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.
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.
The Benefits of Owning International Real Estate
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.
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.
You see, 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.
While I’m not one for tinfoil hats and doomsday prepping, I think that having an insurance policy against government nonsense is generally a good idea.
At its most basic, 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’s 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.
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.
If you rent your property, then you need to report any income that you generate from those rentals, and when you sell, you will need to pay capital gains tax.
However, if you simply buy the property and leave it be for the most part, you have an asset that’s both relatively safe and legally non-reportable.
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 little 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.
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.
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.
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.
So, 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 continuously 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.
Therefore, 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.