Real estate continues to be an enticing way for investors to diversify their portfolios, providing certain tax benefits, income, and growth that other asset classes can't always offer. While most investors start real estate investing in their own backyards, there may come a time when they consider taking their investments abroad. International real estate investing can be a great way to further a portfolio's diversification and gain access to opportunities in growing countries, and a foreign property can even act as a second home, but it's not right for everyone.
Take a look at the considerations you should make before jumping into an international real estate investment, the pros and cons of investing in foreign real estate, and a few ways you can potentially invest in global real estate.
The advantages of international real estate investing
Most investors start their international real estate journey initially seeking a secondary home in a foreign country. Using the property as a personal retreat when desired and renting the home as a vacation rental when they are not there. But that isn't the only way to invest internationally.
Investors seeking further diversification for their portfolios may consider foreign real estate because it provides the opportunity to invest in emerging markets that have growing economies. If you're in a market or country that is unstable or stagnant, investing abroad allows you to participate in and benefit from other countries that are experiencing larger GDP growth.
Many large investment firms and real estate investment trusts (REIT) use international real estate investing as a way to take advantage of growth opportunities for real estate, as income opportunities, or for the tax benefits of owning real estate overseas, like these top three international REITs.
Owning real estate in another country also adds a layer of diversification against political or economic instability. Since the dawn of time, empires, kingdoms, and countries have risen and fallen. Regardless of how you view the powers at play in the 21st century, every single one of them has stumbled at times. Owning real estate internationally allows you to hedge against the ups and downs of various countries' markets and economic cycles.
Potential additional benefits of foreign real estate include:
- Retirement or vacation home for you.
- Protecting your money from inflation.
- Generating an income stream in another currency.
- Tax havens if you are in a high tax bracket at home.
- Opportunity to obtain residency or a second passport.
The disadvantages of investing in international real estate
An essential part of successful global real estate investing is understanding and intimately knowing and understanding the market, especially if it's an emerging economy. Economic vulnerabilities, government corruption, and laws relating to foreign investments all play a role in the ability to invest, the method of investing, as well as the ease and safety of the investment.
Property ownership laws and potential selling stipulations will vary by country, which can make it difficult to purchase or cash out your investment depending on where the investment is located. Some countries will only allow the purchase of land and not buildings or vice versa. Others may only allow foreign buyers to purchase real estate if a native resident is on the deed. You may also run into laws that allow you to purchase the real estate but make it nearly impossible to sell it and take your money back out of the county. So, due diligence is critical when investing overseas.
Another disadvantage to being an international investor is access to financing for the investment. Many countries don't offer mortgages like they do in the United States, even to their own residents. Countries that do offer mortgages may offer unfavorable terms, which could require a much larger down payment or higher interest rates. That means most investors buying real estate abroad need to do so with private financing or a large sum of cash out of pocket.
How can you invest in international real estate?
Investors seeking to own and manage an international real estate investment on their own can purchase residential property, commercial real estate, or agricultural land abroad but should choose the country and market they invest in wisely. Investors should look for opportunities for income and growth but also look at the country's track record and evidence that the property you purchase there will be a stable investment in the long run.
Emerging markets may offer the best appreciation but may not be as stable, especially short term. Retirement havens where the weather is warm and the cost of living is low likely already has a slight premium on the real estate, but they will probably offer you a more secure investment property in the long haul.
If you're looking for diversification but aren't ready to purchase and manage physical real estate yet, you might consider international REITs as part of your portfolio. It will still give you exposure to the growth potential in other countries and mitigate the risk of recessions in your primary real estate market by exposure to global markets. It will also reduce the need to own and manage an asset in a foreign country. The REIT can be purchased via your standard brokerage firm and is typically associated with high-paying dividends.
Things to consider before investing in international real estate
Growth and industry should be a primary consideration when looking at international property. This will lay a strong foundation for long-term capital gains and a stable asset. An international market that has a thriving middle class, a stable political regime, and foreign investor-friendly laws will make the easiest entry point. A housing market near enterprise zones, areas in which tax or public incentives are offered to promote development by investors, will offer you higher demand for your real estate investment.
Keep in mind that you don't have to go straight to their major cities. They are more likely to have higher prices and demand. Instead, you might consider looking at markets outside of the major metro areas which could provide growth over time.
Purchasing agricultural or forestry land outside of cities, for example, and leasing it as such can potentially allow you to cover expenses until the time comes to build or sell. The middle class is skyrocketing, so demand for more food, wood, and other luxury items is on the rise as well. Meeting food production demands with agriculture until the rental demands exceed it can be a wonderful way to structure your real estate portfolio.
Tax implications are also a very important factor when considering purchasing foreign real estate as an investment. The 1031 exchange does apply to real estate overseas, which can be a wonderful way to smoothly roll profits made here into a purchase elsewhere. As with a 1031 exchange within the United States, you don't pay taxes until your money is not put into a like investment, at which point it will be subject to capital gains taxes.
Also keep in mind that any passive income received while you own the property from leasing or renting it does count as income in Uncle Sam's eyes. Make sure to consult your accountant for the implications and best way to structure your purchase, any income, and the potential sale of the property when the time arises.
Most foreign investments will require management in some form or fashion. That means you'll need to account and budget for a third-party management company to help you with the day-to-day operations of the investment when you're not around. This isn't exclusive to overseas investments, as many investors here in the United States implement third-party management for local or out-of-town investments; however, it is something that should be considered.
Whether it is strictly a real estate investment or will be your retirement home when the time comes, foreign investment offers tremendous potential if due diligence is taken. As with any investing, there are good investments and bad ones. Make sure to take the time to research and fully understand the laws for that country and the implications it will have on your taxes at home.
It's also a good idea to seek professional advice from your accountant in the United States while also seeking help from professionals abroad, which could include an accountant, lawyer, or Realtor to assist you with the process of purchasing international real estate.