Disadvantages of Foreign Real Estate Investing (Financing and Refinancing)

Today we are talking about real estate investments abroad and in particular downsides of doing so.
We'll point out some things that can hurt your returns, and give you tips on what to look for.

If you invest in other markets, it gives you more exposure and diversification. This is certainly good. However, there are disadvantages of entering foreign market that you wouldn't have if you were investing just in your local market.

One thing that is important to understand is that lots of value in real estate comes from financing. A good real estate purchase will get you about 8% yield. This is good, but not amazing. And if you do exceptionally well you could do 12%, but this is very rare, and possible only in certain markets.
At the same time there are markets that yield only 3%.

So if we say that average yield is 7-8% that's okay but not really attractive.
BUT if you can borrow money at 2% now you can make returns on bank's money. Cash on cash return can be quite high in that case!

If you are in a market where you can't get loans your real estate purchase won't be such a good deal anymore. Especially from ROI point of view.
As a general rule, it is harder to get loans abroad than in your home country. You can build credit, however this will take years.

This is a massive disadvantage compared to what you can get back home!

On top of this, there are tax consequences of real estate investing. Usually tax treatment of real estate is better than many other types of income, but this also depends on the country.

If you want to get a really good tax treatment you can do it via deferral and refinancing. Since financing is weak in foreign markets this strategy may not necessarily work well for you.

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Author: Michael Rosmer

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[soundslight]

Interesting topic today! :)
Other disadvantages are exchange rate fluctuations, sometimes 10, 20 30% or even higher, will erode your profits. Rental income in another country and managing it remotely even using an agent all tend to act against you. I think buying cash for own use or for renovation and remodelling to flip can work out well. In some markets buying new build means getting a shell or unfinished property. You need to install everything inside - internal walls and doors, bathroom, kitchen, heating/cooling, wiring, plumiing, flooring and so on. It can be a daunting task to work with local labours who work to other standards and language barriers don't help. Property tax can be high in some countries as it's the main source of funding local services

[sophiewanlin]

I agree with you for the most part. Unfortunately, I'm within the exception!^^
Let me explain : I'm French, I live and work in France. I was lucky enough to have an Erasmus exchange in Greece back there. So, I speak Greek, I know the country well, since each year I spend my 1 month summer holiday there (In Frence we have a lot of paid holidays, but that's another subject, I'm a free entrepreneur as a lawyer). I plan to retire in Greece in approximately 15 years. For that, I'll buy a studio or a two-rooms appartment in Athens and I'll put it on AirBnB for most of the year except when I'm on holidays in August. I won't follow your advice because :
1) I know well the country, especially its capital. I know the districts and where to buy at which price.
2) I speak very well Greek, and I know how the real estate works (more or less like in France)
3) I'll pay almost cash with a very low loan (20, 000 € more or less) which I'll take from France in a French bank (average loan today 1.07%) and not Greece as an investment in real estate. I'll repay it in only 7/8 years and it will be less than 10% of my income.
4) I have friends in this city who will take care of my appartment between clients in exchange for a small compensation which is "nothing" for me as a French but almost 2 days work for them for only 2/3 hours of checking.
5) No change so far, it's euros in euros...
For all these reasons, my retirement program will be in this country, and when I move there, renting to tourists will be over.

[randyleebear]

I have made the mistake of owning houses in overseas markets. Investment yields are never what you expect. However owning land for future development can be quite profitable. It is an all cash transaction but returns can be 10 times your investment in some situations. However it takes time and yearly returns are less.

[pereira]

Agree with most of what you said, Michael. Another important element is, of course, the fact that there may be RE management costs associated with generating yield on your investment (ie someone or a company that takes care of the asset while you’re away, manages rentals, etc).
That can go from 5% in lighter arrangements for long term rentals to 25% for Airbnb type of scenarios.
In the latter case, you’d also have the cost of using those platforms (around 15/16%). These can easily eat away most of your yield.

[shillmybags]

Are there any global commercial property markets that lend on a non recourse basis? And would the rates be competitive?

[champtv]

Hey, hope all is well. I have a property that I just acquired in Trinidad and Tobago. I wanted to seek funding for renovations on this property. Do you have any recommendations on American banks that will allow me to fund the project they are overseas?

[leonardcamacho]

You have touched an interesting theme, credit in foreign countries, I would like to see what countries are easier to construct credit and get credit, I have seem most of the interesting places in LATAM they basically don't give you credit or the interest rate is pretty high

[DrewNelles]

Interesting video, and good points on local loan options not being readily available to foreign investors. Particularly for real estate this is a bit puzzling as at the end of the day the house or condo (i.e. the investment) can’t leave the country and if a bank had a good repo system to deal with defaults (and a large enough down payment to cover the expenses) one would think the problem could be overcome.

But as that isn’t the case, are there any online loan options where someone can get a loan on a peer to peer basis (or group of peers to a peer basis might be more realistic)? I’m thinking if there were, the loan would be backed by the property, and if the lenders can figure a way seize the property if there is a default, there would be both secure gains for the lenders and financing for the borrower across borders.

I’m guessing there aren’t, as I’d have probably heard of them, but as such things pop up out of nowhere sometimes, I thought I would ask.

Keep up the great work!

[dlukton]

I have no interest in buying real estate in a foreign country... as a financial investment. There are countless other ways to invest money in ways that are easier to manage. The only reason why I'd buy a house in a foreign country (other than because I wanted to live there) would be to get a residence permit or citizenship.

[Carlos-fsrg]

Hi Michael,
Interesting video! Do you recommend countries with easy access to credit for foreigners?
I was thinking on Bulgaria, Portugal and Romania.
Cheers,
Carlos

[victorpod]

what are your thoughts on mortgages for foreigners like UAE has developed recently? conditions seem to be pretty odd thought

[hitomikagewaki]

Why not just buy a reit or mreit? I've heard a few examples where foreigners cannot buy land: In Thailand, foreigners cannot own land, and in American Samoa people that aren't Samoa cant buy land is this true?

[newworldmoney]

Yep selling my Canadian properties for this very reason.

[tomvilera]

Could you discuss the implications of the new UAE corporate tax?

[FighterFred]

Rather pay cash irrespective of location, who wants to be a bank slave? Debt free is much better. As an investment, especially loan financed, can be very risky if the market crashes. In my country people lost their houses in the crash of 1990s, however their loan is lifetime so they'll never be debt free.

[viwatthai]

So, is it ever an option to get the mortgage in your home market and buy in the foreign market?

[surfreadjumpsleep]

curious about sealand investing opportunities.

[alexandertraveler]

THe best real estate market for Americans is in the backyard

[henrikjohansson]

build a business in frontier markets
invest in stocks in emerging markets
invest in Real estate in Developed markets

[chocmilkisgood]

I really dislike real estate. I bought some for asset diversification and I bought one for my mom's to retire but it's just for lifestyle, I don't think I'll make any returns on it lol 😂

I think one thing is that I don't understand is the price of real estate or where it's going in the future. I see nice houses around the world for $100k with 500Mbps in nice areas.

I fail to understand how a house a 3 hour flight away can be worth $1M and be 10 times more shitty.

I mean I get why but I wonder what the future holds for pricing.