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What You Need To Know Before Investing In Property Abroad
Lief Simon is the founding editor of Global Property Advisor. Over 20 years, he has bought more than 45 properties and invested in 26 different countries around the world.
Carlie: Hey there, it's Carlie with another episode of the Expat Focus podcast.
Has a beachfront holiday home in Mexico taken your fancy? Maybe you’ve spotted a place with a great rental return in Malta. Or perhaps you have your sights set on a house to retire to in Panama. If you’ve never invested in property abroad before, it’s hard to know where to begin. So today’s guest is going to give you some pointers, talk through the current hotspots and the things that can trip up people who are new to the international investment scene.
Lief Simon is the founding editor of Global Property Advisor. Over 20 years, he has bought more than 45 properties and invested in 26 different countries around the world.
Lief, how did you become a global property investor?
Lief: Well, I guess the global part came a little bit by accident. I started in the US, interested in real estate, and bought my first investment property in Chicago when, I guess, I was 27.
And then I had an interest in living overseas, so those two interests combined when I moved to Ireland with my wife, and our first international purchase was our home in Ireland. And from there I started buying investment properties in different countries. My first invesment property, for pure investment purposes, was in Spain.
Carlie: And do you think you need domestic property investment experience before deciding to look at other countries to invest in?
Lief: I think it can help. There's two parts to it, right? There's real estate investing, which has all sorts of books in the US and the UK that talk to you about the basics of that. And in the US a big part of it is using other people's money, buying leveraged and things like that, which is how I actually bought the first building I bought in the US.
Then there's the other country part, and the division of types of law. So, for Americans and Brits, it's common law when you're looking at Latin America and mainland Europe; it's civil law - so some of the contractual things, and how you do your due diligence and check on titles, can vary. So having that domestic experience can really help you analyse the types of opportunities, I think. But then you've got to dig in: each jurisdiction is different.
Carlie: Does it depend, too, on what your goal is with your property investment: if you choose to live in it, or if you're using it as a nest egg for retirement, for example, or as more active income while you're still working?
Lief: For most people, their first international investment would be something like, buy a vacation home and then rent it out when you're not there. And that's an easy way to get your feet wet, because worst case scenario, it's a place you're going to use yourself; and if the investment scenario doesn't come to fruition, it's not the end of the world. So that's one side of things.
And then for me, I'm at the other extreme at this point. I've bought property in 24 countries, I still own property in a dozen countries; and I'm trying to actually scale back and just focus on a few countries right now. Early in my career I was looking for the capital appreciation - the quick growth - to grow my portfolio; and now, twenty years later, as I'm thinking about retirement, I'm more focused on investing in properties that reduce the portfolio. So rental properties, agricultural properties, things like that.
And so your goals may change over your investment career, but the real thing is, you've got to make that first step if you're going to do this. For me, a big part of it is diversification, and setting up cash flows in the countries that I want to spend time. So I've got cash flow investments in Europe for Euros, and cash flow investments in Panama for dollars - I spend half my time in Panama - and so I've structured my life that way so that I don't have to worry so much about exchange rates.
Carlie: You've got some really comprehensive resources on your website, liveandinvestoverseas.com. And there's one article that talks about the four biggest risks of buying property overseas: the political and economic stability of a country; it talks about how foreign investors are treated under local law, and how it's important to know about that; and currency and market risk; and the risk of the property itself.
In your experience, how common is it for property investors to have really investigated all of these factors before diving in?
Lief: [laughs] In some cases, I've met people who overanalyse and end up doing nothing, because they just confuse themselves.
Carlie: It's very overwhelming! This list is very overwhelming, I have to say.
Lief: It... yeah. And then, on the other extreme, you get people with what we call 'margarita madness.' You know, the type of people that show up in a place on a cruise ship, go ashore for the day, end up in a real estate agent's office, they buy into the pitch, they love the sand and beach, and they put a down payment on a condo in a place that they've never been before, they just showed up on a cruise ship. So those people, of course, are doing no due diligence.
So you've got to do something in between. So my wife likes to suggest to people that you invest somewhere where you're interested in spending time, that's the first thing. So just because you might find a great investment opportunity online in, say, Mongolia - which, in fact, there were some about ten years ago - if you're not ever going to go to Mongolia, just walk away from it. There are too many risks, unknown information, and things like that.
So, visit the place, speak with as many people as you can - both real estate agents and attorneys and other expats living there, or buying there - and... I don't know. We could do a whole session, I think, on just the real estate agents in Latin America - Central America in particular - a lot of the real estate agents are Americans. So other Americans feel comfortable with them, but they are the first people who are probably going to try and rip you off. So you've got to not do business with someone just because they speak your language or they're from the country that you're from.
Carlie: That was actually going to be another one of my questions: Is it important for you to actually go to the country, and possibly even look at the property you're planning to invest in; or is it OK to keep that distance and just have a proxy there sorting it out for you on the ground? And how secure of an approach is that when you're investing in property abroad?
Lief: So I have a few rules, and then when I break them I know I'm doing so, and I understand the risk.
One is to visit the property that you're investing in, and visit the location. Because buying sight unseen, which I know a lot of people do, and I know probably a lot of Brits do, because I've seen the marketing materials over the last twenty years that come through - buying in Bulgaria was very hot ten years ago, etc.
The times that I've bought sight unseen, I've either lost hugely or it turned out to just be a pain type of investment. And by going, once you have some experience, you can go and determine whether that investment makes sense for you, just by being on the ground. It may make sense for somebody else, or it may not make sense at all, for anybody.
But seeing the developer in person, seeing the site even if it's pre-construction, just go and see the site. Is this being built in an area that makes sense in real life, not just makes sense on paper? Because lots of investments can make sense on paper, and then I show up and I think, OK, this doesn't make sense to me for one reason or another.
Carlie: I guess going there in person really helps you establish and solidify, is this project legimate? Is it going to live up to expectations?
Lief: Yeah, exactly. And then you can have a face-to-face with whoever the sales person and developer are. I make a lot of investments that might be marginal, based off of the developer being a real person who has good intentions. There's a lot of people who lose money in projects, not because they were scams, but because the developer either didn't know what he was doing, or didn't have the resources to do what he expected to do. But as long as the developer has good intentions, eight times out of ten the project will be at least marginally successful.
Carlie: Lief, you mentioned locations like Bulgaria and Mongolia. Are there jurisdictions more suited to beginner property investors, versus those with a little more experience?
I know when the crash in the US happened, it was a big deal in Australia that you could buy a house in America for a dollar. So there were lots of Australian investors there, really interested in that. Is that something for someone who knows what they're doing with property, or for people who are really green?
Lief: Yeah, I remember the low-income turnkey houses in Detroit were big. [They were] being marketed outside of the US, because Americans wouldn't invest in Detroit if you gave them the properties. Doesn't mean they weren't good investments.
But part of the 'Should you go there, how much due diligence should you put into an investment?' - obviously, some of these houses in Detroit were selling for $20,000, $30,000 - if you're making a $30,000 investment, is it worth spending $5,000 to get on the plane to make it to the place? It's going to take you two years to recoup your due diligence cost.
So sometimes you've just got to make the investment because you've done as much due diligence as you can from afar, and you're willing to take the flyer and understand that the risk of not going there means you're not really aware what's going on on the ground.
And again, sometimes those things can work out, especially if you're working with a legitimate group that's doing everything that they're supposed to be doing.
Now I've babbled on and forgotten the original question, so I apologise for that.
Carlie: No worries, I kind of went off on a side note when I asked it. So my question originally was: Are there jurisdictions that are more suited to beginner property investors? Like I'm assuming a beginner property investor probably wouldn't be advised to check out Mongolia straight off the bat.
Lief: Right. My first investment property, that I mentioned in Spain, was a pre-construction purchase. So especially for beginners, who don't have a lot of cash to pay cash - because getting leverage in a foreign country is difficult, if not impossible depending on the country. So there's some countries where a foreigner can get a mortgage for a purchase: when I was buying in Spain, it was fairly easy to get a mortgage, so that was my backup if I wasn't able to flip the pre-construction condo before it was completed.
So places where there's a strong pre-construction market, and there's financing available, can definitely be a good place to start for someone who's not starting with $100,000-200,000 that they can [use to] buy a property outright.
And so right now, some of those places: Panama is one. Panama is still a fairly strong market, especially in certain sectors. I think Spain is coming around: I haven't looked at it personally recently, but I have contacts there who are keen on Spain. Portugal can make sense, and you can get financing there. My problem with Portugal right now is the prices have gone up so much in the last four years that you really have to look for the good deals.
And I'm sure there are other markets out there that would suit the beginner much more than even some of the places that we talk about, like Colombia and Brazil.
Carlie: And how much does your own nationality come into play when it comes to choosing the country to invest it?
Lief: I think nationality less than where you're based. You want to be able to easily get to the property to check on it; to meet with your property manager if it's a rental; check on the developer if it's a pre-construction. And so, for someone in Australia to invest anywhere really other than Australia and New Zealand, it's a long flight to go somewhere.
Carlie: [laughs] It's a bit of a pain!
Lief: I know South-East Asia, a lot of Australians are focused on that. The problem with South-East Asia is that most countries have restrictions on foreign ownership, so it limits your available market.
For Americans, obviously investing in Central and the northern part of South America can make sense, because it's a day trip, it's easy to get there.
And then for the Brits, most of Europe is easily accessible, so that's where they tend to focus. The Brits also like Florida, I think because of the sunshine, and the Florida developers market extensively to the Brits and the Irish.
Carlie: Lief, when you're just starting your investigating property projects, and what you might be interested in, is there a way to kind of sort the bad from the good? Are there international bodies or accreditations that can help you say, OK, this is a sound, legitimate developer compared to this company, which has got a bad track record? Is there a way to kind of do your due diligence?
Lief: Well, the first thing you want is a local attorney: a local real estate attorney that is used to dealing with foreigners. And in most cases, the local attorney is the one who can do the property check, the title check, and they're the ones who'll be doing the actual title work, the title transfer.
For Americans, they're used to a title company and a real estate agent taking care of that. And there's so many laws and support systems and automated things to protect the buyer.
The rest of the world doesn't really have that. Even in Ireland, when we bought our house there, we were like, "OK, we should have a home inspection" because that's what you do in the US. Well, there are no home inspection companies, or there weren't 25 years ago in Ireland, so someone recommended a civil engineer to come and do the home inspection. We thought, OK, great, he can check to see if there's anything falling down or whatever.
Well, the report we got back from the civil engineer had less to do with the structure and more to do with the decor. He said he would change the wallpaper and the drapes. We were like, well that's not really what we were looking for.
Carlie: [laughs] That's a very strange civil engineer report.
Lief: Exactly. And so it's caveat emptor, and so using a local attorney to research - if it's a development company, research the development company. But even development companies - good development companies - each project is a separate structure, a separate business that they set up, and usually with different people's money: different investors, in many cases, or different banks for the financing.
And so sometimes they've got a bank that's agreed to do the financing, and that bank backs out, that can slow down the project or kill it altogether, depending on the country and the abilities of the developer to find another bank.
So things like that are rare, but having an attorney do that research for you is definitely the best way to dig in deeper to the ability and stability of the developer.
Carlie: Does that mean it's possibly better to go with an existing property than one that's still on the plans?
Lief: Yes, there's downsides to existing properties as well, which eventually pre-construction properties will have. HOAs - homeowner associations - can be great or can be horrible, depending on who's running the HOA, running the building administration. So if you're buying something that's already built, that's one thing you want to look into.
Finances: check the building to see if there's any deferred maintenance that hasn't been done. Is there a sinking fund to do those repairs? A building here in Panama... I saw an ad, years ago, for an apartment in a building that was a really cheap apartment, so of course it got my attention. Reading through the ad, I then quickly understood why it was really cheap. The elevator in the building didn't work, and the owners in the building weren't interested in having a capital call to repair the elevator. And it was a thirty-storey building.
So you don't want to end up in a situation like that, because obviously the value of your property depends on the maintenance of the building.
Carlie: You mentioned earlier some hotspots. What parts of the world do you see heating up for property investment, and where is cooling down right now?
Lief: So I think parts of Portugal are still warm, but prices are too high. In fact, I bought an apartment there in 2015 that I'm selling this year because my rental income hasn't increased, but the property value has doubled. So my yield on the current value is low, and it makes sense to look elsewhere.
There are other areas of Portugal that I think make sense. I think there are probably areas of Spain that make sense, but I haven't had the time to dig in there.
I live in Panama, so I see a lot of opportunities in Panama. We like Colombia and Brazil, especially for Americans and Canadians, because their currencies - the Brazilian real and the Colombian peso - are relatively weak, compared to the last ten years, against those two dollars. So you're buying at a dollar discount, is the term we use. So property has appreciated in Colombia since we first bought there almost ten years ago.
But because of the depreciation of the currency, you can still get good deals with the expectation that maybe the currency will get stronger, but yields in certain markets and capital appreciation is still good.
And in Brazil, for example, just buying a beachfront house: a one-bedroomed house on the beach. One developer that we're working with is selling these for around $100,000. So there's very few places in the world you can get a beachfront residence - condo, even - for that price.
Of course, these aren't in a prime city in Brazil, it's in a rural setting a couple of hours from the nearest large city. But still, at that price, it's unbelievably cheap. But I wouldn't say that that's for a beginning investor. That's for someone who has a portfolio, that they're looking for diversification, at the long-term horizon.
Carlie: Lief, obviously being Australian, I have a bit of an interest in the property market there, as I sit here in France. And I read a lot about the property bubble bursting: "It's too big, it's inflated, property is overpriced in Australia, it's going to reverse and have an American collapse situation any day now."
Have you got any insights on the Australian market?
Lief: I don't pay that much attention to it, and haven't over the years. I see, I'm sure, some of the same things that you're seeing. But based off of what I have seen over the last fifteen years, everybody's saying the Australian property market is overpriced for the last fifteen years. So obviously there's a dynamic going on that has kept that market going, even with some hiccups in between.
Part of that is just - you would know better than me, I think - but Australians like the idea of property as an investment, and property as a storage of wealth, more so than Americans do. Although Americans want to own their home, for investment they mostly look to the stock market and mutual funds. But it seems Australians look to the property market more for investment.
Carlie: Yeah, definitely. And the other market I'm really curious about right now is the UK. I know the Brexit cloud has been hanging over the UK for the past few years. As we're recording this there may or may not finally be a Brexit deal, but even if that happens, you still have a couple of years' transition to go.
What does that mean for the property market? I hear it's been a bit stangnant. Is this still a no-go area, or are there bargains to be had in the UK right now?
Lief: I think there are probably bargains, I haven't paid attention. I'm personally not that interested in the UK even if there were screaming deals, and I couldn't tell you why, it's just a personal thing.
But one group that we work with... in the UK, you've got to be careful. There's a lot of "copycat developments" - in air quotes - that see something that's sold well, and then they just make up a project that they have no idea what they're doing, and no intention of fulfilling.
So over the years, different types of investments in the UK range from cemetery plots to airport parking spaces, to student housing, to assisted living housing. There are legitimate opportunities in each of those genres, but there's so many not legitimate.
This goes back to what you were asking earlier, I guess: how can you tell one from the other? And in the case of the UK, with these, I'm not 100% sure, other than to ask someone who's actually British and knows the market.
I have a Scottish friend who's still very keen on the student housing idea in the UK, and again there are good opportunities and bad opportunities, good developers and bad developers.
For the general market, it's hard to say what areas are really hot right now. But for everybody outside of the UK, the pound is still relatively weak, so that's one way to play the currency and get some appreciation on the real estate side.
The London market - London City, the financial area - was hit because a lot of the finance companies moved to Dublin, Paris and Frankfurt. And we saw an increase in property values - residential property values - in those markets, because of all these finance industry people moving there.
In fact, in the area of Paris where we live, we've been inundated with real estate agent letters saying, basically, "Please, please, please let us sell your apartment." We've got over 4,000 financial industry people who have moved to Paris, and they need quality apartments. So that shift, I think, if the Brexit worked - I don't know what that means in real life - could mean that those properties in central London might have seen the bottom and be going up once Brexit is all settled.
What I'm actually more interested in - and this is more for personal reasons - is if there ends up being a hard border or not in Northern Ireland, and how that affects the Irish market. And I think a hard border will obviously affect the Northern Ireland market, but I think it'll also affect even as far south as Waterford in Ireland, across the board.
Because we lived in Ireland for seven years, and when we moved there it was just after - I forget the name of the accords now - but basically, the peace agreement was signed. Ireland had huge prosperity, for lots of reasons, but including that bombs weren't going off anymore. And if bombs start going off on the Ireland border again, I think that real estate investors, including the Irish real estate investors, are going to put their money elsewhere.
Carlie: Lief, it sounds like you move around the world a bit, and have a few different places that you spend your time. What sort of implications are there from an investment and a tax perspective, and a residency perspective, that people investing in international property and possibly residing in that property for parts of the year need to be aware of?
Lief: Yeah, it's very specific to the person. For Americans it's a little more complicated, because Americans are taxed on their worldwide income no matter what their residency status is in the US. So you always have a tax filing obligation, if not an actual tax obligation.
And then you have probably a tax obligation to your country of residency. So if you're a legal resident, versus a tax resident, mostly depends on how much time you spend in a country. So there are European countries like France, for example, that have more complicated rules to try and capture you as a tax resident. But the general rule, if you're 180, or 183 days or more, in a country, then you're liable for taxes there. And most countries tax on a worldwide revenue income basis.
So that's one reason we're in Panama now. Panama is a jurisdictional taxation country, so we pay taxes on the income that's earned only on the Panama side. Again, of course, being Americans, we're liable to pay taxes to the US.
And then, if you just own a property - this is the biggest question we get from readers who want to buy a rental property in... pick a country - and then how that country handles rental income can vary.
So some countries tax at the source. So the rental property I have in Portugal, my property manager withholds 25% and sends it to the government. And then, at the end of the year, I can do a tax return if I want, if I think that the government owes me money. But with this property that I've had, it's basically not worth the expense of filing to receive a few hundred euros back from the government.
Some countries operate like that. Other countries, you're just meant to file a tax return on your rental income. And most expats in countries that don't have sophisticated tax systems just don't. So that's one way people deal with it.
But in many cases, they wouldn't owe tax anyway, because many countries have a minimum income threshold - a zero-tax band, if you will - before you start paying taxes. So if you've got one rental, and your average income is under a net of say, ten thousand dollars, you probably don't owe any tax anyway, if they're not taxing rental income specifically the way Portugal does, or the way Spain or Argentina, for example, does.
Carlie: Definitely something to understand before you commit to investing in a property, and how much time you're going to spend there, if you choose to.
Lief: Right. And then also, there's the capital gains taxes when you sell. And that becomes more complicated in European countries. Some countries - like France, for example - where you are... if you own the property for - and they've changed the rules now, I think it's - it's either thirty or thirty-three years, you end up paying zero capital gains tax, and after year five it starts decreasing. So the longer you own it, the less you pay in capital gains tax.
Other countries, it's just a straight-up capital gains tax of 10-15%, and then some countries tax capital gains at the ordinary income rates. So it depends how much your capital gain is, and how it falls within the tax bands.
Carlie: That's something else you really need to factor in before you invest: thinking about how long you plan to hold on to this property.
Lief: Exactly. And then the other tax to consider for Americans, and I don't know about Australia, but in America there's no transfer taxes upfront. But most other countries have some sort of transfer tax ranging from 1% to 10%. And so you've got to factor that into your budgeting. So if you have $100,000 / £100,000 / €100,000 to invest, and you're buying in a country that has a 5% - like France, it's 5.74% or something - transfer tax, and notaire fees, then you can really only buy a €95,000 property.
Carlie: Yeah, definitely, and we spoke about that actually recently, with a real estate agent here in France. And the sort of fees and charges to expect when you do invest in a country.
Lief, my final question is: if you've never invested in overseas property before, but you're really wanting to, what should be your step one?
Lief: Huh. Well, I guess the step one is: decide on the country that you're interested in spending time [in], that has a market that makes sense for investing. And then go visit, and look at properties, speak with real estate agents, speak with developers.
You need to educate yourself before you make that first step. But don't overeducate yourself. Don't get hung up on too much analysis. Even for seasoned investors, it can become a problem.
I met a guy, years ago now, at a real estate conference that I was putting on, who was a real estate investor from the US, and he was telling me that he'd been in Costa Rica looking at properties and investments. And I said "Oh great, so how long have you been in the Costa Rica market?"
And he said "Well, I've been looking for four years." And I said, "Oh, well what have you invested in?" And he said "Well, I haven't invested in anything yet, and in fact I've decided to stop looking in Costa Rica because the market passed me by. I'm now looking at the Dominican Republic" which is where the conference was.
And I said "Oh great, so what have you invested in in the Dominican Republic?" He said, "Well, nothing yet. I've been looking for two years and I just haven't found the right opportunity."
So he spent six years, in two different countries looking, and never pulled the trigger because he was paralysing himself, even though he was a sophisticated US real estate investor. He owned dozens of rental properties, but he just was... what I think he was doing, he was looking for The Best Deal, and you're never going to find The Best Deal. You're going to find the best deal in front of you today, and if it fits your parameters, then you should pursue it.
Carlie: Yeah, there's got to be a time when you turn off those email alerts, make yourself a top three and just choose from that. Put your blinkers on and just don't look around anymore.
Carlie: Lief, thank you so much for your time today. I think that's been really insightful, particularly for people who are looking to jump into investing in property abroad for the very first time.
Lief: Great, happy to be here. Nice speaking with you, Carlie.
Carlie: That’s it for this episode, if you have any questions for Lief, you can get in touch with us on social media - we’re ExpatFocus on Facebook and Twitter. You can also share your own property investment experiences on our individual country forums at expatfocus.com, and don’t forget to check out our other podcast episodes, we cover all aspects of expat life, all over the world.
If you like what we do, please leave us a review, and I’ll catch you next time.