Is investing in another country risky? Or is it riskier to have all your eggs in one basket in the US real estate market? The more we consider how much influence the Federal Reserve has over the US economy, the more offshore investing looks like a reasonable diversification play. If you’re new to investing overseas, here’s where to start.
Start With a Connection to the Market
All real estate is local, and buying in a market without a trusted connection to the customs and truth on the ground is risky. A personal tie to a country, whether through family, a mission trip, study abroad, or military service, is one of the best places to start. From there, many countries limit non-residents from purchasing property, so it’s worth learning the rules before you get attached to a location. Countries with relatively open rules on foreign ownership include the US, Canada, Australia, New Zealand, the UK, Germany, France, Italy, Spain, Portugal, Brazil, Mexico, Argentina, Chile, Colombia, and Costa Rica.
Watch out for two traps in particular. Some European countries offer “Golden Visa” programs that grant residency in exchange for real estate investment, which can drive up prices in a way that has nothing to do with the property’s real value. Puerto Rico’s tax credit for US residents who relocate works well if relocation is genuinely your goal, but buying real estate there just to chase the incentive can mean overpaying if the laws change. And be skeptical of glossy inflight-magazine ads: they’ll show you a beautiful new building without mentioning the neighborhood around it may be unsafe or unstable.
Location Still Rules Everything
Think about the cities that host the Olympics. They’re never small, unknown places. They have the infrastructure and political clout to support a massive influx of visitors, and capital cities are almost always a safer bet because they’re better insulated and remain in demand. The same logic that says buy the ugliest house in the best neighborhood applies overseas: buy the location first.
Resort and vacation properties deserve extra scrutiny. Flooding, weak storm water infrastructure, and limited police and emergency services in some coastal or resort markets can leave the property owner carrying more financial weight than expected, and once tourists shift their vacations elsewhere, it’s hard to win them back. Look for Tier A locations: the more developed and densely populated an area, the more likely it is to hold value over the long term. It’s still location, location, location.
Know the Local Customs Before You Buy
A few practical things to watch for as you get further into a deal:
- Some countries charge out-of-country investors substantial transfer fees
- Maintenance costs can run higher for owners who aren’t local and aren’t watching closely
- Go direct as much as possible to avoid intermediaries who don’t have your best interest in mind
- Financing is often limited for foreigners, or available only at very low loan-to-value ratios
- A favorable exchange rate can make your dollar stretch significantly further
We’ve only scratched the surface of what goes into an offshore real estate investment, and that’s part of what makes it exciting. It’s the same lesson we found comparing high cap vs. low cap rate markets here at home: sometimes the strongest returns come from investing where you already have deep local knowledge, wherever in the world that happens to be. Have you invested out of the country? We’d love to hear about your experience.
