Whilst there are many benefits of investing in overseas property, before rushing in and signing a contract, step back and consider the risks. Here, we endeavour to articulate some of the key risks you should consider before buying overseas property.
1. Local Laws
Rules relating to property investment vary around the world. When buying overseas property, be sure to familiarise yourself with the local laws, and be aware that in some countries the legal protections may not be as good as they are in Australia.
- Foreign ownership of property – what restrictions are there for foreign buyers?
- Tenancy laws – what are the landlord versus the tenants rights? What bond can landlords demand from a tenant, and what rights do landlords have to evict a tenant?
- What form of property title will you own – freehold title or leasehold title?
- How do body corporate’s or strata’s work under the country’s legal framework?
Protect yourself by ensuring you take advice from an independent legal advisor prior to signing a contract.
2. Lack of knowledge of local market
If you are buying overseas property, how well do you understand the local real estate market?
There are a number of aspects to the risks associated with lack of knowledge of the local market.
- Do you have adequate access to historical sales information of the properties in the area?
- Do you know which areas are the best performing or have the best growth potential?
- Do you have knowledge and access to all the properties on the market?
- Are there specific local issues that influence the attractiveness of a property (eg. feng shui, direction of the afternoon sun, proximity to public transport / schools, economic development in the area, importance of off-street parking / second bathrooms / security etc)
- Are there any country or location specific issues to consider. For example, maintenance issues associated buildings potentially hundreds of years old, maintenance issues associated with extreme weather (tropical climates, freezing winters), systemic problems with new constructions.
If you do not have a strong familiarity with the local market, using a local buyers agent (acting in your best interests) will help you ensure you buy the right property.
3. Foreign Language
If you are buying in a country where English is not the official language, then you will be signing a sales contract written in a foreign language. If you are financing the purchase of the overseas property locally, then your loan and mortgage documents are also likely to be written in a foreign language. Other documents that are also likely to not be written in English could include documents related to title of the property, and any body corporate documentation and meeting minutes.
Whilst in Australia, we may not take much notice of a lot of what is written in these documents, it is still likely that you would at least skim read these documents to make sure nothing untoward included. When the documents are written in a foreign language it is important to get someone you know and trust to read the documents and explain everything on them, or ask a local lawyer (who speaks English) to review the documents for you. Ideally, you would have all key documents translated to English for your future record and comfort.
4. Currency Risk
One of the benefits of investing in overseas property is that it provides the investor with currency diversification. However currency diversification also brings with it a level of risk, and this risk is magnified when you borrow to purchase the property.
At one level there is the currency risk that impacts your relative Australian dollar return. For example, should the Australian dollar rise in value substantially, then the value of your overseas property (in Australian dollar terms) will reduce.
However, on another level, any mismatch between the local currency, the currency you are borrowing money in, and the currency you are earning income to meet any loan repayments introduces additional currency risk.
Before buying overseas property you should understand the volatility of the local currency against the Australian dollar, and also evaluate how you plan to manage any inherent currency risk (if any) between the currency of your loan and how you will repay that loan. In this article, I previously discussed some options to assist you in managing currency risk when investing in property.
5. Obtaining Finance
Whilst it is getting harder for Australian expats to finance property in Australia, it does not mean borrowing when buying overseas property is any easier. In some countries, you may find banks are reluctant to lend to temporary residents or may impose additional restrictions or require higher deposits.
6. Managing property remotely
Just as it becomes difficult for Australian expats managing their properties in Australia while living abroad, the problems can be magnified when buying overseas property. It can be difficult finding a reliable property manager to take care of your overseas property as well as you would like them to, and if you are not buying property overseas in an English speaking country, you may also have to deal with the problems that language barriers present.
7. Long term investment
Buying overseas property is a long term commitment. The GFC reminded people around the world that property prices can move in two directions, and it can take a long time for property prices to recover. In addition, property is not a liquid asset. Unlike the sharemarket, you cannot simply issue an instruction to sell, and expect to get your money the following day.
If, when buying overseas property, you are not investing for the long term then you run the risk that when you go to sell your property the market may be depressed and you will need to sell at a loss, or you may find it sitting on the market for a long time before a buyer comes along.
As buying overseas property should be a long term investment it also means that you are making a long term commitment to investing in that country. How do you feel about that? Are you comfortable about the long term political and economic stability of the country?
What is your experience buying overseas property? Would you do it again? Share in the comments section below.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. The Australian Expat Investor may receive referral commissions from companies referred in this article.