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A Guide to Buying Overseas Property

A Guide To Buying Overseas Property - A few basic considerations.

MyOverseasProperty.ie has put together the following "Guide To Buying Overseas Property" to help you in your journey to buy an overseas property, whether it be an overseas investment property or a lifestyle property. As you will see there are initial factors that should be considered before even deciding if buying an overseas property is the correct investment for you.

Establish financial goals and objectives:

It is important to clearly understand your objectives. Is this property investment a holiday home, a pure investment or a combination? This will help determine the type and location of the purchase.

A combination of investment and lifestyle can sometimes be the most difficult. Generally, when making an investment decision, you should try to be detached from the property and think with your head not your heart. Forget about what you would like and think purely from a return on investment point of view. This should be a business decision.

Determine a value or target return. For example, I have a child age 10 that will be going to university in 8 years time; therefore, I will need a sum of €30,000 to fund his education.

"I am 40 years now and will be retiring in 20 years. I can use my pension scheme to invest in a tax effective way and manage to generate a passive income to live off from this property investment."

"I am 25 years old and in the next 12-24 months I hope to have an extra €10,000 to travel the world." The financial objectives might not always be realistic, however, it is a good starting point before you consult professionals to help you map out the best way to achieve these objectives.

Establish your risk capacity:

The younger an investor is the higher risk they potentially can take as the time to recoup funds by means of income is much longer than a person that is 5 years from retirement. The younger person may invest in an emerging market like, Latvia for example, which would be a higher risk investment and the person closer to retirement in a lower risk market such as the UK or Germany for consistent annual returns. The age will also effect the mortgage terms. For example, the lending criteria for a mortgage in an overseas market may stipulate that the maximum term is 20 years with a maximum age requirement of 60 years. If the individual aged 55 were to take this option it would mean that instead of the 20 year term they will only get a 5 year term. This would probably mean the income generated from the property will not cover the much higher mortgage repayments.

Age and number of dependents:

Children can be expensive and it is important to do the proper planning for their education. Furthermore, individuals should also take into consideration un-planned children.

Your level of income:

Individuals with a higher level of income may be more willing to take risks as the potential financial losses could be made up due to a very high income stream. Individuals that are dependent on rental income from the investment property for example and may also be already highly geared may opt for a lower risk or medium risk type of investment.

Your current investment portfolio:

Are you a first time buyer? If so understand the implication of purchasing your first home abroad. While it may be cheap you may loose your first time buyer status in Ireland. It is very important to consider your whole portfolio including shares, bonds etc and not only the property portfolio.

By reviewing your current portfolio you can assess how to balance the risk. As a rule of thumb 60% in low - medium risk investments and 10%-40% in higher risk investments tend to be healthy balance however this depends on the individual.

Income from current portfolio? The main purpose of a portfolio of properties is to generate a passive income. While this is very important it is also important that the portfolio pay its own way. Furthermore, what makes property investing attractive is the fact that it is possible to withdraw equity from an existing property to re-invest. It is important to note that the larger the portfolio, the higher the individual may be geared therefore the higher the risk. It is fundamental the income generated pay the bills as a negative cash flow situation will eat into your funds or profits.

Investment experience? With investment comes experience and investors tend to learn very quickly how to manage a property. If you are 20 years old and just inherited €500,000, more than likely you will not be in a position to manage 6 properties in 6 different emerging markets. Investors with more experience may also be in a position to calculate whether or not certain risks are acceptable to take.

Establish financing options: Click here for exmaples of foreign mortgages on the market.

If a you are a first time buyer of any property (whether at home or abroad) establish how it will affect your “first time buyer’s status” in Ireland. Irish Banks at this point of time do not offer mortgages for overseas property investments. Potential buyers will have 3 options- Cash investment; Equity release on main residence or investment property; foreign mortgage.

100% Cash investment:

Least attractive option as investors cant leverage their capital and there may be a 100% currency risk if the property purchased is a non-€ investment.

Releasing equity:

Can be high risk as foreign property may be tied to your home, therefore, if anything should go wrong, you may loose your house. There may be a 100% currency risk if the property purchased is a non-€ investment.

Foreign mortgage:

The best option to protect investors from currency exposure if the property purchased is a non-€ investment; however, lending criteria and interest rates may not be attractive. (Eg: no interest only option, small LTV, high interest rates, short term 10-15years).

As a rule of thumb- From a risk and management point of few, a foreign mortgage in the same currency as the local denomination, the property and the rental income is the best option. It is important to note however that it is not the only option as there are many products out there that may be more favorable but may require more experience. (I.E. Yen or Swiss Franc mortgages).

Forward buying:

Payments for off plan properties. The option of ‘Forward Buying’ your currency should be considered if buying an off pan property that will not be complete for 1,2 or even 3 years time. This is whereby you fix your foreign exchange rate in a specified amount today and elect a date in the future where you would take delivery of your currency. Your elected date can be anything from 1 week to 4 years in advance from the actual date of your order. When buying currency in this way, a margin payment of between 3% and 10% is required at all times. It allows you to hedge against fluctuations in the foreign currency.

Leveraging your cash by means of mortgages is what makes property one of the most attractive investment classes. The higher the LTV the bigger potential profits can be generated. What is leveraging? In short, you borrow to invest. Let’s assume the following scenario- a property is valued at €100,000. Property price inflation / capital appreciation is 10% for that particular year. You have €50,000 in cash, which you can put down as a deposit or you can get financing of up-to 90%. From a return on investment point of view, which option is going to render the best returns? (Purchasing cost etc not included).

The deposit- The amount in cash, or deposit at buyer’s disposal can effect the financing options and in turn can reduce the location in which they can invest. Most foreign banks offer 70% LTV mortgages; therefore would require at least 30% of the value of the property. In some countries like Montenegro for example, there are NO mortgages available therefore 100% of the property value is needed. (South Africa- 50%. Germany- 40%. Brazil- 100%)

Borrowing the deposit-This option can be very high risk; however, many investors especially younger buyers may consider borrowing the deposit. Typically, the deposit will be borrowed at a very high interest rate.

So what type of cash deposit should I have? 30% of the value of the property. 10% purchasing costs (this can be higher) and 10% for furniture.

Understanding Taxation Implications of Investing in Overseas Property:

Always know the costs of buying so you are comfortable with them and so that there are no surprises. Know the purchase taxes, rental and income taxes and the taxes upon the sale of the property. This is important to know before you commit to anything as it can have an impact on how long you hold the property before selling or even the location you decide to buy in.

Read our general overview of the tax regime in the foreign jurisdiction and consider the various types of deductions available against your rental income, if any.

At a minimum, find out whether or not a tax deduction will be available in the overseas jurisdiction for interest on borrowings used to finance the acquisition of the property. Obviously, it would be important to do this prior to obtaining finance.

Obtain professional advice on the optimal ownership structure in order to mitigate any potential unnecessary taxes i.e. Individual V’s Company. Furthermore, certain countries do not permit non-resident individuals to purchase land directly and in such cases you are obliged to incorporate a special purpose company to purchase the property.

Familiarize yourself with the Double Tax Agreement (“DTA”) between Ireland and the target country to ensure that your profits are not subject double taxation. i.e. taxed in the country where your property is located and in Ireland (presuming you are tax resident here).

Ensure you are aware of any acquisition taxes such as transfer tax (stamp duty), VAT, and the rates at which they are chargeable.

Investigate whether any ‘Deemed Rental Income’ taxes apply. i.e. In Spain, in cases where you own a property that you do not rent, you are still liable to tax on the amount of deemed rental income.

Investigate whether any Wealth Taxes exist. This is a tax on the value of your total assets owned by you in the foreign country. E.g. this tax is imposed in France where you own assets worth over €750,000.

Check out the Capital Gains Tax (“CGT”) rate, if any, that is applicable in the foreign jurisdiction and obtain professional advice prior to the sale of your property. i.e. the Spanish CGT rate reduced from 35% to 18% from 1 January 2007. Any person who sold their Spanish property prior to 1 January 2007 would have paid 35% CGT on their gain which could have potentially been avoided with a bit of forward planning.

Consider Irish tax implications and ensure that you include the property details (incl. income and expenses) in your Irish CASE III calculation and Irish income tax return.

Lastly, but most importantly, ensure that you are tax compliant and submit a tax return each year in both Ireland and the relevant foreign jurisdiction where your property is situated. Also, keep a copy of your tax returns and receipts on file.

MyOverseasProperty.ie note: ”For Information on Double taxation treaties with Ireland, investors should visit http://www.revenue.ie/.” (Taxation information is supplied by Foreign Tax Returns, a Myoverseasproperty.ie partner). For foreign tax advice please visit http://www.foreigntaxreturns.com/.

Legal considerations when investing in an overseas property:

Purchasing property abroad is very different from Ireland, therefore, will require legal assistance. There are many solicitors abroad and in Ireland that can assist in all matters of the property transfer, due diligence and additional legal implications. In order to arrange a foreign lawyer that is totally independent

MyOverseasProperty.ie recommends contacting the embassy ( UK or Irish)of that particular country. The embassy will be able to give you contact details of the Bar associations or even a reputable firm. Ask to see their legal license and board registration number. Don’t be shy to ask for references. The solicitor should be bilingual to a very high level. There are many legal issues to consider like whether or not foreigner can purchase property and by means of which type of legal entity, inheritance laws, property rights, tenancy laws, planning laws, titles, immigration laws, repatriation of funds.

It is important to establish which legal entity (natural person, company, trust etc.) will be the best way to purchase and for this type of advice professional guidance is needed. In certain locations like for example Mexico, foreign property buyers can only purchase by means of a Trust. In India, property buyers would have to purchase by means of company to be able to repatriate funds.

An additional consideration when purchasing abroad is creating a will. For example, French inheritance laws (which are quite complex) apply to the passing of French immoveable property, and are essentially designed to protect children (known as forced heirship rules).Under French civil inheritance law, priority is given to children (including illegitimate children and adopted children) and to living parents of the deceased person (the inheritance rights of children are considered more important than those of the surviving spouse).

Whose names are to go onto the title deeds? Whether it is you, yourself and your partner or the family including kids or even if it is better to buy the property through a company or trust should be considered with the help of a solicitor. His decision can have huge consequences from an inheritance tax point of view. While it is possible to do your own research, legal guidance is essential. Draw up a will. Ensure that the consequence of your death and how the property is treated regarding your family is covered.

"Word of advice! Always employ an independent lawyer not recommend by the developer or agency. "

Market assessment - "Location Location Location" - important.  "Investigation, Investigation, Investigation" - Fundamental!

In order to select the best country for investment purposes, it is essential to be able to compare the different markets. Certain locations may offer a higher return do to rapid economic growth but may also be a high risk investment due to instability and transparency issues.

Macro / Country specific.

Political stability- is essential in maintaining order and confidence in a country. The attitude of the government towards foreign ownership can change very easily affecting your property ownership rights and also the investment and the overall property market. A good example is Turkey were recently the courts annulled a law which permitted foreign ownership.  If your re-sale market depended on foreign owners - you were in trouble.  Fortunately, this law is about to change again permitting foreign ownership. 

Global competitiveness- “GCI, albeit simple in structure, provides a holistic overview of factors that are critical to driving productivity and competitiveness, and groups them into nine pillars: Institutions; Infrastructure; Macro-economy; Health and primary education; Higher education and training; Market efficiency; Technological readiness; Business sophistication; Innovation.” Source: World Economic Forum.

Economic freedom- “The 2007 Index of Economic Freedom measures and ranks 161 countries across 10 specific freedoms, things like tax rates and property rights. View scores and rankings for any country, along with detailed data and background analysis.

How does economic freedom help an economy grow? Studies in previous editions of the Index confirm the tangible benefits of living in freer societies. Not only is a higher level of economic freedom clearly associated with a higher level of per capita gross domestic product (GDP), but GDP growth rates also increase as a countrys economic freedom score improves. The World Economic Freedom measures 10 specific factors, and average them equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represents the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom. The ten component freedoms are: Business Freedom/Regulation; Trade Freedom; Fiscal Freedom; Freedom from Government; Monetary Freedom; Investment Freedom; Financial Freedom; Property Rights; Freedom from Corruption; Labor Freedom”. Source World Heritage Organization

Positive demographic indicators- Influx of people to a specific country / region / city can be a very important sign. It is essential, however, that the population remains productive. The Global Competitiveness and Economic Freedom Index is a very good guideline whether a nation is growing in a positive manner. Negative population growth can have really dramatic consequences, for example, following the collapse of the Berlin wall, thousands of people migrated to the West in search of better opportunities leaving thousands of properties standing empty. This type of negative migration is happening in most new EU membership countries like for example Poland where thousands of the younger generation are traveling abroad in search of better income.

Employment levels and wage growth- Unemployment levels are important to assess how an economy may be doing. If the level of unemployment is decreasing, it may be a sign of increased productivity and also possible increase of FDI. In emerging markets wages can be as low as €150 per month- this can be a positive and a negative factor. If wages are increasing in line with property price inflation, the domestic market can in most cases continue to afford the new properties. If property prices continue to rise at a rapid rate per annum i.e. 35% and wages is not increasing then the domestic market cannot afford the new properties. Furthermore, this will also mean that the debt will increase as higher LTV mortgages are sought after.

Inflation- Decreasing, increasing or stable? The higher the inflation rate the lower the actual returns from the investment. Establish what the economists predict in coming years.

Currency- Currency fluctuations can be a major risk for any type of investment. It is essential to ascertain how stable the market is? Certain markets like South Africa, Hungary, USA (at present) are very good examples of how volatile currencies can be.

Tourism- Is the tourism market growing and are there factors that may influence the performance. I.E: Are there new airports being built and are there new low cost flights planned for the country?

Decentralization- Does the government have major plans that will affect specific regions?

Size of the mortgage market:

What is the size of the mortgage market?

Is the mortgage market growing?

What is the disposable income vs. debt ratio? When this ratio is too high, it makes it difficult for the domestic market to afford the new properties and in turn will affect the re-sale market. A high ratio combined with very strong property price inflation can also lead to what is know as a “Property Bubble”, which in effect mean that property owners will sell property at a lower price and lose equity.

What mortgages are on offer? 100%- normally a sign of trouble!

What are the lending terms and currency options?

Are the interest rates stable? What are the forecasts?

Supply and demand

What is the total population?

What are the current owner-occupancy levels?

How many properties are in existence?

What type of properties does the current supply consist of by type?

How many properties have received planning permission and how many are pending?

What is the most popular type of property and how long does it generally take to sell the property?

Who is the re-sale market?

By how much has property values increased over the last 5 years and what type of property have increased the most in value?

Rental information.

What is the owner occupancy level? In other words, how many people live in their own homes?

What is the occupancy level for rental properties?

What is the average net rental income for the different property types?

How long is the rental season? When are the peak times, and off-peak times?

Which parts of this region / Town / City is considered to be upper class, middle class, lower class?

What region / town / city are the most popular?

What is the most popular type of property for rental purposes?

What type of property generates the highest rental returns?

Research sites:

Visit the websites major banks in each country.
National Statistical Offices in each country provide information that can be a very useful tool.

Overseas Property Research Resources:Website Details:
World Tourism Orginisationwww.unwto.org
Colliers www.colliers.com
Knight Frank www.knightfrank.com
Cushman Wakefield www.cushmanwakefield.com
Research Worldwidewww.researchworldwide.com
International Monetary www.imf.org
World Heritage Organisation
World Economic Forumwww.weforum.org
Statistical Offices World Wide www.bls.gov/bls/other.htm
Worldwide Salaries www.worldsalaries.org
Global Property Guidewww.globalpropertyguide.com
Doing Businesswww.doingbusiness.org

Micro / region/city/ town specific considerations:

Is the / region/city/ town part of the governments decentralization plan?

How accessible is this particular location?

What is the climate like?

What amenities are available?

What language does the local population pre-dominantly speak?

What medical facilities are available and what quality are they?

Is the local economy growing? Are there many new businesses opening?

Are there many new jobs being created?

What is the unemployment level? Is it increasing or decreasing?

What is level of wages that the average person is getting? Increasing or decreasing?

Is there investment in local infrastructure or plans in the future? Airports? Roads? Harbors? Rail links? Trams?

Are there a lot of people moving to the area on a permanent basis? Are the people moving to the location for employment purposes or retirement?

Is there an increase in the tourism numbers?

Are foreigners legally allowed to own property in this location?

Are there any restrictions on foreigners to live in this particular area?

Rental information  considerations- "Does the property wash its own face"

What is the owner occupancy level? In other words, how many people live in their own homes?

What is the occupancy level for rental properties?

What is the average net rental income for the different property types?

How long is the rental season? When are the peak times, and off-peak times?

Which parts of this region / Town / City is considered to be upper class, middle class, lower class?

What are the local taxes and running costs for a property?

What is the most popular type of property for rental purposes?

What type of property generates the highest rental returns?

Is there a specific license needed to be able to rent out property in this area?

Supply and demand - crucial in determining your exit strategy

What is the total population of the region / city / town?

How many properties are in existence?

How many properties have received planning permission and how many are pending?

What is the most popular type of property and how long does it generally take to sell the property?

Who is the re-sale market? Local people or foreign buyers?

By how much has property values increased over the last 5 years and what type of property have increased the most in value?

Project specific -"You can never ask enough questions!!!"

What gives this development an upper-hand over other projects? What ads value? Do a price comparison with at least 5 similar projects in the area by different developers.

What amenities are close by?

How many businesses are opening in close proximity?

What public transport is available?

What is the name of the company / individual that is selling the property?

What is the ownership title?

Has all the planning permissions been received?

Has construction been in accordance with the legal guidelines?

Is there a mortgage taken out on the land?

Is the developer / seller the sole owner of the land?

Is there a structural guarantee for the project?

What is the price per square meter of the properties?

Has the full VAT amount been paid on the project?

What are the payment terms and when is the completion date?

Is the deposit fully refundable including bank charges? Do you have this in writing?

Does the contract have a penalty clause if the developer fails to complete on time?

How many properties in the whole project? How many units of each?

How many units in the project have been sold? And to who?

Are the properties fitted out completely? Including all the white goods and connections? If not what are the costs to have it ready for renting? For example in Poland and Bulgaria, often, apartments come as a shell and will require you to fit them out with kitchen/bathrooms etc.

Are the properties built energy efficient?

What facilities are included in the project?

What is the cost in relation to owning a property in the project?

Who paid insurance for the communal areas?

Is there a rental management company that can take care of the property? How long have they been in business? Is it a pooled rental system or paid on the unit being let?

What is the name of the maintenance company? And how long have they been in business?

Is there a guaranteed rental available on this project? What is the cost of the property w/o the rental guarantee?

What is the rental yield of the guaranteed rental? Net?

The rental guaranteed insured or backed by a bank?

Who is guaranteeing the rental?

Which rental management company will manage the guaranteed rental?

Who will the management company rent the properties to?

What are the costs to be paid by the owner as part of the rental guarantee?

How often is the guaranteed rental income paid? Monthly? Quarterly? Yearly?

Is the fit-out and furniture included in the price?

Unit specific - "Ask the right questions":

What way is the property facing? Morning sun, evening sun?

What view does the apartment have? Is the view guaranteed?

What does the property over look?

Is the property a corner unit?

Is the property located next to a staircase?

Is the property located next to an elevator?

Does the property have a balcony?

What is the total size of the property and price per sqm?

Does the size include or exclude the balcony?

Does the size include or exclude communal areas?

Is the size measured based on the actual living space or does it include the walls?

Can I get a copy of the specifications?

Additional tips:

1. Always travel over to view the property. Don’t buy sight unseen.

2. Always try to work with an established agent and broker that is a member of one of the major trade bodies.

3. When purchasing through an agent get clarity from the start what their commission are and what services they will offer in return.

4. If a second hand property is being purchased, always have an independent valuation and structural survey done.

5. Speak to the local people and find out what is going on in the area. Buyers can never ask enough questions and we recommend speaking to as many local people as possible including rental management companies, recruitment agencies, and local government offices. Another recommendation is to ask other people that have gone through the process already.

6. Never sign anything before getting legal advice. Prior to reservation buyers can request a sample contract of the property