There are many rules in play when you invest in real estate abroad. In property, the most important thing to remember is the following: Location, location, location. Real estate is a long-term investment, and extensive research is required to gather the right data about the property market in the foreign territory. Whenever you take capital and invest it in real estate, there is a high opportunity cost (the foregone opportunities) involved. Multiple considerations must be factored into the equation with real estate, such as the current state of the overseas market, and how easy it will be to sell that real estate if you need access to your funds. Whether you’re going it alone, or using a recognized international real estate company, it’s important to understand precisely what your options are.
Consider the following scenario: You could purchase a posh 4-bedroom townhouse in an Eastern European country, or a delightful 2-bedroom flat in the London metropolis. Depending on how you wish to manage your investments, you could be looking at things like short-term rentals, long-term rentals, or vacation homes abroad. Careful analysis of the property market will reveal some interesting phenomena. What are the latest property trends? Have property prices appreciated or depreciated over time?
You may wish to buy on the dip, hoping for a rebound, or you simply may wish to buy on the way up while markets are steadily rising. It’s important to drill down into precise markets to understand the nature of them. What happens in Paris may not apply in Milan, or Prague. Various industry aficionados should be consulted for the most up-to-date market trends and data to help you in your real estate search. Sometimes, this will involve reading up about property laws, real estate taxes, capital gains tax, and any other amendments that could influence the value of your financial portfolio.
And Then There Is the Issue of Money…
We left this issue for last since it is the most important issue to focus on. Whenever you’re dealing with international real estate, the most sobering consideration of all is financing. Will you have the necessary funds to purchase the real estate, and how will you repatriate rental income, and property sales income from the foreign country to your current location? These are exigent concerns. The viability of any investment is dependent on acquiring the necessary financing for it. The exchange rate (the value of one currency for another) is central to this issue.
When you convert currencies, you are effectively selling one currency in the pair and buying the other currency in the pair. For example, a US citizen buying real estate in the UK will sell USD and buy GBP. If the current exchange rate is 1.34, and the property price is £1 million, the US buyer will require approximately $1,340,000 to purchase the real estate. Unfortunately, this is hardly ever the true cost that is paid. Banks and traditional financial institutions tack on much higher rates, hidden fees, transaction charges, commissions and the like to substantially raise the total cost.
Non-Bank Providers of Financing Offer Cost-Effective Solutions for International Investments in Real Estate
Many of the leading money transfer companies are not banks like HSBC, Barclays, Bank of America, Citigroup, Morgan Stanley, Chase Manhattan and Deutsche Bank. They are non-bank entities like FinTech enterprises. The reason they have exploded onto the scene is because people – international real estate investors included – are tired of paying the extortionary rates levied by banks on money transfers. Once you’re ready to make an international FX transfer to buy real estate, it behooves you to test the waters with leading non-bank entities. These companies include the likes of WorldFirst, Currencies Direct, TorFX and others.
Fortunately, these companies are highly credible, established, and offer low-cost services. The minimum transfer can be as low as £500, and dozens of currencies are supported by these companies. Among the many benefits of using them are low or no fees, quick and easy registration, and the lowest possible spreads on FX transfers. Banks are notorious for high fees levied on incoming and outgoing wire transfers, but the biggest expense is in the spread (the difference between the buying price and the selling price on currencies). A practical example will illustrate precisely how you can benefit from avoiding traditional banks and going with a non-bank entity such as these international money transfer companies:
- Assume a purchase price of £1 million and an exchange rate at Reuters of 1.34. If you approach your bank, they may offer you a rate of 1.350 to purchase GBP. The extra $0.015 may seem insignificant, but on £1 million that amounts to $15,000 more tacked onto your purchase price. In GBP that amounts to £11,194 that you have lost through using a bank with a high spread. Sometimes the spreads can be higher, and there are additional fees added on to raise the price.
Are There Other Considerations to Bear in Mind When Purchasing Property Abroad?
Currencies are influenced by a multitude of factors, notably geopolitical forces, monetary policy, and economic announcements. In the case of the US and the UK, there are many factors at play. For example, the Fed is in the process of raising interest rates (quantitative tightening). This will invariably help the US buyer by strengthening the value of the USD relative to the GBP. If the current interest rate is 1.25% – 1.50%, there will be greater demand for the USD. Another factor that could weigh heavily on the purchase price of foreign real estate is tax reform in the US. When the House and the Senate agree to a tax proposal that they want signed by President Trump then this will result in a massive capital inflow to the US. This bodes well for the USD.
On the UK side, positive developments with Brexit negotiations will help to strengthen the GBP relative to the USD and the EUR. If Prime Minister May is able to continue making progress with her European counterparts, this should help the GBP to rally. This will then weaken the USD by requiring the real estate buyer to pay more in USD for the equivalent GBP value. By juggling push and pull factors around, and finding the most opportune time to purchase real estate abroad, investors can benefit greatly from these international FX transactions.
The benefits of investing in real estate abroad are evident across several channels: rental income, and investment growth. Sometimes the growth rate in property markets abroad outpaces the inflation rate, helping to build real wealth for the investor. Barring an economic downturn, bricks and mortar investments abroad and the currency flows that make it impossible are widely regarded as the best way to go.