Budget airlines, instant communication and access to international data are making it easier than ever to buy property overseas. The global marketplace can offer limitless possibilities – but with more opportunity comes greater risk.
Why consider overseas?
Todd Hunter, director of wHeregroup, sums up the appeal of investing overseas with one word: “opportunities”.
In particular, Mr Hunter believes entry price points are a major incentive luring investors to markets like New Zealand or the United States.
“You can pick up some pretty good quality houses in both of these places for a bit cheaper than you would in Australia,” he says.
When buying overseas, investors can benefit from currency fluctuations that will stretch their dollar further. Mr Hunter explains that when the Australian dollar falls, any rent and capital gains earned overseas are instantly magnified. On the flip side, when the dollar is high against a foreign currency, you can get more for your money in the overseas country.
“You can take advantage of the exchange rates. The property market doesn't have to do fantastically well for you to make money,” Mr Hunter says.
Director of Cash Flow Gold Jason Simpson has found investors are drawn to overseas markets, particularly the United States, by the promise of a high rental income stream.
“In relation to residential income, net cash flow of anywhere from nine to 14 per cent is a fairly obtainable passive income in some US markets. With commercial property, north of 20 per cent is reasonable,” he says.
Similarly, some regions are experiencing rapid capital growth, particularly those now in recovery after the global financial crisis.
“Equity and growth in the US is far higher than here in Australia. With the global financial crisis recently, we've seen homes in Georgia increase by 300 per cent in the last four years,” Mr Simpson says.
If you can do your own research and avoid high pressure, you're 99 per cent of the way to getting a great deal.
Understanding the local area is vital, whether buying next door or on a different continent. However, venturing into new territory may require some additional preparation.
Firstly, Positive Real Estate’s Sam Saggers suggests investors work out what it is they want to achieve – whether cash flow or capital gains – and how much risk they are prepared to take on.
Mr Saggers also encourages investors to consider how similar the country is to Australia and how easy it is to access.
“If I was to choose an international property market to invest in, I would definitely consider how often I could go there, whether they have a similar culture to Australia, whether they have a similar banking system, the ease of funding and if I could repatriate the money without huge tax implications,” he says.
Mr Saggers also emphasises the importance of societal factors. Working out how residents live and what they value helps investors choose an area where people actually want to live.
“It takes a little bit of research to understand what the locals want, where you find that social fabric of the community and what's important to someone locally,” he says.
Finally, Mr Saggers suggests taking a cue from Chinese or Indian investors, who tend to closely follow international trends.
“The Chinese are a good gauge of where to invest internationally. Look where they’re looking,” he says.
Mr Hunter changes his research criteria depending on the country in question. In the US, for example, he believes it is vital to study employment ratios in each area; in other locations, it might be security or natural disaster that tops the list of considerations.
Economic considerations also come into play, according to Mr Simpson. He suggests zeroing in on areas that are bouncing back from hard financial times.
Factors like employment, strong economic growth or the presence of large companies could indicate a pick-up in activity is on the horizon.
“You want to look at an area that has been hit hard and that has the potential to come back strong,” he says.
Once you have identified your area, Mr Simpson suggests jumping on a plane and visiting local real estate agents. He believes investors should speak to a minimum of two independent agents about any potential purchase.
“At the end of the day, it's going to cost you around $3,000 or $4,000 and three or four days out of your life, but you could potentially save around $100,000. Get on a plane and get over there,” he says.
Mr Hunter encourages investors to verify any information provided by agents with their own research. For investors who want extra guidance, Mr Hunter advises working with a trustworthy buyer’s agent, ideally someone who has already invested in the region.
In addition, a tax consultant with experience in international exchanges can be invaluable.
“There is international tax law that you have to consider. There are certain countries where Australians can't invest,” Mr Hunter warns.
He also advises investors may need to put certain legal structures in place to protect themselves from litigation, and to account for local banking arrangements.
Investing in an international context means working with the unfamiliar and unknown.
One of the biggest dangers in any marketplace is over paying. Mr Saggers believes international investors often end up spending more than the locals, including in Australia. The mistake, he believes, is failing to understand local market trends and preferences.
He also urges investors to steer clear of deals that seem too good to be true – high rental yields can come at a price and may indicate an unstable marketplace.
“If you want a cash-flow return, you can go up to Papua New Guinea and buy yourself a property for about $400,000. You get about $2,000 a week for it, which means you're getting a 20 per cent return,” he says.
“But is Papua New Guinea a stable country? Is there a lot of crime in Papua New Guinea? Is there a big resale market?”
Ultimately, he believes the higher the danger, the higher the return.
“That's why the yields in London aren't high or the yields in Sydney aren't high; they're reliable marketplaces,” he says
In Mr Simpson’s experience, investors must also be wary of buying “flipped” properties. This is a practice whereby investors buy neglected houses in distressed areas, do superficial renovations and then sell them for a dramatically marked-up price.
“That's seriously the number one concern for anybody buying in the US,” he says.
Another danger is that property spruikers target the international market, pushing people to buy in areas with little growth potential.
“Generally those people will have high pressure salespeople and they won't disclose all the information, such as the full address. If you feel like you're being hassled to buy or under any pressure, just walk away,” Mr Simpson says.
Currency arbitrage can also work against international investments by devaluing income when the Australian dollar climbs. Mr Saggers says investors need to carefully judge when to trade currencies to maximise their profit.
Another culture’s approach to property management may also be difficult for Australians to comprehend. For example, Mr Saggers has found American property managers tend to treat their role more like debt collection than management. In Mr Hunter’s experience, many offices overseas collect rent manually, in cash.
Unless investors are prepared for these pitfalls, they may find themselves running into trouble with their international purchase.
You can take advantage of the exchange rates. The property market doesn't have to do fantastically well for you to make money.
Is international right for you?
International investment is open to anyone with the right cash and advice behind them, according to Mr Simpson.
“If you can do your own research and avoid high pressure, you're 99 per cent of the way to getting a great deal,” he says.
At the other end of the spectrum, Mr Saggers tends to think international investing is best left to professional, highly experienced investors.
“You've got the battler, who really shouldn't be putting their money overseas but has maybe $50,000 or $100,000 and likes the concept of buying to get the return. I've never met anyone [like this] it has worked for,” he says.
He believes people with substantial cash assets could do very well buying into successful international hubs, like London or New York.
“To be honest, if you've got the money to play in that space, it’s well worth looking into,” he says.
Mr Hunter takes a more moderate position. He believes international investing offers excellent opportunities, even at the cheaper end of the price scale, but says it is not ideal for a first-time investor.
“It's not that overseas is any more difficult, but I would say you would want to have some real estate transaction experience before you venture over,” he says.
He also believes the best deals are available for investors looking to buy more than five properties.
“It’s not about doing a one-off transaction because it can become expensive with set-up costs and ongoing costs. Those costs can then be dispersed through multiple properties,” Mr Hunter says.
International markets are rife with opportunities. Investors prepared to take the risk may find they have the world on a platter.
New Zealand: stay in the neighbourhood
New Zealand has a lot of points in its favour, including a similar culture to Australia, an interlinked banking system and a favourable exchange rate.
“You could actually use the same principles you use here but just use New Zealand as a stepping stone to good returns,” Positive Real Estate’s Sam Saggers suggests.
In his experience, some regional towns offer investors returns of 10 per cent or higher.
Director of wHeregroup Todd Hunter also has New Zealand on his radar, saying the country’s economy appears to be bouncing back. The low entry price points are a major drawcard, but he warns earthquakes are an issue when buying in this region.
The United States: high risk, high reward
Cash Flow Gold’s Jason Simpson singles out the state of Georgia as a current hotspot due to its strong economy and rapid value growth. wHeregroup’s Todd Hunter also has an eye on Georgia since recent changes to tax law have boosted the local economy.
Michigan is another spot to watch, according to both Mr Simpson and Mr Hunter.
Mr Hunter sees Detroit’s poor financial situation as a chance to buy into the bottom of the market. However, he warns that some areas of the city have a high crime rate.
“When you hear about how Detroit's gone bad, to me that was an eye opener that Detroit is probably a good place to invest now. But there are some very ordinary places in Detroit and some good places,” he says.
Bali: off the beaten track
People who love the tropical island lifestyle can combine business and pleasure by investing in Bali. While an unusual investment destination, more opportunities are popping up in this region.
“In recent years, Bali has emerged as one of the top destinations, not only for holidays but also for investment,” says Ayana Residences director of sales Mariusz Mierzejewski.
He suggests changes to the government in Bali, as well as upgrades to local infrastructure, have made the island an investor-friendly destination.
In addition, the number of visitors is expected to triple when a new airport is built.
“There are more and more foreign investors buying land, houses and apartments and doing business in Bali, which actually drives the prices higher. We have seen prices increasing in Bali in the past five years in the double digits,” Mr Mierzejewski says.
By choosing a “lifestyle investment”, he says investors can earn rental income as well as having access to a holiday home.
International investment hubs
Positive Real Estate’s Sam Saggers believes the best profits are found in major cosmopolitan hubs, like London, New York, Singapore or Hong Kong. The price point for these cities can be quite high but they also come with impressive growth potential.
“Manhattan just went through a global low. The market has been going very strong. People are buying apartments and making $200,000 or $300,000 in a short period of time,” he says.
“Hong Kong has always been a strong performer. London, everyone buys there internationally.”
While Mr Saggers acknowledges the price point is out for reach of many investors, he believes those who can afford a foothold in these markets are likely to see excellent returns.
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