Investing in real estate is a great way to build wealth and diversify your portfolio. But most American investors buy properties in the US only. Is it smart to also invest in real estate in other countries as well?
This article will try to answer that question. We’ll go over the benefits and drawbacks of investing in foreign real estate and give some tips on how you can start.
Benefits of Investing in Foreign Real Estate
First, let’s go over the benefits of investing in foreign real estate:
Investing in foreign real estate allows you to diversify beyond the US market. If real estate values drop in the US, you still have the value of your foreign properties to rely on. They also help you diversify your income currency. If the US dollar tanks, generating income in another currency will soften the blow.
Developed countries tend to have cyclical real estate markets. Property values fluctuate and only go up gradually over time. But in emerging markets, the potential for high returns is much greater. A country might be experiencing massive economic growth, and your assets will benefit as a result.
If the US had a political or economic crisis, your foreign investments could safeguard you from the effects. In worst case scenarios, you could even emigrate to your foreign property as a safe haven. In that way, foreign real estate acts like an insurance policy against the government. It allows you to hedge against domestic instability and inflation.
Owning foreign real estate gives you a permanent place to stay away from home. You can go whenever you want and not need to worry about booking a hotel. Use it as a vacation retreat when you need to, and rent it out while you’re gone.
Foreign real estate can also help you lower your tax burden. For one, you don’t need to report international property to the IRS. So they allow you to create a safe tax haven, though you’ll still need to pay taxes on any passive income you make through renting them out.
If the property is your primary residence, you are also exempt from paying capital gains tax on the first $250,000 if you are single or $500,000 if you are married. That’s true for properties in the US and those abroad.
And if you use the 1031 exchange program, you can roll any capital gains from selling a house into buying a new one while deferring taxes. But to do that, the new house must be in the same country as the first.
Challenges of Investing in Foreign Real Estate
Of course, investing in foreign real estate comes with its own challenges as well. Here are some that you should be aware of:
When you don’t live in the same location, let alone country, it takes a lot more work to understand the housing market. In the US, you may have a go-to agent who’s licensed and experienced. But you may not know anyone in the country you want to invest in. So you’ll need to connect with a local you can trust to tell you what’s a good deal and what’s not.
Obviously, other countries have different laws. So you’ll need to deal with different property laws, and navigating them can be difficult for an outsider.
Financing a real estate purchase overseas is hard. A lot of countries don’t even offer financing like we do in the US, and those that do may only offer unfavorable terms—like large down payments or high interest rates. So unless you can pay in cash, you may need to find a private lender to finance your deals.
Tips for Investing in Foreign Real Estate
Now that you know the pros and cons of investing in foreign real estate, here are some tips to get started:
The most hands-off way to invest in foreign real estate is to buy shares of an international real estate investment trust (REIT). These are big companies that manage properties across the globe. By purchasing a small share of the company, you don’t have to worry about any of the logistics or management.
But if you want to buy foreign property outright, study other markets closely. Look for areas with economic growth and good industry. The market should have a thriving middle class who want to rent, a stable government, and foreign-friendly investor laws. Do your due diligence and don’t settle for something that will pose too much risk.
You’ll need to be physically present to close deals, but you probably won’t be around enough to manage properties on your own. So build a good team on the ground to help you out as well. Take some time to study and prepare before you execute. If you can do that, you’re well on your way to having a highly diversified real estate portfolio.