Why You Should Invest in Foreign Real Estate

Investing in foreign real estate can be an exciting and lucrative opportunity for those looking to diversify their investment portfolio. There are several reasons why investing in foreign real estate is appealing to investors. One of the main benefits is the potential for higher returns compared to domestic real estate markets. Additionally, investing in foreign real estate can provide a hedge against economic downturns in one's home country.

However, investing in foreign real estate comes with its own set of challenges and considerations. Foreign markets may have different regulations, tax implications, and legal processes that investors need to navigate. It is essential for investors to conduct thorough research, seek professional advice, and understand the local market dynamics before making any investment decisions.

Top Advantages of Foreign Real Estate Investments

Invest in foreign real estate and potentially receive numerous benefits to your portfolio from tax advantages to lifestyle enrichment.

Diversification of Investment Portfolio

Local real estate can help diversify a portfolio because they operate in different markets. Foreign real estate takes this to a whole new level by providing exposure to a completely different market and economy. For example, if the U.S. real estate market dives, the foreign real estate market may not be affected. Losses in the local markets may be balanced by success in foreign markets. There’s the potential that foreign markets will provide stronger returns when the local market dips.

Tax Advantages

If you invest in local real estate, you’ll have to declare the asset to the IRS. However, the IRS does not require investors to declare foreign real estate holdings. And you can deduct the cost of trips you take to check on the property from your tax return. Depending on the country, the U.S. may have a tax treaty with them, allowing investors to take advantage of reduced tax rates in that country.

Potential for Lower Property Prices and Higher Rental Yields

Many emerging markets abroad have undervalued property. Investors can research these markets and purchase real estate while the property values are low. Then as they rise in value, investors can charge more in rental income or sell for a profit.

Investors should also consider areas that are rising in tourism. Properties can be purchased and then rented out as a vacation home or leased to expats living or staying abroad.

Opportunity for Personal Use and Lifestyle Enhancement

Your foreign property doesn’t need to be rented all the time. If you only rent it part-time as a vacation home, then you’ll also be able to use it when you please. Enrich your life by regularly traveling to your property overseas. Immerse yourself in the foreign culture and experience the lifestyle in a different country. You could learn a different language, try local cuisine and partake in different traditions.

If you love the area of your foreign real estate, you could consider moving there for retirement. It’ll always be a possibility to relocate. It’s often easier to become a citizen of a country if you own real estate in that country.

Hedge Against Currency Fluctuations and Inflation

If you only invest in U.S. assets, then your entire portfolio is linked to the U.S. dollar. That means that your entire portfolio could be affected if the U.S. economy dips and the dollar decreases in value. Investing in foreign assets, such as real estate, exposes your portfolio to multiple currencies. That can help hedge against inflation in the U.S. economy and protect your overall portfolio.

Potential Risks and Challenges of Investing in Foreign Real Estate

Foreign real estate is an exciting market and provides many advantages. However, it’s not without risk. The foreign real estate market is just as volatile as the U.S. market. There’s no guarantee that properties will rise in value or that rental prices will stay steady. And changes in the currency exchange rate can affect your income.

There are also many legal and regulatory complexities associated with buying real estate in a different country. You’ll likely need a lawyer or investment professional to guide you through the process to ensure everything is done according to that country’s law.

You’ll need to prepare yourself for the cultural and political factors that play into owning property abroad. There may be language and cultural barriers you’ll need to navigate when dealing with real estate agents or tenants. Plus, it’ll be harder to maintain and manage a property that’s in a different country. You’ll need to maintain a good relationship with a property manager that you can trust.

Finally, political instability or geopolitical risk can affect how easy it is to get to your property and manage it. For example, when the COVID-19 pandemic hit, travel was nearly impossible. Such global events can limit your access to the property and make it more difficult to manage.

Things to Consider Before Investing in Real Estate Overseas

Choosing to invest in foreign real estate shouldn’t be a spontaneous decision. You’ll need to consider many factors to identify a market and ensure your portfolio is prepared to take on this new, unique asset.

Research and Preparation

Before investing, conduct thorough research. First, research the country and its regulatory, legal and tax considerations for foreigners owning real estate. Then find a market with strong growth trends. You can identify emerging markets by rapid economic growth, rise in population, and increasing income per capita. To learn more about promising foreign markets, talk with an investment professional who specializes in the area.

Setting Realistic Goals

Foreign real estate investing may provide a new stream of passive income. However, you need to have realistic dreams so you don’t set yourself up for disappointment. Understand your investment goals and risk tolerance and use that information to select your investment. Consider the foreign market, property values and rental trends to ensure that the investment you’ll receive and the income you may earn match your goals and risk tolerance.

For example, if you choose to take on more risk, you may want to purchase property in an undervalued market. But if you want to limit risk, then you’ll want a property in a market that’s already established.

Selecting the Right Location

Choosing the right location isn’t as easy as finding an undervalued property. You’ll also need to consider the location of the country, the attitude toward foreigners and the political situation. You won’t want to invest in a location with a lot of political unrest or economic instability.

Ensure that you can easily travel to your property so that the country’s political situation won’t affect your property value. It may be ideal to also choose a country that encourages tourism and receives a high number of tourists.

Legal and Regulatory Considerations

You’ll be investing in an entirely different country, and their legal and regulatory requirements will likely be different than in the U.S. Before investing, you’ll need to fully understand the legal framework and regulations where you’ll be operating. There may be challenges while trying to buy foreign real estate that you’ll patiently need to navigate. You’ll likely need to partner with a lawyer to help you navigate these foreign laws.

Due Diligence and Property Inspections

You may not be able to physically be at the property during the inspection and purchase. Depending on your situation, you may not be able to see it much or at all before you purchase. So you’ll need to conduct thorough due diligence. Make sure a comprehensive property inspection is done, search the title and verify ownership of the property before buying. You want to make sure you are getting your money’s worth and that you understand the state of the property you’re buying. It may be helpful to partner with a local professional or real estate agent in that market to act as your liaison.

Managing and Maintaining Foreign Properties

You won’t be there to regularly check on the property, so you’ll need a trusted property manager. If you know any other foreign real estate investors in the market, you can connect with them to see if they recommend any property managers. You can also conduct your own research to identify managers. Ensure you meet with them and potentially ask for references to verify them as a trustworthy partner.

If you want to rent your property, you’ll want to research that market and identify standard rental rates for similar units. You can rent it to long-term tenants or use it as a vacation property that you list on sites like Airbnb and Vrbo. Look for real estate data in that country and market to identify how much you’ll need to pay the property manager and set aside for repairs and maintenance.

Become a Foreign Homeowner

Foreign real estate can be a great way to diversify your portfolio, hedge against inflation and other economic risks and receive a stream of income. However, it’s important to understand the challenges associated with owning a property abroad and have a plan on how to navigate the legal framework and manage the property itself. If foreign real estate interests you, you’ll want to talk to a trusted financial adviser and legal expert to set yourself up for success.

Frequently Asked Questions