Anyone who invests in real estate knows that property taxes are a huge expense -- often the largest expense an owner has. What if you could buy property and not pay property taxes because there aren't any? Sound too good to be true? Well, it is, at least in the United States. But some countries have no property taxes. Let's find out which ones and how to start investing in those countries if you so desire.
Property tax-free countries
The first thing to know if you want to invest in countries with no property tax is which countries fit the bill. Here's a list of them, in alphabetical order:
- Cayman Islands
- Cook Islands
- Faroe Islands
- Norfolk Island
- Saudi Arabia
- Sri Lanka
- Turks and Caicos
- United Arab Emirates
Keep in mind that all countries need to generate money, and if the method isn't through property tax revenue, it will come some other way. Some potential taxes that might be levied include:
- Higher income tax
- Higher sales tax
- Estate tax
- Corporate tax
- inheritance tax
- Personal income tax
- Personal property tax
- Indirect tax
Sometimes a property purchase is expensive to buy in a country with no property tax, and some countries impose what's called a "stamp tax" or a "stamp duty." It works like our transfer tax, paid when property is sold by one party and bought by another. (Although the United States has a transfer tax in addition to property taxes, the U.S. transfer tax rate is among the lowest in the world.)
Countries that have a stamp tax collect a percentage of the property's purchase price, which goes to the government, just as our property taxes do. But you pay the stamp tax only once, not like an annual property tax bill.
The takeaway is to always consider the total cost of a property investment to determine the best deal overall. A stamp tax of 3%, for example, might be doable if you don't need to pay property taxes or a high property tax rate, but a stamp tax of 10% might not work under any circumstances.
Trivia: The country with the highest property tax is Belgium. The U.S. state with the lowest property tax rate is Hawaii, but Hawaii is an expensive state in which to buy.
How to get started investing in another country
It takes some work to invest in another country, so you might want to do so for other reasons than just property tax purposes. It's typically not as simple as hiring a real estate agent to broker the deal and then paying for the property. And if it is that simple, you might be getting ripped off. (More on that later.) Let's explore some general ins and outs to help you decide whether you want to proceed.
Pick the right location
The “location, location, location” mantra doesn't apply just to U.S. real estate. You need to make sure you pick not only a country that will be favorable for your investment portfolio but the right city and neighborhood within that country. If not, you stand to lose money on the deal.
Let's say you want to invest in a popular new tourist spot, but since the market is hot, it's unaffordable, so you decide to buy further out. What if the market changes? If tourism wanes and there's not much business in that once-hotspot, your spillover area will probably fare even worse. Or what if you can't get enough (or any) rental income so far out?
Properties in desirable, established areas with good infrastructure will usually be OK, but properties further out have a higher likelihood of losing value. So before you buy in a foreign country with no property tax, it's best to pick an area that's likely to stand the test of time. Remember that real estate doesn't always appreciate. Buy in the best location to give you a better chance of a good long-term outcome.
Compare property costs
When you're deciding where to invest, compare prices by calculating the price per square meter. You do this by dividing the total cost of the property by the total number of square meters it has. This gives you a starting point to determine where the bargains are.
It's important to compare apples to apples, such as whether the country is in a developed, emerging, or frontier market. Here are the differences:
- A developed market is the most industrialized and stable, and therefore the safest investment. Israel is a developed market, as is the United States.
- An emerging market is experiencing growth and can yield good results, but there are political and economical uncertainties. Malaysia, China, and India (not on our above list) are examples.
- Frontier markets have the potential for the highest returns, but they offer the highest risk. They're usually smaller than emerging markets. Examples are Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates.
Next you'll need to determine the reason prices might be low. The risk factors are as follows:
- Economic: Can the country pay back its debts? A country with an unsound economy is a riskier investment.
- Political: Are the people who run the country making decisions favorable for investors? You'll want to steer clear of countries that are unfriendly to foreign investors.
- Sovereign: Is it likely the country might miss a debt obligation based on its present economic status? This points to how stable a country is.
This adage is true in the United States, and it's true in foreign countries: Buy the cheapest property in the best neighborhood with the best amenities you can afford. You can always spend money fixing up the property, but you can't change the location. Buying in established capital cities, for example, is typically a good way to go versus buying further out, particularly when buying in emerging and frontier markets.
Here's the part where you need to be careful, as the possibility of being ripped off is real. Buying real estate in other countries isn't usually as easy as buying in the United States, as the U.S. has a history of trading and selling real estate freely.
To buy in foreign countries, you usually need a real estate agent who has a representative who can navigate through the local communities to find deals. The more people involved in your real estate transaction, however, means the more people you'll need to pay, and some people charge foreigners extremely high markups.
Also, if the locals know they're dealing with a foreigner, they might try to take advantage of the situation, not unlike what a first-time tourist visiting Hollywood or the Big Apple might experience. Not everyone is honest. For example, you might be shown a photograph or marketing material of an apartment in a beautiful new building in a frontier market. The building might actually be new and beautiful, but it might also be in the middle of a dangerous area, an area in which no one (except another unsuspecting foreigner) will buy.
If you visit an area of interest and hire a local you trust to help you find a good property, you'll likely make a better investment.
The Millionacres bottom line
Investing in foreign countries is more complex than buying investment property in the United States, but it's often worth it if it significantly decreases your tax burden. Look for deals that make the most sense, and do business with people that treat you well. There's potential to make money investing in foreign countries, especially when you don't need to pay property tax, but remember, that's only one factor to consider. Overall property value is important as well.