Portofino, Italy
The current investment climate in the United States is volatile.
The Bureau of Economic Analysis’s third-quarter GDP readings, while positive, reveal a lackluster performance by the U.S. economy. Inflation is high, and the financial markets remain unpredictable.
Recession is on everyone’s minds, and experts from Fannie Mae to Freddie Mac are predicting downturns.
In times like this, people look to hard assets like real estate to store and insulate value. Real estate is a dependable store of wealth—a tangible, physical asset rather than something notional, like Bitcoin or stocks.
Instead of buying into the U.S. housing market, which, along with the housing markets of several other rich economies, is heading towards a price slump, investors should buy in property overseas.
Overseas property is the cornerstone of any diversification strategy. It’s a safety net against things like volatile markets, economies, and political situations, and it’s an investment that can bring capital growth and cashflow across currencies.
But beyond being just an investment, a piece of property overseas provides other unique benefits. Here are seven reasons why you should buy overseas property.
#1. Overseas Property Comes At A Discount For U.S. Dollar-Holders Right Now
When buying property in a foreign currency, the local currency’s exchange rate affects the sales price in dollar terms. A currency advantage means that whatever your capital budget, it’ll buy you more.
The current strength of the U.S. dollar is creating extraordinary opportunities for dollar-holding property investors around the world. It’s at historic highs against the euro, the pound, and other key currencies.
A house costing 100,000 euros would have cost you US$133,000 at an exchange rate of US$1.33 to the euro back in 2013 but only US$99,000 at today’s US$0.99 per euro.
Right now, the enhanced spending power of the greenback means you can diversify your real estate portfolio overseas at a discount.
#2. Overseas Property Costs Less Than U.S. Property
On top of the savings brought by the current currency advantage, overseas property can be many times cheaper than comparable U.S. property. Beach property in Northern Cyprus or Ceará, Brazil, for instance, can cost less than US$100,000. In top U.S. beach towns in California or Florida, you could easily pay 20 times that.
#3. Overseas Property Can Provide Income
In addition to being a second home, renting out your overseas property to short- or long-term visitors can generate cashflow that can be used to offset the carrying costs of your property or to build a nest-egg in the local currency.
Net yields tend to be lower in Europe, but in places with tourism appeal, double-digit returns are possible. In Northern Cyprus, for instance, a small beach property can cost less than US$100,000. With short-term rental markets back at pre-pandemic levels, net yields of more than 10% are realistic.
To take advantage of the U.S. dollar’s strength in Europe, consider coastal areas of Portugal, Spain, France, and Italy for a short-term vacation rental investment. Rental properties can be found for less than US$200,000 in these countries that historically have strong tourism demand.
Another advantage of buying an overseas property with the currently strong conversion rate for the U.S. dollar to the local currency is that the exchange rates could swing back to historical averages sometime in the future, meaning that you could realize a U.S. dollar appreciation in the value of the property, even if the underlying price of the property is unchanged in the local currency.
#4. Overseas Property Brings Privacy And Tax Advantages
Overseas property is one of two remaining asset classes that Americans are not required to report to the IRS every year. Here’s the relevant reference from the IRS’s website: “Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported.”
The IRS likely leaves foreign real estate alone because, even if it wanted to, it’d be unable to seize or force the sale of your second home in Belize, your penthouse in Colombia, your beach house in Brazil, etc. Lawyers, former spouses, friends, ex-employees, and so on are likewise stone-walled.
Renting out your overseas property can bring tax advantages. You can deduct the cost of every trip you take to check on your property on your U.S. tax return. It’s possible to deduct the interest paid on your mortgage for your foreign home from your taxable income.
#5. Overseas Property Brings Diversification And Risk Reduction
When buying property overseas, you reduce market risk, exchange rate risk, risk of seizure by the U.S. government, and liability risk. U.S. courts can’t seize your foreign property.
Overseas markets may rally while the U.S. housing market heads towards a slump. By investing abroad, you’re putting an egg in a different basket.
#6. Overseas Property Can Bring Residency Perks
Buying real estate above a certain value can be a fast track to residency in that country. Countries like Portugal, Spain, and Greece have Golden Visa programs that exchange low-hassle residency and access to the Schengen Area for property purchases. Other countries, like Montenegro and Northern Cyprus, will grant residency for a property purchase of any value.
Overseas residency is another essential component of any diversification strategy. Obtaining legal rights to live in another country means that you have a place to go if you ever want or need to leave your home country permanently.
Your overseas property could be your plan B if government regulations become too stifling at home. It could be a place to ride out the next pandemic. Some countries had much less intrusive COVID lockdowns than the United States, for instance.
Residency usually leads to citizenship after a certain number of years has elapsed. Gaining a second passport opens up the possibility of renouncing your U.S. citizenship—a serious consideration but one that increasing numbers of Americans are doing every year.
#7. Overseas Property Allows For Low-Cost Vacations
A piece of property overseas is an investment, but ideally you buy in a place where you also enjoy spending time. It can double as a retirement plan—today’s investment can be tomorrow’s retirement residence, earning you rental income until you’re ready to move in yourself.
Real estate overseas can also double as a holiday or second home, an investment that you and your family can enjoy from the day you make it. You could organize house swaps with other overseas vacation home owners. Spending time immersed in rich cultures where society is more peaceful benefits your wellbeing.
The cost of living in many of the most desirable places around the world is less than in the United States, especially the costs of services and health care. By spending time in your vacation home, you can avoid winter heating bills or worse, potential grid collapses like the southern United States saw last year.
Go somewhere warm where you don’t need heating in winter but not too warm where you need air conditioning.
Downsides To Investing In Overseas Property
Just as there are unique benefits to buying property overseas, there are also unique downsides.
Not many countries have an equivalent to the United States’ Multiple Listing Service. No MLS means that agents can’t show you everything available that fits your parameters, because they don’t have access to everything available. They have access only to their proprietary listings. If they don’t have what you ask for, they show you something regardless of whether it meets your needs.
In most cases, you’ll need to be prepared to buy with cash. It can be difficult for non-resident buyers to get mortgages. It’s possible in some European countries, but it can be more expensive than it is in the States.
Banks may require you to take out a local life insurance policy naming the lending bank as the primary beneficiary if you die before the mortgage is paid off.
Most life insurance companies around the world will insure you only up to age 70 or 75. That limitation restricts the mortgage term if you’re older than 50 when applying for financing. A 65-year-old, for example, can qualify for a 10-year loan at best.
Another factor to consider when buying property in Europe is transactions costs. These can be as low as 1% but as high as 10%, depending on the country.
If there’s a place you really want to vacation every year, then owning the property and renting it out can reduce your vacation expenses. But you may feel obligated to use the property for vacation, and if you use it for more than the thresholds for the expense deductions, the direct financial benefits are reduced.
On the flipside, if you opt not to use your overseas property yourself and rent it out instead, it becomes a pure investment, which can also trigger tax obligations.
