Dateline: Kuala Lumpur, Malaysia
Recently, I attended a talk by a financial guru who specializes in diversification.
Although he had plenty of good suggestions, I noticed that all of the mutual funds and other investments that he mentioned were located in the United States.
You see, one of the largest problems that I’ve noticed in the investment community is that when most people discuss diversification, they focus too heavily on what they’re investing in and not enough on where.
Obviously, you wouldn’t dump all of your money into a single business, bank account, or rental property. You want to protect your assets in case something goes awry.
However, if all of your investments are in just one country, then you’re negating all of the diversification efforts that you’ve made.
Think about it – if your home country experienced political instability or economic decline, how would your investment portfolio fare?
Chances are, not too well – unless you’ve diversified internationally.
Put simply, international diversification is the key to any modern investment strategy.
Not only are there plenty of great opportunities in markets overseas, but you also further secure your wealth by ensuring that one government can’t make or break you financially.
But where do you begin?
With so many different investment opportunities around the world, deciding where to go and what to invest in can be difficult. International real estate, however, can be a great way to start.
In this article we’ll cover:
- Benefits of Owning International Real Estate
- How to Find International Real Estate
- If You Should Consider Investing in International Real Estate
The Benefits of Owning International Real Estate
Investing in foreign real estate is a good way to start internationalizing your portfolio and your life, and there are plenty of benefits of owning it aside from just diversifying your assets.
In addition to protecting your wealth, buying international real estate also allows you to earn higher returns and enhance your tax strategy, and in some countries, you can even get a second residency or passport out of your investment.
If you’re considering investing in international real estate, here are five benefits to think about:
You Can Earn Higher Returns with International Real Estate
The number one reason why people want to buy international real estate is to get higher returns on their investments.
In most developed countries, you’re not going to see huge profits from your real estate investments. For example, my friends who live in Australia tell me that they’re happy if they get a 2% return on their properties each year.
That’s right – only 2%.
These kinds of markets are also somewhat cyclical. While you likely won’t lose your whole investment if you buy a condo in New York or London, you may end up stuck with it for longer than anticipated if you have to wait for the market to rebound.
My friend who runs a property fund in Cambodia, on the other hand, is faring much better. He makes around 7-10% percent in rental yields on his properties while earning 10-15% in value appreciation each year.
Granted, my friend’s returns are on the higher end of the scale, but you wouldn’t even come close to those kinds of numbers in cities like Sydney or Los Angeles.
Cambodia’s real estate market has seen unprecedented growth over the past decade, making it an excellent emerging market to invest in.
You see, unlike more established markets, emerging markets like Cambodia and Georgia have been growing consistently over the past ten or twenty years, and they’ll likely keep growing well into the future.
Therefore, if you’re willing to invest in real estate in these kinds of markets, then you can see much higher yields and grow the value of your property much faster.
International Real Estate Can Help Protect Your Assets
Buying international real estate is also a useful method of protecting your assets.
By owning property outside of your country of citizenship, you insulate yourself from all kinds of issues or instability that may arise at home.
Suppose that you owned property in both the US and Asia during the 2008 recession. While your property values in the US may have gone in the toilet, your Asian properties likely remained fairly stable.
Additionally, owning international real estate can help protect you in the event that you become the subject of a frivolous lawsuit.
If you own a business in a lawsuit-happy country like the US, then there’s a real chance that you can become the subject of some kind of facetious legal claim.
However, if a substantial portion of your wealth is invested overseas, then anyone filing suit against you will need to actually go to those jurisdictions if they want your assets.
And, unless they actually have a legitimate claim against you or your business, they likely won’t be very successful in their pursuit – if they’re willing to even go there in the first place.
Investing in international real estate can thus help you protect your assets from a variety of adverse events that could affect your wealth and assets.
International Real Estate is a Form of Government Insurance
In addition to helping protect your assets, international real estate also acts as a form of “government insurance” in case of serious economic problems or political instability.
If you live on the west coast of the US or Canada, then you may have noticed a large number of Chinese investors buying up properties in places like Vancouver and Silicon Valley. Many of these Chinese investors want to buy property in western countries because of their anxieties about China’s government and future economic prospects.
Issues like currency devaluation, trade wars, and political changes have made them nervous, so they want to invest in more stable markets as an insurance policy against potential problems back home.
Citizens of western countries, on the other hand, tend not to think this way.
Because these countries are largely regarded as stable democracies, their citizens are less inclined to seek this kind of protection against problems with their own governments. However, this mindset ignores some of the frightening things happening in the western world today.
Brexit, for instance, has created quite a bit of panic in the UK as negotiation deadlines loom with no agreement in sight.
Although the UK isn’t going to collapse or turn into a third world country anytime soon, some UK residents have been acting as if that were the case and have even started stockpiling food and medicine.
In western countries, we mistakenly believe that nothing truly bad will ever happen here, so when something like Brexit shakes that sense of stability, we tend to panic.
That’s why having some kind of government insurance is important.
I’m not one for tinfoil hats and doomsday prepping, but I do believe that having an insurance policy against government nonsense is generally a good idea. Insurance guarantees that some kind of expense or loss will be covered in the event of an accident or unforeseen circumstance.
You pay in a certain amount, and in exchange, you get protection.
As anyone who has ever been in a car accident will tell you, insurance is important. Although paying premiums isn’t pleasant, it’s far less expensive than hospital bills and car repairs.
However, while most financially savvy people see the value in having car, health, and homeowners insurance, very few people take out an insurance policy against their own country.
To see what I mean, let’s revisit the Brexit example.
The average UK citizen is panicking because they don’t have any backup plan in place. If all of their wealth is invested in the UK, for instance, then they could suffer tremendously if the British economy takes a tumble.
However, if you’re a UK citizen with a second passport or a second home abroad, then you’re probably less worried. You know that you have the ability to easily leave the country if things go belly-up.
You have government insurance to protect you.
And, investing in international real estate is one of the best ways to get this kind of government insurance.
International real estate allows you to establish a second residency abroad while giving you a permanent place to go in case you need to leave your home, and in some cases, it will also give you a second passport.
Additionally, unlike regular insurance, the premium you pay can actually earn you money through rental yields and value appreciation. Therefore, by investing in international real estate, you’re also investing in an insurance policy against serious political or economic issues at home.
International Real Estate Can Benefit Your Tax Strategy
Owning international real estate can also enhance your tax strategy regardless of your country of citizenship.
If you’re a US citizen, then you likely know just how hard it is to legally reduce your tax burden. Between citizenship-based taxation and laws like FATCA, it’s incredibly difficult to lighten your tax load as a US person.
While you can claim some exemptions if you live abroad, they only exclude a small portion of your income from the IRS, and you still need to pay full tax on all of your passive income, such as capital gains.
However, if you’re a US person, there are two types of overseas assets that you legally do not need to report to the IRS: precious metals stored overseas in private vaults and international real estate.
Essentially, this means that you can park your money in a foreign real estate investment and allow it to accrue appreciation value without paying a dime in taxes. It would practically take a declaration of war for the US government to demand your property.
You should keep in mind, however, that your international real estate’s tax-exempt status does not fully apply if you rent or sell the property.
However, if you simply buy the property and leave it be for the most part, you have an asset that’s both relatively safe, legally non-reportable, and comes with five other tax benefits:
1. No Capital Gains Tax on Foreign Property Used as a Primary Residence
For US investors, the rules on capital gains taxes from personal residences are the same, no matter where the property is located.
If you’ve owned US real estate (and actually managed to make a profit when selling), you are likely familiar with the tax law that allows you to exempt the first $250,000 in capital gains tax if single, and $500,000 if married.
To qualify, you must live in the house as your primary residence for two of the five years prior to selling it.
It’s best to purchase property in a country that has a similar system of property taxation as the United States since US tax law cannot offset or eliminate capital gains taxes payable where the property is located.
2. The 1031 Exchange on “Like Kind” Property
Another popular tax benefit used by US real estate investors is the 1031 exchange for swapping one property for another “like kind” property. The idea is capital gains tax deferral.
We frequently talk about the power of compound interest and how it applies to offshore investing. Doubling a penny every day for a month becomes $5,368,709.12, but deducting 30% capital gains tax from each day’s profits leaves you with a mere $48,00 and change.
The lesson is that if you can’t eliminate taxes on your investment returns, deferring them is a preferable middle ground. Quite simply, paying tax on every transaction along the way can cost you a fortune.
Put another way, taxes on your investments are probably the difference between a luxurious oceanfront retirement and barely scraping by.
That’s why the 1031 exchange program is so interesting; it allows you to defer capital gains tax by rolling your original principal and the return into a new property.
Just as US real estate can be used in a like-kind exchange, so can foreign real estate. The only rule to remember is that “like kind” is defined as either domestic or foreign property; the two can not be mixed.
3. Owning Foreign Real Estate in an Offshore IRA
If you already have a retirement account, moving it to a cooperative custodian overseas can be your gateway to investing in all sorts of products that your US custodian would never let you touch.
Among those options: foreign real estate.
Of course, you can’t benefit from your own IRA. That means that, just as in the United States, you can’t buy a beachfront condo in Nicaragua and move right in. Terms like “self dealing” and “IRA” don’t go well together.
However, you can own foreign real estate in your government approved Self-Directed IRA, and you can enjoy ongoing rental income as well as capital appreciation.
Real estate held in your IRA is treated the same way other investments in your IRA are treated; it is taxed when you take the money out.
While US real estate held in a foreign trust isn’t always the best idea (any judge can claim authority to invalidate the benefits of your foreign ownership), owning foreign real estate in a US government retirement account can have a lot of benefits.
4. Tax-Deductible Mortgage Interest
If you plan to purchase a second home overseas for use while on vacation or as a future retirement home, you may be able to write off mortgage interest on up to $1.1 million in debt.
It’s best to consult a US tax advisor before you add your second home’s mortgage interest to your tax return, but the key here is that the rules are supposed to be the same whether your second home is in the Bahamas or Boston.
The difficulty of this may be actually getting a mortgage as many foreign banks will not want to deal with expats.
You may be able to get a foreign mortgage by putting down 30-50% on a property, or by obtaining developer financing if your property is a new build (although many new builds that are expat-friendly tend to be overpriced).
Additionally, things like depreciation and other home-ownership expenses may or may not be deductible.
5. Lower Taxes on Foreign Income for Non-US Persons
If you’re not a US citizen, owning international real estate can still benefit your tax strategy by giving you alternative residence options and a source of foreign income.
Citizens of residential tax countries like Australia have the ability to remove themselves from their home country’s tax system and establish residence in a low-tax country to drastically reduce their tax burden, and owning international real estate can help facilitate this process.
To see how this works, let’s use an example.
Suppose you live in Singapore and don’t have any tax obligations in your country of citizenship, and you generate income from rental properties in Georgia.
Because Singapore is a territorial tax country, you only need to pay tax on money that you make in Singapore, so any income that you earn from foreign investments is not taxed.
While you will need to pay a 4.5% tax on your rental income in Georgia, that’s quite a small amount compared to what you would pay in the UK or Germany.
International real estate can therefore be an important component of your tax strategy. With proper planning, you can use these investments to potentially reduce your tax rate to the single digits.
Therefore, regardless of your country of citizenship, buying foreign real estate can help you legally reduce your tax burden.
Owning International Real Estate Can Help Diversify Your Life
Overall, investing in international real estate can help you diversify your life in many ways.
When you own property in another country, you can reasonably plan to live there part-time or in the future.
Because you actually own a home or apartment in that country, you won’t have to fuss with renting if you decide to move there for an extended period of time.
Additionally, many countries will allow you to obtain a residence permit by investing in property there.
Although residence by investment programs vary, many countries allow you to obtain a residence permit for a year or more with a large enough investment, and a substantial number of them will allow you to apply for permanent residence or citizenship after you spend a certain amount of time there.
Therefore, getting residence or citizenship by investing in international real estate can benefit you in a number of ways.
In some cases, it can serve as an “escape hatch” if you’re concerned about political or economic stability back home.
If you’re buying real estate in a country that uses a different currency, you get the added benefits of currency diversification (my friend Matthew Partridge sees Poland as a great long-term bet for this).
In the worst case scenario where you have to leave your home country for good, you’ll have a home waiting for you in a more peaceful part of the world.
On the other hand, you may want to own property in a place where you spend a large portion of your time.
Recently, I worked with a couple who fell in love with the idea of spending their summers on the coast of Montenegro.
Instead of spending money on hotels every summer, they decided to buy a more permanent home, which allows them to save money on rentals and earn money while their property accrues value.
To put it simply, investing in international real estate allows you to create home bases in various countries and begin to craft a more diversified and internationalized lifestyle.
How to Find Foreign Real Estate for Sale
Knowing the benefits of foreign real estate is one thing, but obtaining that real estate is an entirely different animal.
As we’ve talked about before, things are going to be different when you go to a different country. If you want the results to change drastically, then the work that goes along with that is going to be substantially different.
That doesn’t mean that you can’t go overseas and buy real estate, but it does mean that you’re going to do it differently than you do in your home country.
In the US, there is a very large and regulated real estate market. It isn’t hard to find the exact value of a home. Real estate agents will answer your call almost 24/7. Apps like Zillow can help you find just the property you’re looking for.
The whole market is there to serve you.
When you go overseas, that won’t entirely be the case. In most cases, there is an inverse relationship between the accessibility of data and professionals with the quality of the investment.
I cringe whenever I watch a TV show that talks about “investing” in Los Angeles real estate. It’s a lifestyle choice, perhaps, but there isn’t good investment criteria there.
That being said, you will find a thousand real estate agents in Los Angeles waiting to take your call.
Not the case in Cambodia. Or Georgia. Or Colombia.
Avoid the “Expat Bubble”
A good example of this principle is in areas like Latin America where people from the US and Canada are willing to go. There, you’ll find expat organizations designed to help people find real estate.
These organizations are tempting to use because they make the whole process look so easy, but on many of their websites you can’t even find the exact values of the properties.
These properties are often overpriced, turnkey investments that are set up for second residences or offshore conferences.
They are always a bad deal.
If you could just go to a website, sort through the listings, and figure out the yield for a potential property, the yields would be lower. The potential wouldn’t be there.
You can see this in Cambodia. As the country is developing, prices are going up and yields are being squeezed, partially because of the amount of foreign investment.
If you had bought property in Cambodia five or six years ago, you would have bought that property at a lower price and sold it for much more because of the amount of Chinese investment in the country over the last few years.
The easier it becomes to find property in developing countries, the worse a deal you’re going to get. So, how do you find a good deal?
Build an On-the-Ground Relationship
The great myth that real estate works the same all around the world is dangerous. You need an on-the-ground relationship in a prospective market.
The greater the potential in that market, the more essential that relationship is.
Ideally, this person would be you, but if not, you’re looking for someone who understands the local language and customs, as well as what you want to do.
In the US, no one would attempt to sell a million-dollar home for twice its value. In other places around the world, however, it’s common practice to double the estimated value of the property on the off-chance that some poor sucker will buy it without a second thought.
In some places, making a $60,000 offer on a property listed for $100,000 is a smart move, but wouldn’t get you even a call back in others.
You need someone who knows the difference.
Two examples of this are the countries of Georgia and Malaysia.
I bought a house in Malaysia. I’ve spent time in Malaysia before both as a traveler and renter. I know that there are a lot of property websites with transparent data.
I also know that the challenge in Malaysia is that agents don’t work for the seller.
The seller will go out and get multiple agents to try and sell their property, each of which has to find some kind of edge over their competitors. This leads to the use of bait-and-switch tactics and other practices in the emerging market that can lead to you seeing a very different property on the ground than the one that was so exciting on the web.
Understanding this aspect of the market allows me to do better business in Malaysia. I can buy as a local and avoid surprises.
I’ve bought and helped many others buy property in Georgia. I’ve done more work there than I have anywhere else because there is so much potential. But, in Georgia, there are many outdated listings that you just won’t be able to find a deal on.
I did some research with one of our lawyers on these online listings.
We went through and dug up one hundred listings that seemed like half-decent investments. We reached out and found that fifteen were still for sale.
Of those, only five were willing to show us the property. The rest made excuses or tried to sell without us seeing it.
Of the five, one changed the price upon realizing we were foreign.
We only had the chance to seal the deal with about four properties of a hundred.
Finding that Relationship
The reason why I can do so much more business in Georgia is that I know one good real estate agent there. She’s the only good real estate agent in the country. Period.
You can’t find her. She doesn’t have a website. She doesn’t have anything. She’s the daughter-in-law of a famous Georgian movie star who gets listings because she’s well-known in the community.
Then she goes out and shops to a small book of businesses, working only by referral.
Finding relationships like that can be difficult. You may be able to find the right person by working with attorneys or (maybe) accountants in the country, but often it requires much more effort.
Like in Georgia, many countries have very few good agents that you can work with to find the property you’re looking for.
Often, you may be able to find someone who has already done the sifting for you. An expert who has already gone and searched through different agents and found a few that will understand both your investment goal and the local customs.
In other places, you will have to become that expert and pan for gold yourself.
Should You Consider Buying International Real Estate?
Now that you have a better understanding of how owning international real estate can benefit you, you may be wondering whether you should begin your foray into the international real estate market.
In general, I often recommend that people buy international real estate because it’s a good first step into the Nomad Capitalist lifestyle.
Owning international real estate allows you to dip your toe into a more internationalized lifestyle without requiring you to leave your friends, family, and business in your home country.
Therefore, it can be a good way to start taking action to go where you’re treated best without committing too heavily to any one option or strategy.
That being said, you should consider these three issues as you make your decision about buying international real estate.
To make smart international real estate investments, you will need to travel to view properties and finalize purchasing agreements.
In many international real estate markets, buying online is unfavorable at best and impossible at worst.
If you want to buy property in Georgia, for instance, it’s near-impossible to find anything useful on the internet since many online property sites are filled with outdated or unavailable listings.
Additionally, you generally need to be physically present to close on property deals in nearly every country.
Although you can technically use an agent or representative, you probably don’t want to rely on them throughout the entire process.
Think of it this way – if you’re planning to buy a property in your home country, how do you go about doing so?
Chances are, you narrow it down to a few properties that you’re highly interested in, tour them, negotiate a price, and then you make a deal.
Your real estate agent will certainly help you find properties that meet your needs and negotiate with owners, but you probably want to see the property yourself before you buy it.
You need to confirm that the property is what you’re looking for, and you should ensure that you’re not missing anything critical about it that could be a problem in the future.
When making real estate deals, you always want to see the property in person before closing.
Therefore, although agents and local representatives can help you tremendously, you will need to travel to view the property yourself if you want to make a smart international real estate purchase.
One of the largest benefits of owning international real estate is diversification, but if you invest too much of your wealth into any single property, you can completely negate that purpose.
Suppose you’ve always dreamed of owning a home along the French Riviera, so you decide to peruse properties in Monaco.
Owning property in Monaco comes with a number of excellent benefits, including a pathway to becoming a resident of a tax-free country, but it comes with a catch.
Buying property in Monaco is very, very expensive.
Unless you’re a multi-billionaire, you’ll likely be pouring most of your wealth into a single property if you want to buy a decent-sized home in Monaco.
If you went ahead and bought the property anyway, think about what would happen if the market suddenly bottomed out. You’d lose nearly all of your wealth.
The simple truth is this: no matter how wealthy you are, you never want to put all of your eggs into one basket – even if that basket appears relatively stable.
Therefore, when considering where you want to buy international real estate, you need to take cost into account and set a reasonable budget.
Finally, as you consider where you want to make your international real estate investment, you need to carefully consider why you want to make this purchase.
If you’re looking for a second home or summer residence, then your ideal property is going to be different from a person who’s looking to earn the highest possible returns.
For example, properties in Cambodia are an excellent choice for people looking to make money. The Cambodian economy is growing rapidly, which means that property values are continually rising.
However, actually living in Cambodia can be difficult for many people.
While it has made leaps and bounds over the past few decades, it’s still very much a developing country. If you want to invest in international real estate to have a second home, you may want to look elsewhere.
You should also consider whether you want to get residency or citizenship by investing in international real estate.
If you want to live in the EU, for instance, you should consider investing in countries that offer Golden Visa programs, such as Latvia, Portugal, or Cyprus.
Considering your intentions when buying international real estate is thus a crucial step in the process.
While you may be tempted to jump on a property with high earning potential, it may not be your best option if you’re looking to move in or eventually become a citizen of that country.
Buying international real estate can be an important first step in the process of going where you’re treated best.
Whether you’re looking for higher returns, asset diversification, or a form of government insurance, making a smart international real estate investment will benefit you well into the future – even if you never leave your home country.
If you need help figuring out what type of international real estate investment is right for you, click here to get professional assistance.