Presently, there are seven compelling reasons to own a property abroad. The United States present investment climate is volatile. Positive third-quarter GDP numbers from the Bureau of Economic Analysis reflect a disappointing performance by the U.S. economy. The inflation rate is high, and the financial markets continue to be volatile. Everyone is concerned about a recession, and experts from Fannie Mae to Freddie Mac foresee economic downturns.
In times such as these, individuals seek tangible assets such as real estate to store and insulate value. Real estate is a reliable wealth storage since it is a concrete, physical asset rather than a virtual one, such as Bitcoin or equities.
Instead of investing in the U.S. home market, which, along with the housing markets of numerous other developed nations, is headed for a price decline, investors could purchase real estate elsewhere.
Foreign real estate is the foundation of every diversification plan. It is a hedge against uncertain markets, economies, and political circumstances and an investment that may provide capital growth and cross-currency cash flow.
In addition to being an investment, offshore real estate also offers other distinct advantages.
Here are seven reasons why you should invest in foreign real estate.
#1 Foreign property is now discounted for U.S. dollar holders.
When purchasing property in a foreign currency, the exchange rate of the local currency influences the dollar value of the purchase. A currency advantage means that regardless of the size of your capital budget, it will purchase more.
The present strength of the U.S. dollar is generating unprecedented possibilities for dollar-holding property investors worldwide. It has reached all-time highs versus the euro, the pound, and other major currencies.
A home costing 100,000 euros would have set you back $133,000 in 2013 at the currency rate of US$1.33 per euro but just $99,000 at the current exchange rate of US$0.99 per euro.
Right now, the expanded spending power of the greenback means you may diversify your real estate holdings internationally at a bargain.
#2 Overseas property is less expensive than U.S. property.
In addition to the savings afforded by the present currency advantage, international real estate can be significantly less expensive than equivalent U.S. real estate. For example, beachfront property in Northern Cyprus or Ceará, Brazil, may be purchased for less than $100,000. In premier coastal communities in California or Florida, you may easily pay 20 times as much.
#3. Overseas Property Can Provide Income
In addition to becoming a second home, renting out your foreign property to short- or long-term guests can create cash flow that can be utilized to cover the carrying expenses of your property or to establish a nest egg in the local currency.
Net yields are typically lower in Europe, although double-digit profits are feasible in tourist-friendly locales. In Northern Cyprus, for instance, a tiny seaside property can cost less than US$100,000. With short-term rental markets returning to pre-recession levels, net returns above 10% are feasible.
To take advantage of the U.S. dollar’s strength in Europe, explore the coastal locations of Portugal, Spain, France, and Italy for a short-term vacation rental investment. In these nations with historically high tourism demand, you may find rental apartments for less than $200,000 US.
The exchange rate between the U.S. dollar and the local currency might revert to historical norms in the future, allowing you to experience a U.S. dollar gain in the property’s value even if the underlying price of the property remains the same in the local currency.
#4 Foreign Real Estate Offers Privacy And Tax Advantages
One of the two remaining asset groups, Americans are not required to declare annually to the IRS in overseas property. The necessary citation from the IRS website is as follows: “Foreign real estate is not needed to be disclosed on Form 8938 as a designated foreign financial asset. For instance, a personal dwelling or leased property does not need to be declared.”
The IRS is powerless to confiscate or compel the sale of your second property in Belize, a penthouse in Colombia, a beach house in Brazil, etc., even if it wanted to. Attorneys, past spouses, friends, previous employees, etc., are similarly stonewalled.
The rental of your foreign home might provide tax benefits. On your U.S. tax return, you can deduct the expense of every trip you made to inspect your property. It is possible to deduct mortgage interest paid on a foreign residence from your taxable income.
#5. Foreign Real Estate Provides Diversification And Risk Reduction
When purchasing real estate overseas, you avoid the market, currency rate, seizure, and liability risks. U.S. courts are unable to take your overseas assets.
Overseas markets may advance as the U.S. home market declines. By investing overseas, you are diversifying your portfolio.
#6. Foreign Real Estate Can Provide Residency Benefits
Buying property over a specific price point can be a fast road to citizenship in a country. Countries such as Portugal, Spain, and Greece provide Golden Visa schemes that swap property purchases for low-hassle residence and entry to the Schengen Area. Other nations, such as Montenegro and Northern Cyprus, give residence for any property acquisition.
Another crucial component of any diversification plan is overseas residence. Obtaining legal permission to reside in another nation ensures you have a place to go if you ever wish or are forced to leave your native country permanently.
If domestic rules become too restrictive, your foreign property might be a backup plan, and it might serve as a refuge during the next epidemic. The United States, for instance, experienced significantly less invasive COVID lockdowns than other nations.
After a specific number of years of residency, citizenship is often granted. Obtaining a second passport raises the prospect of renunciation of U.S. citizenship, which is a serious choice but one that an increasing number of Americans make yearly.
#7. Foreign Property Enables Low-Cost Vacations
Foreign real estate is an investment, but you should preferably purchase in a location where you also love spending time. It may double as a retirement plan; today’s investment can become your future retirement home, generating rental income until you move in.
Foreign real estate may also serve as a vacation or second home, making it an investment that you and your family can enjoy immediately. You might arrange house exchanges with other owners of international holiday homes. Spending time immersed in countries with peaceful societies is beneficial to your health.
In many of the world’s most desirable locations, the cost of living is lower than in the United States, particularly for services and health care. By staying in your vacation home throughout the winter, you may avoid costly heating expenses or severe power outages like those that occurred in the southern United States last year.
Go somewhere warm enough that you do not require heating in the winter but not so warm that you require air conditioning.
Negative Aspects of Investing in Overseas Real Estate
As there are special advantages to purchasing property abroad, there are also unique disadvantages. Few nations have an analog to the Multiple Listing Service in the United States. No MLS implies that agents cannot show you all available properties that meet your criteria, as they do not have access to all available properties. They have exclusive access to their listings. If they do not have what you want, they will show you something else, regardless of whether or not it fulfills your requirements.
Generally, you will need to be prepared to pay in cash, and mortgages might be difficult for non-resident purchasers. In several European nations, it is feasible, but it might be more expensive than in the United States.
Banks may require you to obtain a local life insurance policy designating the lending bank as the principal beneficiary if you pass away before the mortgage is paid off.
Most life insurance firms worldwide will only insure you until you are 70 or 75, and this restriction limits the mortgage duration if you are 50 or older when you apply for financing. For example, a 65-year-old can qualify for a 10-year loan at most.
Another aspect to consider when purchasing property in Europe is the cost of transactions. Depending on the nation, they can be anywhere from 1% and 10%.
If you have a certain destination for your annual holiday, owning the property and renting it out might lower your vacation spending. However, you may feel compelled to utilize the property for vacation, and if you exceed the criteria for cost deductions, the immediate financial benefits are diminished.
On the other hand, if you choose to rent your foreign home instead of using it yourself, it becomes a pure investment, which might also raise tax responsibilities.