Is Investing in International Real Estate Right for You?
When choosing whether to invest abroad, consider two simple questions:
- Do you have a passion or affinity for a particular country?
- If so, how much do you know about that market?
These questions often surprise people, because they’re not about money, specific investment strategies, real estate expertise, or experience. Other important factors, such as your budget, will obviously impact your decision, but these two basic questions get right to the heart of why some people succeed in overseas real estate investments where others fail spectacularly.
Play on your passion
The considerations for purchasing a vacation or retirement home are quite different from the ones outlined here. (Of course, if you occasionally want to use an investment property for your family vacation, that’s great!)
Building a robust real estate portfolio, whether at home or abroad, means treating your investment(s) as a business. This is why it’s so important to find your passion.
Passion is what fuels successful businesses. Passion brings out the best in people and gives them the drive to succeed. After all, every business venture hits the odd bump in the road, and passion keeps your enthusiasm alive when you get that call about a burst water pipe in Berlin at 6 a.m.
Have you always jaunted to Jamaica, for example? Are you fanatical about all things French? Do you dream of Denmark?
Bottom line is, when you like what you’re doing, you do it better. So, although crunching the numbers and doing the research are important, don’t be afraid to let your personal passion inform your decision making. And if your passion lies closer to home, go for that instead!
Tap into available knowledge
Just because a country appeals to you or looks great on paper (in terms of growth prospects, return on investment, and so on) doesn’t mean it’s accessible for you personally as an investor. If you have no prior experience or knowledge of that country and no contacts there, you may struggle to set up and manage your investment.
After you’ve identified where your passion lies, you need to realistically assess how accessible that country is for you as a first-time investor in that market.
If your own knowledge and experience of a particular country is limited, don’t be shy about hitting up your friends, family, and acquaintances for advice. Make a list of your contacts who have some experience of your chosen market, whether it’s your colleague’s brother who has a holiday home or the local barista who grew up there. Most people are happy to help by answering questions and recommending useful contacts.
Ultimately, it’s not all about the numbers. Some countries, no matter how attractive they look financially, just won’t stack up for you personally. Be realistic about what’s achievable for you at this point in your property journey.
Consider your budget
Passion aside, unless you’ve got plenty of funds to play with, your budget will absolutely impact your decision on whether to invest at home or abroad.
Simple budget constraints have driven many real estate investors into exciting foreign markets. For example, the London real estate market is so buoyant that beginner investors are often priced out altogether. So, if you’re renting an apartment in South London and looking to get into property investing, chances are, you’ll have to look farther afield. You’ll certainly get a lot more for your money in Bulgaria than you will in Balham!
When you’re deciding which country to invest in, budget is an important factor. You may well have a passion for Monaco, but if your budget is more slot machine than high roller, the world’s most expensive property market will be way out of your reach.
Your budget may not be your own cash. Taking out a mortgage or other form of finance means you need less upfront capital to purchase a property. However, if you plan to buy your investment property with a mortgage, availability of financing in a given country is another factor to consider.
Some of the more mainstream investment countries like Portugal, France, and Spain will do mortgages for overseas buyers, which makes those countries more accessible to investors with limited capital. In less developed markets, however, obtaining a mortgage may not be an option.
In addition to getting a mortgage in your chosen investment country, other financing options include the following:
- Taking out a mortgage in your home country: Some specialist providers offer mortgages for overseas properties, although these mortgages tend to be more expensive and difficult to obtain.
- Releasing equity from your home or another property you own: This approach is a great low-barrier way to purchase affordable property overseas, because it means you can pay cash and avoid any overseas financing. On the downside, it ties your investment to your home and can put your home at risk.
- Taking out a personal loan: For investors on a budget who have no equity to release and limited access to mortgage funds, a personal loan can provide a relatively quick and easy way to raise funds.
- Buying with friends and family: Pooling your resources with like-minded friends and family can be a great way to boost your budget. However, you should always have a legal agreement in place that sets out who owns what proportion of the property and be clear from the outset who will be responsible for managing the property.
The low property prices in many overseas markets means you can be a bit more creative with financing options. I know one couple, friends of friends, who purchased a ridiculously cheap property in Eastern Europe by borrowing on their credit card!
Taking on additional mortgage debt or a personal loan isn’t for everyone, and whether it’s right for you will depend on your tolerance for risk. A risk-averse investor may only be comfortable with a small mortgage of, say, 30 percent of the value of the property — or even no mortgage at all — while someone who’s more comfortable with risk may be willing to stretch to an 80 percent or 90 percent mortgage.
Never borrow more than you can afford to repay, no matter how mouthwatering the investment opportunity. And always talk to an independent financial advisor before making any decision. They’ll be able to help you decide what you can afford and which financing option, if any, is right for you.
Assess Your Risk Profile
Every investment is different, and the success of each investment depends on a wide range of factors or risks. In an overseas market, there are even more factors to consider. So, before you dive into the cool, sparkling waters of overseas property, you need to understand your personal risk profile. Why? Because your attitude to risk in general should inform any investment decision, especially whether investing overseas is the right move for you.
Your risk profile can best be defined as how much risk you’re willing to accept, or how much risk you’re comfortable with, as you work toward your real estate goals.
Of course, you should be concerned about any risk that may affect your ability to make money on a property, but some people have a greater tolerance for risk than others. Understanding your attitude to risk is an important step in deciding whether to invest overseas or closer to home.
Identify where you sit on the risk spectrum
Consider someone purchasing an apartment in the Algarve, Portugal. Let’s call our fictional investor Dave. Dave doesn’t know the Algarve well, and this is his first overseas investment. So, in addition to getting up to speed on running a property as a vacation rental, Dave also has many other specific barriers to overcome:
- The language barrier
- Lack of local contacts
- No knowledge of local laws
- Currency risk (Portugal being in the eurozone)
- Limited ability to manage the property himself (because he lives 2,000 miles away)
All these factors make the investment a higher risk than, say, a buy-to-rent apartment in Dave’s hometown. Understanding Dave’s risk profile essentially means understanding how concerned he is about these factors.
No investment is absolutely risk free, so there’s always an element of risk to contend with. The key is to work out what you’re comfortable with and not push yourself beyond that point.
If Dave were very risk averse, this investment may be too high a risk. If Dave were a very adventurous investor, he may see the Algarve’s stable real estate market, which is a favorite among foreign investors, as too “safe,” not delivering high enough returns. Dave sits somewhere in the middle: He’s comfortable with the risks associated with investing in Portugal, but he wouldn’t be comfortable venturing into markets that are relatively untested for overseas investors.
In this way, risk tolerance is a spectrum, not a black-or-white issue. Are you the sort of person who likes jumping out of planes, bungee jumping, and climbing mountains? Then, in general, you have a greater tolerance for risk than I do (I’m a guy who enjoys fishing, playing guitar, and taking my family on vacation in our vintage camper van). But having started my own business in my twenties, I have a greater tolerance for risk than, say, someone who has worked for the same company, in the same job, for 30 years.
Even if your general attitude to risk is pretty gutsy, and you do enjoy jumping out of planes in your spare time, that doesn’t mean you’ll feel comfortable with high-risk real estate investments. The goal isn’t to push yourself into one form of investing over another — it’s to figure out what you’re comfortable with.
Consider country-specific risk factors
You’ve got a passion for a particular country. You’ve got a base level of local knowledge, either through your own experience or existing contacts. It’s within your budget. Now, how can you tell whether that country suits your risk profile?
Assessing countries for risk is kind of like assessing companies when investing in the stock market. Do you go for a newer company with huge potential for growth (and, let’s be honest, utter failure), or do you go for an established blue-chip company that’s expected to deliver steady returns over many years?
It’s the same with international real estate. If you want a safer investment (as “safe” or reliable as any investment can get), you’ll probably opt for a country that:
- Has a stable economy (steady economic growth, minimal fluctuations in exchanges rates and interest rates, and so on)
- Enjoys political stability
- You understand and know well (or have the ability to access and gain knowledge more easily)
- Has an established real estate market that’s already welcoming lots of international investors
With a fairly low-risk country like this, you may see smaller gains in terms of capital growth than you would in a higher-risk real estate market, but you’ll also probably experience fewer crazy swings in terms of income and costs.
Like stocks and shares, as a rule of thumb, higher-risk real estate markets tend to offer higher returns. Someone with the foresight to purchase a two-bedroom apartment in East Berlin in the early 1990s, just after the fall of the Berlin Wall, would have paid as little as $9,000. Now, it would be worth easily $300,000. But investing early in untested markets like this may mean weathering years of political and financial uncertainty before you see real gains.
Even a country with an established real estate market that attracts thousands of foreign buyers each year isn’t immune to risk. If the economy isn’t stable, you can still get burned. Take Greece, for example. After years of political and economic uncertainty and a crippling financial crisis, property prices in Greece have fallen more than 40 percent (at the time of writing) since 2008, while property taxes and rental taxes have increased multiple times. For the gung-ho investor, these low prices in Greece may represent an opportunity for a bargain. But if the country were to be ejected from (or opt to leave) the eurozone, prices would likely plummet further. Depending on your ultimate goal, this risk may not be a deal breaker for you, but for many people, it would be a huge concern.
Factor your goals into the equation
When weighing the risks of overseas investments, you need to understand your ultimate goals, because your goals will affect your risk tolerance.
Consider the following:
- How long you intend to hold the investment: If you’re planning to hold the property as a long-term investment, short- and medium-term fluctuations will be less of a concern. In the context of decades, housing bubbles will pass and political landscapes will (often, but not always) smooth out. However, if you’re planning to turn the property around as a short-term investment, perhaps as a development project, then political and economic fluctuations can have a huge impact on the success of your investment.
- Whether you’re looking for capital growth (an increase in the property’s value) or regular income (for example, as a rental property): If you want to be earning income immediately and consistently, you need to invest in an established market with a ready-and-waiting target audience. You can’t afford to wait for an emerging market to catch up to your vision.
- What strategy you intend to employ: This ties in closely to the previous point. An ongoing income strategy like houses in multiple occupation or vacation lets likewise requires an established market.
One of my investments very much falls into the emerging market field: an apartment in Egypt. In the short and medium term, financial and political instability (compared to, say, Europe or the United States) means returns are, for now, small. But my goal for this investment was to get into the market early, buy cheap, hold the investment for ten years (maybe longer), and get a great return. In the context of this goal, short-term fluctuations and uncertainties aren’t such a concern.