Anyone who travels has likely had the experience of falling in love with the culture, food and lifestyle in another country. While some people just dream of someday owning property internationally, others take steps to invest in a second home abroad. While buying a property in a foreign country can be exciting, it's not something to undertake without some serious research and expert advice.
“We do warn people about the 'margarita effect'," said Ronan McMahon, real estate editor for International Living and editor of Real Estate Trend Alert. “That's when people go somewhere beautiful and click with the area and buy property on the spur of the moment. It's best to take your time and keep your guard up so you don't get caught up in a scam or make a mistake."
McMahon splits his time between Mexico, Ireland and Portugal and owns rental properties and personal residences in those countries.
Scott Kapin, a senior vice president with City National Bank Trust and Estate Planning, worked with a client considering buying a home in Mexico .
“She has family living in Mexico and wants to be closer to them," Kapin said. “City National is a co-trustee of her husband's estate so we're helping facilitate the process and working with legal counsel in Mexico."
Hiring local experts in addition to working with your wealth management team in the U.S. is essential to making wise decisions when buying property overseas.
“There's an old adage: If you think it's expensive to hire a professional, wait until you hire an amateur," said Kapin.
Language barriers can be a challenge when you buy property in another country, said Kathleen Peddicord, publisher of Live and Invest Overseas and author of several books on buying real estate overseas. Peddicord and her husband, Lief Simon, a global property investor and contributor to the Live and Invest Overseas newsletter, split their time between Paris and Panama.
“Even if you speak the local language, you may not be expert enough to read a contract in that language," said Peddicord.
Experts in international property ownership suggest the following tips before you make a deposit on a villa in Mexico or a pied-à-terre in Paris.
1. Line up an attorney
Hiring a local lawyer before signing any paperwork or spending any money is the most important step in purchasing property overseas, said Simon. Typically, you can hire a real estate attorney who will also take care of the property's title review.
“It's important to make sure the local attorney is completely arms-length from any other part of the transaction and is representing your interests," said McMahon. “Unfortunately, there are times when an attorney is aligned with the developer or real estate agent and it isn't clear that the person is representing your interests."
Kapin recommends reaching out to your network of professionals for contacts in other countries.
2. Figure out your finances
Just as with buying property in the U.S., it pays to consult your wealth advisor to consider how a cash purchase will impact your overall financial plan.
“You also need to understand the other costs associated with owning property overseas, including maintenance," Kapin said. “You need to look into whether you want to rent the property to short-term vacationers and what the costs and income would be" if so.
While many high-net-worth individuals pay cash to buy property overseas, it's smart to have a bank account with local currency available to you.
3. Be aware of local real estate practices
One of the biggest differences when buying property overseas compared to in the U.S. is the lack of a multiple listing service, said Peddicord.
“That places an extra burden on buyers to try to figure out what they should pay for a property they want since there isn't a way to find out what similar properties sold for," she said.
In addition, real estate agents in many countries work solely for their commission rather than representing the interests of the buyers or the sellers, said Peddicord.
“This means that buyers must work harder to filter through real estate agents to find someone they can trust for advice," Peddicord said.
4. Check residency rules
In some countries, such as Montenegro, buying property is a way to establish residency, said Simon.
“A 'Golden Visa' is also available in many countries, especially in Europe, that provides residency for people who buy property or invest a certain amount of money in a country," said Simon.
Typically, he said, that starts at $250,000 or more.
“In Mexico, foreigners aren't allowed to own property within a certain distance of the coast, but it's possible to do a long-term ground lease or to set up a domestic LLC to hold the property," said Kapin. “U.S. trusts can only manage assets in the 50 states, but there are vehicles in other countries that can provide some asset protection."
5. Review all tax implications
Simon said property taxes are typically lower in most countries than in the U.S., while capital gains taxes are often similar to the U.S.
“In many countries, you'll pay a transfer tax or a stamp duty when a property changes hands," said Simon. “That can range from 1% to 10%, which could be a significant cash requirement if you're buying a home valued at $1 million."
If you plan to rent your property, you'll likely need to pay taxes on the rental income in the country it is in. A property management company may withhold the taxes and pay them for you, or you will need to hire a local accountant, said Simon.
“Make sure you have the right accountant in the U.S. who understands the tax issues associated with owning property overseas," said Kapin. “You also need an accountant or proper representative in the country where you're buying property, who may or may not be the same person as your legal expert."
6. Consider security issues
Staying safe while you're overseas is of prime importance and you also want to make sure your overseas property is protected when you are in the U.S.
“A strong property management team can be your best option and is readily available in areas with many foreign buyers," said McMahon. “You may want to consider buying in a gated community in some locations. Obviously, if you prefer to buy in an off-the-beaten-path location, it's more challenging to find the support you need to maintain your property."
Overseas buyers should research political issues, crime and the prevalence of extreme weather when determining where to buy.
“We don't talk about any destination where there's concern over personal property rights," said Peddicord.
7. Review health care options
Medical care abroad is generally much less expensive than in the U.S., said Dan Prescher, senior editor at International Living, so many wealthy people pay cash for minor issues, medications and even some surgeries. In addition, many U.S. health insurance policies include limited emergency medical coverage while traveling abroad for a few months. Travel insurance is another option.
“For those taking up residency in foreign countries, it's often possible to join that country's national health care system at a very low cost," said Prescher. “Nearly all countries that have national health care systems also have private insurance options as well, which are usually much less expensive than the same options in the U.S."
8. Renting your property to vacationers
Some cities and developments limit short-term rentals, but property owners can generally rent their homes in most places, said McMahon.
“A local lawyer is the best resource for the rules about vacation rentals," said McMahon. “You need to follow the rules to be compliant, which may mean you need to get a license and to pay local taxes on the rental income."
As with any real estate deal, it's important to take your time and buy carefully.
“If you buy well, you can sell well in few years if you decide you want to try living in another country," said McMahon.
Supplementing your U.S. team of wealth advisors with local experts and researching the place you want to live can smooth the path to your overseas investment or vacation property purchase.
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