taxable gain in another country. You may have to then pay tax on that gain in the country in which it was made as well as your country of residence.
Luckily, many nations have made bilateral tax agreements with each other so in some cases you may be taxed in your country of residence and be exempt in the country in which you make a gain.
On another note, you can’t make a claim on a capital loss on an overseas property but you can make a claim on a loss if you borrowed money.
“Say if you borrowed $300,000, you can deduct the interest on the loan if it’s related to a loss on an investment property,” Tina said.
There are many different ways foreign and bilateral tax agreements can have an impact on your investment strategy so speak with a professional accountant before investing in property overseas.
You must factor in Australian tax laws, local property taxes including land tax, insurance, and management costs. On top of that, there are plenty of other hidden costs that a property promoter may not tell you about.
5 ways to win at international real estate
Diversify your holdings
One of the more advantageous benefits to investing in international property is that you may be able to minimise your risk by mixing up your property holdings rather than having all of your eggs in one Australian property basket.
Specifically, you’re able to take advantage of a different economy and protect yourself from any potential downturn in a country’s real estate market.
In addition, you may get better rental yields in a foreign market than you can in Australia.
Pay less in tax!
By diversifying in different property markets you may well find yourself falling into smaller tax brackets in certain countries than you currently are in Australia which can potentially save you thousands.
This is great if you’re in a country that requires you to pay tax on any capital gains you make from a sale of property before transferring the funds to Australia.
It’s easy to access equity
Accessing equity in your current home is not difficult – it’s your money after all. Generally speaking, you can access up to 80% of the property value in equity and up to 90% with some banks.
However, you will have to meet all standard requirements when refinancing your mortgage with with your bank.
They will revalue your property and assess your ability to make the new repayments (your serviceability) and then lend you up to your chosen loan to valuation ratio (LVR), which is your loan amount compared to the value of the property.
“When you withdraw the funds, the bank will often ask you to declare what purpose it is for and you say investment,” Lucas Lopez, director of accounting firm Lucentor, said.
“Overseas rental income is a category of income you can include as part of the serviceability calculations,” he said.
Buying property for your SMSF
Yes, it is possible to purchase international real estate to bolster your self-managed superannuation fund (SMSF).
In order to comply with the Superannuation Industry (Supervision) Act (SIS Act) though, the fund requires an investment strategy from you, as the trustee, that allows direct property investment.
A suitable investment strategy needs to show the purpose behind it and how it will benefit the members of the SMSF (the sole purpose test). A licensed financial adviser can help you with setting up an appropriate investment strategy that adheres to the SMSF borrowing rules.
It’s essential to speak to a qualified accountant that specialises in SMSFs before making any financial decision.
Take a holiday
A benefit that can be overlooked: overseas investing can be just as good for your soul as it can be for your bottom line.
As you would do when buying property in Australia, you’ll need to check out a few properties and find a reliable property manager and tenants before buying. The only way you can do that is by investigating the location yourself. Germany, anyone?
Why there’s still opportunity in Australia
Yes, if you do really well in overseas investing, you may be kicking up your feet on the French Riviera in no time. The reality though is that retiring abroad is usually only a good way to go for those with family who reside outside of Australia.
Instead of peeping over your back fence, have a dig around locally.
Not only did the Australian housing market largely hold its value in the aftermath of the global financial crisis (GFC), prices have grown exponentially since then.
If you compare Australia with the rest of the world, we’ve never suffered from a significant market crash, with our prices never dropping below the 10 per cent mark.
Funnily enough, much of this growth has been spurred on by foreign investors over the past couple of decades, the reason being that Australia is one of the most popular destinations to retire in the world.
A number of industry figures have pointed to a slowdown in Australian house price growth in the short to medium term but most of them are suggesting this to ease off slowly.
In fact, the recent QBE’s Australian Housing Outlook 2014-2017 report found that almost all state capitals are predicted to see house growth over the next three years, with Sydney to grow by 9 per cent and Brisbane to grow by a staggering 17 per cent.
It’s a clear sign that Australia will continue to cater to investors in the immediate term and there really has never been a better time to build your property portfolio with the government considering introducing new lending rules that could see investment loans become more pricey.
In addition to this, there’s no telling when the accelerator will ease off on the Aussie property boom so to take advantage, it pays to get in quick.
Do you really want to diversify?
Go interstate and avoid investing in areas that are “hot” or being heavily focused on by the media. By the time you go to buy it, everyone and their mums will know about it and you’ll have missed your opportunity.
You’re better off doing your own due diligence and looking for untapped opportunities.
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