If you’re looking for some sun, a home on the beach in a warmer climate overseas can cost fractions of what you’d pay for a local second home. Enjoy the security of a hard asset, securely storing and growing your money in another currency, further diversifying your reliance on the local economy.
But before you fall in love with the perfect vacation destination villa, remember that buying overseas, and financing an overseas purchase, can be an opaque process. The ideal purchase is carefully researched and easily paid for. Know the questions to ask, the professionals to speak with, and the financial details that will make your purchase smooth.
Work Out the Financials
Bank financing for foreign property owners can be hard to find, expensive, and difficult to get approval for. While it’s possible you’ll find your perfect property in a country where a local bank is happy to lend you the purchase price minus a small down payment, often, you’ll need a very large percentage of the money to put down—sometimes as much as 50%. Many countries will offer loans, but with interest rates of 8% to 10%, far higher than what you’d pay for a local loan if you have strong financial resources and stable income.
You may have taken out a life insurance policy on your first home’s mortgage, to cover the remainder of the mortgage should you die before the loan is paid off. Many foreign countries require this type of insurance before approving anyone for a mortgage at all.
This is likely how you purchased your first home, and it can serve you well as a source of funding for your future home as well. Take a careful look at the terms and conditions, as well as the interest rates. Expect that the rates will be higher for you, as a foreigner, than for local citizens. You may need life insurance to cover the rate of your loan, and you’ll need funds available to pay monthly mortgage payments.
Builders in developing markets know that they can’t always demand straight-up cash for real estate purchases. Because of this, private sellers and developers will often offer ownership with a payment plan, for example, 50% now, and then 10% each year over the next 5 years. Depending on your agreement with the owner, down payments and ongoing payments are in increments that work for both parties involved. The title won’t be transferred until the property is paid off, though you’ll be able to live there, rent it out, or do maintenance on the property.
If you have cash on hand, that’s obviously the simplest method of payment. If you don’t have liquid funds, it’s still possible to pay cash. Homeowners can take out a line-of-credit, cash-out refinance, or home equity loan on your existing property to use the cash for a new purchase. Once you’re ready to retire to your new home, the process from the sale of your first house will pay off your home equity loan. Meantime, the rental income from your foreign investment can help you make loan payments.
Any U.S. resident individual buying property abroad is exposed to U.S. tax on that property, including income tax on the rental income, capital gains tax on property sales, and inheritance tax on foreign properties you may leave your children. You will be able to designate the foreign property as your main residence (for both you and your spouse), which can exempt you from some capital gains tax when you sell the home. However, this can backfire when you’re ready to sell your U.S. home, which would then be subject to that tax.
If you’re renting the foreign property, you should treat the income as a rental business. As such, you’d be able to claim business expense tax relief, including any travel to or from your property. You can also receive U.S. tax relief from foreign taxes paid, depending on the tax liabilities of the locale in which you’re purchasing the new property. This allows you to deduct the amount you’ve paid to the foreign government from your U.S. tax liability. You will likely need to register yourself with the local tax authorities, and should speak to an accountant familiar with expat tax liabilities for both the U.S. and your new residence.
Transferring Money Abroad
Typically, when purchasing foreign real estate, you’ll need to make several very large money transfers to a foreign currency, as well as small routine transfers for maintenance, construction, cleaning, etc. Save yourself the high bank fees for transfers by going to a reputable foreign exchange money transfer service, such as XE or Currencyfair. Look for something with no fees and speedy transfers to the currency you need. Money transfer companies may have amount limits or membership perks, so look into the details before you sign up. Your privacy and security should be of the utmost importance. Look into what insurance the transfer service provides, so you know your money will get where it needs to. Check out the exchange rates too, as some companies may charge no fees, but have higher exchange rates.
Enjoy You New Home
Once you’ve spoken with a developer or owner, real estate legal service provider, and an accountant, the best money transfer services can help you get your money into that sparkling new investment. Decorate how you like, pay support staff to maintain your property while you’re away, and get homeowners insurance to protect against weather damage or break-ins. All of it is possible, and can save you a bundle over purchasing a second U.S. property. Enjoy your beachfront or foreign urban home with the money you need to make it comfortable for you.