With prices rising and yields falling in Australia, you may be considering diversifying your property portfolio. But is international real estate a good investment?
Blogger: Otto Dargan, managing director, homeloanexperts.com.au
If you’ve been investing in property for a few years now, chances are you’re wondering when the good times will end for Australia’s real estate market. Dread usually follows this curiosity.
Although many property experts have pointed to a gradual slow down, that popping sound has been enough to “encourage” investors to take a peek across the seas and see what opportunities lie abroad.
Of course, investing in international real estate isn’t a new thing, with many of those who have taken the leap reaping the spoils of super-cheap property prices and higher rental yields.
Many globetrotting investors look to the long-term and invest in countries where they plan to eventually retire.
Before you jump on the next flight, slow down and return your seats to their upright position!
Overseas investing can be a bumpy ride so it pays to know your stuff.
It’s easy to access equity
Accessing equity in your current home to buy overseas property is not difficult – it’s your money after all. Generally speaking, you can access up to 80 per cent of the property value in equity and up to 90 per cent with some banks.
However, you will have to meet all standard requirements when refinancing your mortgage with your bank.
They will revalue your property and assess your ability to make the new repayments (your serviceability) and then lend you up to your chosen loan-to-valuation ratio (LVR), which is your loan amount compared to the value of the property.
A bank will also often ask you to declare the purpose of the loan and you simply select investment.
Overseas rental income is a category of income you can include as part of the bank’s serviceability calculations.
Diversify your holdings
Diversifying is one of the staples of a good investment portfolio so why not mix up your property holdings by putting some of your money to work overseas?
Consider a few different countries with robust economies in order to protect yourself from any potential downturn in one particular real estate market.
The plus side is that you may be able to get better rental yields in a foreign market than you currently are in Australia.
Pay less in tax!
By diversifying in different property markets you may well find yourself falling into smaller tax brackets in certain countries than you currently are in Australia, which can potentially save you thousands of dollars.
This is great if you’re in a country that requires you to pay tax on any capital gains you make from a sale of property before transferring the funds to Australia.
Buying property for your SMSF
Yes, it is possible to purchase international real estate to bolster your self-managed superannuation fund (SMSF).
In order to comply with the Superannuation Industry (Supervision) Act (SIS Act) though, the fund requires an investment strategy from you, as the trustee, that allows direct property investment.
A suitable investment strategy needs to show the purpose behind it and how it will benefit the members of the SMSF (the sole purpose test). A licensed financial adviser can help you with setting up an appropriate investment strategy that adheres to the SMSF borrowing rules.
It’s essential to speak to a qualified accountant with experience in SMSFs before making any financial decision.
The best way to avoid or at least minimise the following is to plan ahead and seek out appropriate advice from a professional team including an accountant, lawyer and a property manager.
You’re not in Australia anymore
Not all property markets are created equal so don’t make assumptions about overseas markets based on an Australian outlook.
If you’re a seasoned investor in Australia, you have to compete with a lot of media commentary and analysis about the state of the real estate market.
Most of it is white noise but you can generally make better decisions if you make yourself aware of planned infrastructure projects such as the development of roads and motorways, airports, mines and overall urban renewal schemes. It’s very difficult to keep track of this if you’re buying international real estate.
Taking the US as an example, the rate of vandalism has exploded since the global financial crisis, creating neighbourhoods of renters.
There are even entire suburbs that are now ghost towns as a result of the closure of particular businesses or industries that the town was reliant upon, such as car manufacturing.
When people are renting, they don't look after their houses and they tend not to look after the neighbourhood well.
On that note, it’s important to research the state of supply and demand in a country.
Oversupply is not a good thing if your strategy is to make money!
It’s not the same mortgage industry you’re used to
First and foremost, there are some nations that won’t even let you buy property unless you’re a citizen. Those that do will not approve you for a mortgage because you’re a non-resident, meaning you will have to come up with the funds to complete the purchase yourself.
In addition, some countries require you to set up a company in order to purchase real estate, meaning that your investment is owned through a trust and not in your name.
Setting up a trust is a tough exercise if you’re looking to buy property locally, so trying to to do it for property abroad is even more complex.
In cases like this, it helps if you have family or relatives in the country you’re looking to purchase property who can take ownership.
In some countries, you don’t really own the property at all but rather you purchase the property via a lease arrangement.
This is similar to properties in Canberra, which have a 99-year lease term.
Although you can do whatever you wish with the property and earn an investment income, the property can be subject to changes in zoning by a government and they can buy it back from you at any time.
Managing a property abroad can be tough
Travelling overseas costs money and time.
You may well be able to make the initial trip to locate and purchase a house or apartment overseas but if the property requires sudden repairs or you plan to renovate, undertaking such work is risky if you’re not actually in the country to manage it.
If there's something wrong with the property, you wouldn't know about it and even if you did, you can't be there in time to resolve it, unless it's your home country and you go back every year.
Worse still, unscrupulous real estate agents won’t tell you about this so unless you can fly over and buy near a major city, it’s a massive risk.
Beware of exchange rates
Speculating on currency exchange is so tricky that even experienced economists often get it wrong. The risk involved with speculating is perhaps the biggest case against overseas investment overall.
Let’s say you invest A$400,000 into a property costing EUR€300,000 (at the rate of EUR€0.75 ).
Over the next five years the property goes up as expected – five per cent per year. That is EUR€15,000 per year or A$75,000. You then sell the property and bring back EUR€375,000.
Unfortunately the Australian dollar has strengthened to A$0.95/euro. Your proceeds are now A$394,737 (375/0.95) as opposed to A$500,000 (at the rate of A$0.75/euro)
All your gains are wiped out because of the exchange rate and these estimates don’t even take into any taxes and legal and real estate fees you might be expected to pay.
Any rental income you’ll earn will also be subject to fluctuating exchange rates so choosing the right time to transfer money to your account is essential.
Double tax attack
Yes, there is the potential to pay less on your investment gains but this can be undone by double taxation.
To explain, as an individual in one country you may make a taxable gain in another country. You may have to then pay tax on that gain in the country in which it was made as well as your country of residence.
Luckily, many nations have made bilateral tax agreements with each other so in some cases you may be taxed in your country of residence and be exempt in the country in which you make a gain.
On that note, it’s important to keep in mind that you can’t make a claim on a capital loss on an overseas property but you can make a claim on a loss if you borrowed money.
Say if you borrowed $300,000, you can deduct the interest on the loan if it's related to a loss on an investment property.
There are many different ways foreign and bilateral tax agreements can impact your investment strategy so speak with a professional accountant before investing in property overseas.
Australia still has a few surprises up its sleeve
Yes, if you do really well in overseas investing, you may be kicking up your feet on the French Riviera in no time. The reality though is that retiring abroad is usually only a good way to go for those with family who reside outside Australia.
Instead of peeping over your back fence, have a dig around locally.
Not only did the Australian housing market largely hold its value in the aftermath of the global financial crisis, prices have grown exponentially since then.
By buying property in Australia, you’re also in a position to borrow to invest. In fact, there are some lenders that will allow you to borrow 95 per cent of the property value and capitalise the cost of lender's mortgage insurance, saving you thousands of dollars in upfront costs.
If you compare Australia with the rest of the world, we’ve never suffered from a significant market crash, with our prices never dropping below the 10 per cent mark.
Funnily enough, much of this growth has been spurred on by foreign investors over the past couple of decades, the reason being that Australia is one of the most popular destinations to retire in the world.
A number of industry figures have pointed to a slowdown in Australian house price growth in the short to medium term, but most of them are suggesting this to ease off slowly.
It’s a clear sign that Australia will continue to cater to investors in the immediate term and there really has never been a better time to build your property portfolio with the government considering introducing new lending rules that could see investment loans become more pricey.
In addition to this, there’s no telling when the accelerator will ease off on the Aussie property boom so to take advantage, it pays to get in quick.
Do you really want to diversify?
Go interstate and avoid investing in areas that are “hot” or being heavily focused on by the media. By the time you go to buy it, everyone and their mums will know about it and you’ll have missed your opportunity.
You’re better off doing your own due diligence and looking for untapped opportunities.
About the Blogger
Otto Dargan is a two-time winner of St George Bank's 'Australia’s Brightest Broker' competition and the managing director of specialist mortgage broker homeloanexperts.com.au.