Dateline: Kuala Lumpur, Malaysia
And we’re always on the lookout for the best country, the cheapest real estate markets, countries with no property taxes, and – most importantly – identifying what makes for the most profitable investments.
We even offer our Real Estate Master Class for those who are serious about foreign real estate investment.
Every international real estate investment deal is unique and is motivated by different factors, whether it’s for a citizenship by investment, residence by investment, general diversification, currency diversification, or just having a place to live overseas.
But whatever it is that motivates people to invest in real estate abroad, I have also heard a lot of concerns over the years from many different people about the challenges of real estate investment overseas.
From debt to lawsuits to depreciation, there are numerous concerns about the real estate market where you live that – chances are – don’t exist or certainly don’t exist in the same way overseas.
In this article, we will confront these challenges of real estate investment, including issues to avoid as well as concerns that you might want to reconsider if you are going to invest in the markets we regularly recommend here at Nomad Capitalist.
Don’t Plan On The Same Challenges[embedded content] [embedded content]
All the concerns clients have brought to me about the challenges of real estate investment overseas are usually native to the real estate market that each individual calls home.
I particularly notice concerns that are native to the United States and I’m very respectful of that. Obviously, if someone is putting their trust in me to help them look at properties, I need to deliver the information that they don’t know – that’s why they’ve come to me.
I am sympathetic.
But I also want to clear up some misconceptions and ideas about the challenges of real estate investment as they apply to investing overseas. Because, as you’ll find, it’s a completely different ballgame out there… and that is usually to your benefit.
1. Legal Consequences
The world is a big, often complex place. What is polite in one country can sometimes be seen as the rudest thing you could possibly do in another. The same applies to business, but most people ignore this fact.
While many expats want to understand the cultural nuances of a place when they go to a country to be polite and respectful, they often fail to do the same and adjust their thought process on how the government, laws, and taxes work in different countries.
It’s not uncommon for people to project things happening in their own country and expect it to be the same everywhere else.
However, bureaucratic cultures often developed to solve local issues and a decision made by a judge or politician hundreds of years ago might have changed the course of a country’s legal system.
For example, while the US is a very litigious culture (where looking at someone the wrong way can have them calling their lawyer on speed dial) the rest of the world is hardly like that.
I’ve had clients visit a home in another country that would make an ideal rental unit but then get very nervous about some minute aspect, like a loose wire, that could be a liability. In the US or Europe, this would likely be a violation of some 500-page safety code, and a renter that somehow gets harmed by it would be well in their right to sue you for everything you’re worth.
But this simply isn’t the case in most of the world, where renters are held equally responsible for their decisions in regards to the home in which they live.
Libertarian acquaintances of mine have come to visit me in Georgia and, funnily enough, they complain about an unmarked hole on the pavement currently being repaired. “Why doesn’t the government do anything about it?” they wonder aloud.
Well, I would ask them, isn’t this the world you wanted in the first place, where you alone would be responsible for your decisions and the resulting consequences? This is the kind of world you can find in emerging and frontier markets where you won’t be held responsible if your tenets slip on a banana peel in your living room.
It may seem daunting to deal with another country’s legal system, but you are likely to face more legal challenges of real estate investment in your home country than you will in the more laissez-faire environment of developing markets overseas.
2. Tax Issues
“Ok, fine so you won’t get sued for your international real estate business,” some of the objectors might say. “But surely this web of properties and global diversification creates very complex tax obligations?”
Yet again, this is a problem of extrapolating the world one knows and thinking that investing in real estate overseas is the same as real estate investing locally.
Chances are that if you file US taxes, you probably don’t do it yourself. In every country with a sizable US citizenship community, there are also US accountants and tax experts. And if there isn’t, you can find these expat tax services online as well.
The reason being is that the US tax code is so complex, with so many exemptions and clauses, that unless your full-time job is to know it by heart, it’s scary.
Other countries that are actually business-friendly and haven’t let cronyism get in the way of economic progress have simplified their tax forms so much that they fit into a single page. You can easily do it yourself if you feel like it, or cheaply hire someone to do it for you.
The point is, the bureaucratic nightmares existing in your current country don’t necessarily exist elsewhere. This is without even mentioning that in many places you might not even have to pay taxes at all.
There are plenty of tax-free countries around the world that would be glad to have your investment dollars and will not tax your residential rental income.
There are also territorial tax countries that will only tax your local income. So, if you don’t rent your local properties and your income is sourced elsewhere, you can effectively live and invest in a tax haven – despite the fact that the locals might not classify it as such.
So, to briefly answer a complicated question: No, my foreign real estate ventures do not create a complicated string of tax obligations all around the world.
In fact, by being strategic about how I’m investing abroad, my tax obligations are often far simpler than they would be had I decided to stay in the US.[embedded content] [embedded content]
Cards on the table, I do not like debt because it has the potential to force me to act in ways contrary to my own wellbeing.
I personally have zero liabilities because debt is a risk that makes the borrower a slave to the lender. I have no interest in being a slave under any condition.
Whenever you create financial obligations with another party, the sum total of your available options is diminished. At every point, you have to consider whether a decision you make will ultimately affect your ability to repay your debt.
Some investments can take years to pan out. But what happens if your income is suddenly cut and you have a bill collector hounding you for interest payments every month? That’s not a situation I am willing to deal with.
So, let me offer you one of my best real estate investing tips: don’t use a mortgage to fund your investments.
This is especially true when investing in foreign real estate. Not only do banks have far more restrictions, but interest rates are much higher overseas than what you would find in the US and other western countries and the loan-to-value rates are going to be much lower meaning you’ll be required to invest more upfront anyway.
Generally speaking, you don’t want to spend your time kissing up to banks, filling out their forms, and begging for their approval. It’s just not worth it to finance your investments overseas from both a time and money perspective.
Can You Reduce Risk With Debt?
Now, some folks have come to me with the argument that having debt on a property can be used as a hedge against litigation. But again, this is a very western-based strategy.
It is true that you can leverage a property once you already own it, opening up possibilities to get some liquidity from your investment or, as these clients have put forward, use it as a hedge against lawsuits.
To the first argument, what if the interest rates unexpectedly go up and your investments don’t? Then it’s a race against time as you’re desperately trying to undo the compounded damage of the interest on the capital that you’ve invested.
As for the second argument, we’ve already addressed it. Other markets are not as litigious as the US and other western countries. So, the idea of having debt on a property so that someone has less to take if you were to become a litigation target is a very US/western-centric idea.
You are not going to have this issue in most of the emerging and frontier markets we talk about here at Nomad Capitalist. They’re simply not as litigious.
But even once I’ve addressed this issue, I still get the occasional question about having debt on a property overseas to reduce the risk of a market crash.
My first response? Buy in a market that is less susceptible to crashing.
People in the US are acutely aware of the fact that property prices do not always go up. And this is especially true in certain areas of the United States. But that doesn’t mean that every market is as volatile or overheated as the one you are from.
We dedicate much of our time to finding the best real estate markets that are stable, affordable, and profitable.
We recommend buying in Tier A locations in capital cities in established countries with domestic markets. If you do that, you can be much less concerned about market crashes. And by investing in better markets, the need to reduce this risk with debt is largely eliminated.
4. Government Confiscation
Government confiscation is the perennial fear of people who invest in emerging markets that often don’t have strong legal traditions defending property rights. It’s definitely not an unfounded fear, as it has happened on numerous occasions in various places.
However, this type of headline-grabbing event gets overstated in favor of the duller reality – which is that even if a country has a dictator, it needs foreign capital inflows. And the quickest way to lose access to foreign investment is by expropriation.
Sure, they might get away with stealing people’s property once. But what about the day after when they need money?
They’ve suddenly made themselves the pariah of the investing community and it will take decades to rebuild their reputation. And in the meantime, all capital that they didn’t expropriate has fled the scene, causing more damage than any benefit they could have ever received from the expropriation.
So, unless borderline insane or driven by communist madness, even authoritarian leaders are a little bit more delicate nowadays as they have learned the mistakes of the past.
And while we are busy pointing fingers at emerging economies, let us not forget that the US regularly expropriates real estate as well. They don’t call it anything scary like “nationalization” or “expropriation”, but at the end of the day “eminent domain” is much the same.
The reason that you don’t often hear about it, except in libertarian circles, is because the government tends to massively overpay for any real estate it seizes. It’s as if you have your house burgled but the burglar leaves a winning lottery ticket in exchange, so it’s fine.
The point still stands though, the US does take people’s property. If you care to look, there are plenty of people incensed about the fact that their family home was torn down because the local government wanted to build a parking lot for a casino.
As someone who isn’t a US citizen anymore, I don’t particularly care who owns the boot that could stamp me, even if it’s a US one. At the end of the day, I just don’t want to be tread on.
To put it bluntly, I have less fear that the Malaysian government would expropriate the apartment I own here compared to the US government if I still had property in the US.
Malaysia has a reputation of business-friendliness that it needs to build and uphold for its future development ambitions to come into fruition. The US, on the other hand, has no such qualms. It already has a reputation (whether it deserves to keep it is a question for another discussion altogether).
Furthermore, the US doesn’t outright need to expropriate real estate to gain control over it. They can simply use the powers of civil forfeiture, which allows them to confiscate the assets of anyone suspected of involvement with crime or illegal activity without necessarily charging the owners with wrongdoing, and offer no monetary recompense.
In other words, if the US government wants an asset and it is not feeling particularly generous, it has the legal capacity to take it without thinking much about it.
In addition, many people hit by civil forfeiture are never charged with a crime but must go through long legal procedures if they want their assets back. Most of the time, the victims of these injustices do the math of the legal cost involved and just write off whatever was stolen by the US government instead.
All this to say that you might not be so secure where you are.
5. Currency Risk[embedded content] [embedded content]
Given that the dollar is the world’s currency par excellence when talking about investing in property abroad, the investing community defaults to talking in dollars.
The global real estate market does not have a unified praxis, so some countries may use the dollar in real estate deals, even if the local economy isn’t dollarized.
This is partially done to ensure some stability in the underlying asset so that, if the local currency fluctuates wildly, people can still retain some value in assets that are fairly illiquid.
Irrespective of whether you paid for the real estate in dollars, if the underlying economy isn’t dollarized you will likely be paid in the local currency for whatever rent you charge. So, even if you bought something in dollars, the return on your investment will partially be determined by the value of the local currency.
This phenomenon is magnified dozens, if not hundreds of times if you do buy real estate in another currency. Essentially, when you invest in property abroad it is not only a real estate investment but also implicitly foreign exchange speculation.
When it comes to the challenges of real estate investment overseas, this is one factor you definitely need to understand.
For example, imagine you purchased an apartment in Turkey five years ago for $100,000, or thereabouts ₺269,000 back then. Let’s say you picked an excellent spot and in this past half-decade, the apartment went up by 100%, so now your apartment is worth ₺538,000.
That said, you encounter a small problem once you want to convert back into dollars. Because of the massive devaluation of the Turkish Lira over this same five-year period (due to fears of President Erdogan’s increasing authoritarianism), you now realize that your investment is only worth $79,143 – so in reality, you lost $20,857.
At first, this might seem like it’s all bad news. After all, finding a good investment is complicated in and of itself, and now you also have to consider currency risk when investing overseas?
But think about the other side of the coin – the same could happen the other way around.
You might have accidentally picked one of the most horrible foreign real estate investment ideas, but if the currency appreciated enough by itself you would still be ahead!
That’s why now is actually a fantastic time to invest in Turkey because prices are so low that you can pick surprisingly great apartments for bargain-basement prices. I don’t foresee the currency recovering in the immediate future, but I remain quite bullish about Turkey in 10+ years.
If that type of investment holds no appeal for you though, there is no shame in not participating and you can still enjoy plenty of investment ideas that will allow you to achieve global diversification.
Instead, look for a market with a stable history relative to the dollar and see what happened at various crisis points in the last few decades. Some countries even peg their currencies to the US Dollar to guarantee this stability.
6. Real Estate Investment Scams
In any area where there is money to be made, there will be predators who want to abuse your naivete. This is particularly the case when dealing with global real estate, as a lot of people know the benefits, but few know the downsides.
You hear less about the investment scams because the people who fall for them (or any scam for that matter), are often embarrassed that they have been conned out of their money. So, even if the losses are considerable, they might not even report it to the police.
This is partially why a scammer might be able to operate in an area for years on end without ever encountering legal problems. Because, technically speaking, no crimes have been committed if nobody complains.
Now, where it concerns investing in property abroad, it’s worthwhile to be on high alert. Remember, by virtue of you being a foreigner and likely not knowing the language, you are often on the backfoot.
Scammers know that most people investing overseas are out of their depth and will take advantage of this fact. Often, they will pose as friends who will ease your burden as well, saying that they can translate for you.
What they don’t say is how their markup on the real estate for this service can range anywhere near 10% – 40%. It’s invaluable to hire an impartial third party to translate for you and deal with the local market rather than through these realtors.
However, this is assuming they even sell you something worthwhile, which actually has resale value. More likely than not, they will use your ignorance of the markets against you.
They know that overseas investors often get “shiny object syndrome” so they advertise in those glossy in-flight magazines with artistic photos. And if you decide to give the apartments a look, they will look the part as well.
What they won’t tell you is that these are cheaply-built newbuilds that are unlikely to survive the decade, and the land they’re built on is worthless.
Just out of curiosity, I went on a tour with one of these disreputable realtors in Istanbul, where I know the lay of the land fairly well. I got the whole tour and was shown around and everything looked rather lovely.
That said, they failed to mention that just around the corner is where the Syrian refugees lived. Meaning that these beautiful apartments with a swimming pool were built pretty much in a refugee camp, which is a far cry from the exclusivity and glamor they try to portray.
To deal with these particular challenges of real estate investment overseas, you can hire a local and use their knowledge to help guide you through the valley of thorns and false promises.
Or, if you just can’t be bothered with this type of thing, you can invest in a REIT, which is like a fund that invests in real estate as a group, giving you partial ownership over a thousand different properties over the city, country, or even the world.
It’s a good option for people who want to have global diversification but don’t trust themselves enough to make the right choices, or just can’t be bothered with it.
Overcome The Challenges
In broad strokes, these are the common challenges of real estate investment that people face when doing deals overseas.
There is no denying that it can be complicated – if it weren’t, everyone would be doing it – but if you are able to overcome the difficulties and rise up to the challenges you can receive enormous profits for your patience.
There are two ways you can overcome these challenges to capitalize on the benefits of investing in foreign real estate.
The first approach is to collect a series of home bases. These should be in countries where you want to live and where you can easily establish local bank accounts. Once you have the account set up, you can use it to hold and transfer the funds for monthly maintenance fees and other costs such as utilities or building management.
I like to create datasheets for my properties that include everything from the electricity account number to where each bill is paid and when it is auto-charged to my local bank account.
I can hand this over to a property manager or just set the whole thing on autopilot and let it run on its own.
And since my empty homes are not generating income, I don’t have an income tax obligation. This strategy allows me to have properties spread out across the world that are managed with a simple system and produce minimal to zero tax obligations.
The second strategy is for those who want to pursue real estate investments that they can scale.
One friend of mine likes to focus on three different real estate markets at a time. It’s few enough that he can familiarize himself with each market to know how to navigate it but also provides a level of diversification across markets.
He will usually buy three properties at a time in each location and then, when he has more cash, do three more. Then, when he feels comfortable with those markets and how he has scaled his investments there, he will find other markets and start to build those up.
If you’re purely going to invest, I wouldn’t be spread all over the world. Find a place where you would be comfortable scaling. Set up good infrastructure with a good lawyer, a good renovation guy, a good property manager, etc. and then build from there.
It doesn’t have to be more complicated than that. It can be pretty straightforward if you create procedures that will allow you to build up property portfolios around the world.
Investing overseas has never been this straightforward or rewarding, now is the time to overcome the challenges of real estate investment and enjoy the rewards.
And if you would like help designing your own international property portfolio, feel free to reach out to our team. We would be glad to help!