September 04, 2012
For those considering investing in property overseas it is important to thoroughly investigate the limitations and benefits before committing to a purchase. There can be great advantages to a foreign investment such as this but the disadvantages should also be measured.
Many countries do not have the title checks, securities and guarantees in place that apply in Australia. It’s important to check the property title system in the country you are looking to buy within; for example, in some countries the property must be owned by a local resident nominee.
Other points to consider include:
- What are the legal and property management costs involved?
- Is the property title guaranteed?
- Is the property freehold as opposed to only leasehold?
- Does the seller truly own the property?
Overseas property purchases often appeal to people with enough equity in their existing property/ies to borrow all the funds locally and have the purchase secured against their Australian property/ies.
However, there are risks associated with this finance strategy, such as the changes in exchange rate. For example, if someone borrows $AUD150,000 to purchase overseas and finds that the exchange rate devalues by 30%, they now own a property worth 30% less, but they still have debt and repayments on a $AU150,000 loan. Keep in mind the opposite may also come into effect, whereby the exchange rate increases and therefore the property’s value increases.
Another option is to borrow enough funds locally for the required deposit amount and fees (eg. a line of credit loan) and then borrow the balance of funds required in the country of purchase. This can be advantageous if interest rates are cheaper in the country of purchase and, because the borrowings are in the same currency as the property and the rental income, the currency variations do not impact them as much.
Unfortunately, purchasing in a foreign market with different laws and rules than our very strong consumer credit laws in Australia means borrowers may be less protected than they would here, or perhaps not protected at all. Buyers also need to be aware that interest rates can also be far more volatile overseas and many offshore lenders will not lend to foreigners.
A benefit of investing in overseas property markets is the possibility of picking up a bargain when compared to property prices and capital growth potential and/or rental yield at home. An overseas property with a great location, size and potential for return on investment can be a solid money maker.
There is also the possibility of being able to purchase a positively geared property whereby the rental income exceeds that of the loan repayments and other property-related costs. Or, the buyer may be able to negatively gear the property and gain from tax deductions for these costs. It’s always a good idea to refer to a financial advisor.
Another positive is that the buyer is providing support to the economy of the country they purchase in, thereby supporting the global economy, and perhaps providing rental accommodation to those who need it.
If the overseas property is held onto as a long-term investment there is the potential for accumulating capital gain. Plus, if the property is a holiday home there is the added bonus of being able to enjoy it while profiting from the investment.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"