Ten things you must know before buying international real estate

The ten things you must know also applies in developed markets like London
London remains a top destination for buyers of international real estate

The following is a transcript of a presentation entitled Ten things you must know before buying international real estate that was delivered to the Australian and New Zealand Chamber of Commerce in Japan on October 16, 2014. Video of the presentation is available here.

The presentation explains how to buy international real estate, including:

  • Alternatives to buying property and the fact that you don’t have to buy
  • Idiosyncrasies in different markets, such as tax codes and the continued use of asbestos and lead paint
  • How real estate markets vary within countries at the state, city and neighborhood level
  • How buying international real estate exposes you to geopolitical risk
  • Why demographics creates threats and opportunities, especially if you are looking the for best place to retire abroad
  • Why solid interpersonal skills are essential when buying global properties
  • Why everything takes longer when you cross an international border
  • The challenges of arranging a cross-border mortgage
  • Why FATCA is a problem for Americans buying overseas property
  • Why you need tax advice before you buy international property
  • Tips for researching your real estate purchase
  • Examples from Canada, the United States, the United Kingdom, Australia, New Zealand, Indonesia, the Philippines, Spain, Japan, the United Arab Emirates, the Netherlands, Singapore, Malaysia, Germany, Portugal and more

For more information, see Landed Global.


 

Ten things you must know before buying international real estate

Let me start with an act of heresy: It’s OK not to buy!

Let me repeat that message for those of you who were expecting a sales pitch. “You don’t have to buy a home.”

In fact, there are many good reasons not to buy. For example, if you are like many professionals here in Tokyo, you or your spouse may need to relocate to keep your current position or to find a new job. The real estate market might be overpriced—making it cheaper to rent than to buy—like it is in many parts of Canada at the moment. Your personal life could be in a state of flux. The homes that are for sale might not meet your needs, tastes or budget. Better investment opportunities could exist elsewhere. Prices might be falling or your reference currency may be strengthening, allowing your spend less, later. Or you simply may not be able to afford it.

There is nothing in the financial planning rule book that says you have to own property to accumulate wealth or—more important—to be happy. But let’s say that you’ve weighed the pros and cons, and you are ready to buy real estate abroad, whether that’s a residence, a weekend retreat or an income property. Now what?

It’s never been easier

Let’s start with some good news. It’s never been easier to buy and own a home in a second country. There’s more information available on the Internet; more transportation options, like low-cost airlines to get you to and from your second home; and more cities and countries are welcoming foreign immigrants, retirees and investors.

Those realities are reflected in the statistics. In 2013, 232 million people lived abroad, up from 175 million in 2000 and 154 million in 1990. Over three million American baby boomers plan to retire abroad. And more than a million Britons now reside outside the United Kingdom, a number that has doubled since 2006. And growing numbers of newly wealthy people from India and China are buying abroad.

Third, there are many similarities between international housing markets. If you live in Hong Kong and buy a home in another common law jurisdiction—like England, Canada, Australia, New Zealand and the United States—many of the legal concepts, ownership structures and buying processes will be familiar.

Likewise, civil law countries—such as France, Germany and most of Africa and South America—share similarities. Even some hybrid systems, like the ones used in Mainland China and Japan, have familiar elements, like the way they treat condominiums.

Idiosyncrasies abound

That said, every real estate market has idiosyncrasies. Some are pleasant, like 30-year, fixed-rate mortgages in the U.S. that allow you to lock-in your financing costs. And in America, mortgage interest is tax-deductible.

Others are a rude shock. For example, if you are a nonresident and sell your home in Canada, your lawyer must withhold 25%–50% of the sale proceeds until the government is satisfied that you have settled your tax bill.

Building standards are another source of surprises. For instance, most people know that asbestos, which causes lung cancer, and lead paint, which is linked to brain damage, are common in old homes around the world. But you might not realize that asbestos is still used in new homes in the United States. Meanwhile, lead paint is sold today in 40 countries in Africa, Asia, Eastern Europe and Latin America.

Attitudes toward home ownership also differ. In Hong Kong, real estate is seen as a store of wealth and a commodity that can be traded. In other places, housing is treated as a social good—like health care and clean air—or a basic human right. Speculators are heavily taxed and landlords must contend with rent controls and other tenant-protection measures.

Those attitudinal differences also extend to new developments. If you buy off the plan in London, you might be shocked to learn that your new, luxury flat is next to social housing for low-income families or other disadvantaged people. Erected under “Section 106 Agreements,” these joint developments are common in the UK, as are new homes built on brownfield sites, where a factory, a chemical plant or a steel mill once stood.

In addition, cities such as London and Vancouver are seeing a backlash against buy-to-leave owners, who purchase a home and leave it empty. Critics say this inflates housing prices and deprives locals of a place to live.

Local social standards can have a profound impact on your ability to enjoy your home. For example, the New York Times recently published a profile of a real estate agent named Tama Robertson, who specializes in serving lesbian, gay, bisexual and transgender clients. That’s a far cry from several Nigerian states, where the punishment for homosexuality is death by stoning. Closer to home, the 1975 film Monty Python and the Holy Grail continues to be banned in Malaysia.

Heterogeneous markets

Fourth, housing markets are not homogeneous. There are economic, customary and legal variations at the state or province, city and county, and neighborhood level. For instance, Louisiana and Quebec are both civil law jurisdictions in common law countries.

This also applies to a market’s attractiveness as an investment. Single-family homes are not the same as condos; new condos differ from old ones, especially in places like Vancouver and New Zealand, which were plagued by leaky homes; and residential, industrial and commercial property are distinct markets that are shaped by different economic and political forces.

This is important because people selling international property often make blanket statements like “now is the time to buy Paris.” Parts of the market might be a superb investment, just as other sectors are overpriced, overbuilt and headed for a correction. If someone tells you a city or country is a “great buy,” ask what specific market they are describing and why it’s compelling.
While you are at it, inquire about the origin of the data. Not all sources are credible and the numbers might have been concocted by someone’s marketing department, packaged by a trade body or tweaked by bureaucrats.

Speaking of sectors and sub-sectors, be careful buying recreational property, especially when you are feeling mellow after a good vacation. Like many forms of discretionary spending, vacation homes suffer when times get tough. For example, prices in Australia’s Gold Coast dropped 50% after Lehman Brothers went bust in 2008. And like the couch potato who signs up for a gym membership as part of a New Year’s fitness kick, buyers often overestimate how often they will use their recreational property.

Geopolitical risk

Fifth, buying across borders exposes you to geopolitical risk. For example, internal political conflicts closed both of Bangkok’s international airports in November 2008, stranding thousands of travelers. The political uncertainty now affecting Hong Kong can reduce the value of your home. It can also create opportunities for risk tolerant buyers.

Diplomatic spats between countries, such as the one that erupted between Canada and United Arab Emirates in 2010 can interfere with your ability to enjoy your home. At the height of the dispute, Canadians visiting the UAE were charged 1,000 Canadian dollars for a visa. More recently, Russians who bought apartments in New York City and Chinese factory owners in Vietnam have been paying close attention to the news headlines. There is nothing like an international conflict—or the sound of gunfire—to remind you that real estate is both immobile and illiquid.

Demographic opportunities

Sixth, demographics creates threats and opportunities. For example, in the United States and Canada, many baby boomers—people born between 1946 and 1964—have a large proportion of their wealth invested in their homes, which they plan on selling to pay for their retirement. But there are far fewer people in succeeding cohorts and many of them are saddled with large student loans and low-paying jobs. As the boomers downsize, there will be a glut of single-family homes and few buyers, depressing prices.

Demographics are reshaping national economies and housing markets. For instance, the populations of Japan, China and Western Europe are aging and women are having fewer children. Some countries have increased immigration: 2.5 million people of Turkish origin now live in Germany. Others, like Japan, are bracing for a smaller, grayer population, where geriatric daycare centers outnumber kindergartens.

Demographics also presents opportunities. For example, in rich countries with aging populations, there is strong demand for recreational properties. Senior-friendly activities, like golf and tennis, are more likely to appreciate in value than ski resorts and rock-climbing centers, which attract few retirees.

Similarly, nations with plenty of young people—who will be tomorrow’s doctors, nurses and aides—are desirable retirement destinations. For example, in 2012, just 4% of the people in the Philippines and 5% of those in Indonesia were aged over 65. Contrast that with Spain and Portugal, where seniors represented 18% and 19% of the population, respectively.

Unlike geopolitical threats, demographic trends unfold slowly. That makes it relatively easy to buy in a place with a stable or growing population, where young people are staying and where incomes are rising.

Interpersonal skills are essential

Seven, solid interpersonal skills are essential when you buy abroad. In addition to an agent, lawyer and banker, you will be dependent on other people, who will to help with gardening, collecting rent, paying bills, filing taxes and other activities.

Friends or family who have bought a home in a city or country can be a useful source of intelligence and introductions to people who will treat you fairly and honestly. Reviews and comments in social media can also be helpful. But you’ll still need to overcome cultural and linguistic barriers and determine who is trustworthy and competent.

You’ll also need the ability to build rapport and solve problems. That includes knowing when to push an issue—like insisting that a contractor redo defective renovations—and when to shut up.

Speaking from experience, it’s easy for tempers to fray and for disputes to escalate to the point where lawyers are involved. Or worse.

Everything takes longer overseas

Eight, everything takes longer overseas. Furthermore, everything costs twice as much and is twice as frustrating as it would be at home. Time zones, public holidays, labor regulations, differing work ethics and distance make simple things complex. That’s particularly true when your baseline is a compact, hyper-efficient place such as Singapore and you are buying a home in a more relaxed or less developed location, like Thailand.

To put that into perspective, in New Zealand you can re-register a property in less than a day. In Kiribati, it takes an average of 513 days.

With that in mind, ask yourself how much time you want to devote to buying and running a home; managing a renovation project; or custom-building a house. Some people love the challenge. For others, renting is easier and less stressful.

Borders complicate finances

Nine, international borders complicate financial matters. It’s difficult to get a mortgage if you don’t reside or have a credit history in the country where your home is located. If a mortgage is available, the terms are usually worse than they would be for a local customer: You’ll get a shorter loan tenor, a lower loan-to-value ratio, and pay a higher interest rate.

Citizens of the United States are disadvantaged, because the costs associated with the Foreign Account Tax Compliance Act, or FATCA, have made many international banks reluctant to do business with American clients.

As a result of these hassles, many international buyers pay cash. Cash lets you complete a purchase quickly, with fewer contingencies in your offer, which can be a big advantage in a seller’s market. If you pay cash, however, you’ll need to obey the capital controls in the origin and destination countries, or you may not be able to repatriate the proceeds when you sell your home.

Income, capital gains, sales and property taxes, are complex in their own right. An international border only adds to that complexity. It’s wise to get expert advice before you commit to a course of action.

Insurance can provide peace of mind when there distance between you and your home. Many insurance products—such as fire, homeowners’ and public liability cover—are available around the world and are comparable in scope and approach. But that’s not true of all kinds of cover. For instance, earthquake insurance has only recently been made available throughout Italy. In Turkey, on the other hand, you can’t get utilities connected to your home without proof of coverage. Here in Japan, it’s rider on your fire policy.

Research is the key

Which brings me to my last point: Research is the key to success. Fortunately, new and increasingly powerful tools are making it easier than ever to investigate countries, cities, neighborhoods and even suppliers.

For instance, if you are shopping for a new home, the International Standards Organization has published ISO 37120, a benchmark for sustainable development that measures urban services and quality of life.

Fifteen cities—including London, Rotterdam, Shanghai, Dubai, Chicago, Johannesburg and Buenos Aires—have adopted the ISO standard, which lets you compare metropolitan areas using 46 different indicators.

Or you can consult the Urban Observatory, which uses interactive maps to compare 50 major cities on themes ranging from population density to environmental noise, and from traffic patterns to flood zones.

Maps that combine data in innovative ways are another powerful tool. For instance, you can view the locations of 19th century factories in London, rat inspection data for New York City, toxic waste sites in Los Angeles and WWII bomb locations in Amsterdam.

What’s even more interesting is how “big data” is being used to provide real time information. In the Netherlands, for example, there is an internet map showing the locations of buses and trains from seven transport providers. In Helsinki, you can see the locations of snowplows and levels of traffic noise.

From crime statistics to income and education levels, there are hundreds of examples of ways that the Internet is providing new insights and empowering buyers.

Ten things you must know

To recap, you don’t need to buy a home abroad. You can achieve most of the benefits and eliminate many of the headaches by renting instead.

Second, international living is part of a growing trend. Today, it’s easier to own a home abroad than ever before.

Third, there are many similarities between international housing markets, but watch out for the quirks that define each market. And remember that each country and city comprises hundreds of sectors and subsectors, each of which is different.

Fifth, consider how vulnerable your new home is to geopolitical risks. Sixth, as the French philosopher August Compte noted, “demography is destiny.” Without people there is no real estate market. So it helps to understand population trends.

Seventh, buying abroad makes you dependent on other people. Your people skills can make the difference between a successful purchase and a disaster.

Eighth, when an international border is involved, everything takes twice as long, is twice as expensive and is twice as frustrating. But if your expectations are realistic, you can take this in stride.

Nine, money-laundering legislation, capital controls and international tax law can add great complexity to your purchase. Address these issues before you buy, instead of trying to stuff the toothpaste back into the tube when you are ready to sell.

Finally, the internet and big data empower buyers in new and exciting ways. Take advantage of this information, much of which is available free on line, to make an informed purchase.

If you do the research before you set sail, international home ownership can be a rich and rewarding experience.

Thank you

Video of “Ten things you must know before buying international real estate” is available here.