Checklist For Buying Income-Producing Properties Overseas
Buying a rental property abroad offers a myriad of benefits.
With one transaction you can diversify your market and currency risks, get higher long-term returns on your investment, access undervalued markets, and set yourself on a path of adventure.
Buying your first overseas rental can seem daunting, but it doesn’t have to be… You don’t need to figure out the entire process by yourself.
I’m here to give you the simple steps you need to take to make an informed decision about whether to buy an income-producing property abroad.
I’ve personally bought and sold real estate in half a dozen countries, and I’ve assisted clients in purchasing and selling hundreds of properties across the globe.
These are the questions I recommend you ask yourself before buying a rental property abroad…
1. What country do you want to buy a rental in?
If you’re investing for rental returns, you should go where the returns are best at a risk level you can tolerate. It’s a bonus if the property is in a place you personally enjoy. However, unless you plan on regularly using the property yourself, stick to the numbers.
2. In what area should you buy property?
Is the property in a high-demand area or is it well-priced in an up-and-coming area? Study the maps. Pay attention to distances to hospitals, grocery shops, restaurants, shopping districts, malls, services, and schools if you’re planning on renting to families.
Does the surrounding area look rundown? What rents do neighboring properties achieve? Can you find parks, beaches, and places of natural beauty close by?
Being close to major employment hubs, especially foreign companies, increases your rental potential.
3. Is there easy access and transport to and from the property?
Can you walk to where you need to go? If not, are there reliable and safe public transport options close by? Expats and millennials often don’t have vehicles, so accessibility is important.
4. Are there any projects in the neighborhood that might affect your buy?
When I was a green real estate researcher, a developer in South Africa was trying to sell my clients oceanfront condos.
This is still a common scam. A developer builds a beachfront condo tower 200 yards from the ocean and sells the condos as unobstructed beachfront.
The developer then builds another condo block in front of your condo tower, blocking your views and access, and sells those new condos as beachfront. The developer might do this a third time before he reaches beachfront.
Be aware of any major infrastructure projects that would negatively impact your area, access, or views.
5. Are you on the path of progress?
Is the city developing in your direction or away from you? What’s driving the market in this area? What major developments are in planning?
Check the zoning density and development plans for areas around you.
Ask multiple realtors which communities and areas are best for rentals and which ones are over and undervalued.
6. What is your budget?
How much cash do you have to spend?
7. Can foreigners get mortgages from local banks?
What life insurance fees will that add? At what loan-to-value ratio and interest rate will the bank finance you?
If you can release equity from property back home, it’s usually cheaper and easier than getting a foreign mortgage.
If you would like to hear about beachfront rental property investments that are projecting an ROI of 10%+ with turn-key financed options starting below US$100,000, go here.
8. What is your risk tolerance?f
Mature markets offer lower risks and lower returns. To find better returns you have to be a little more adventurous.
9. What are your ROI goals?
This question ties into your risk tolerance.
Is your ambition set in a steady, low-risk, long-term rental income? If so, you should look at more mature markets and expect a lower return on investment (ROI).
Places like Portugal or Panama City are good examples of mature markets with steady rental returns. Get more information on a project by the beach just 15 minutes outside Panama City here.
Do you need a higher ROI? If so, you should consider up-and-coming markets that have stronger short-term rental opportunities and lower entry price points.
Talk to local experts and realtors about areas with the best rental potential. Ask about the city center, tourism centers, beaches, and short-term rental potential.
10. What tenants are you aiming to attract?
Foreigners will generally pay more in rent but demand higher levels of comfort, finishes, and amenities.
Local rental markets are usually more of a medium market, but occupancy isn’t affected by a tourism crisis like the one caused by the pandemic.
11. What are the extra expenses and how do they affect your net yield?
You need to know all the closing costs, rental fees, property management fees, insurance fees, garbage fees, and what maintenance and repair costs you are likely to have. This greatly affects your return.
12. What are your local income and property taxes?
If the country you are a tax resident in has a double taxation treaty with the country you own a rental in, it can help avoid paying taxes on your investment twice.
13. Is there a quality property management company available?
This is a critical factor.
Talk to prospective management companies, get references, and have them give you a realistic occupancy rate and an annual rental income on any property before you buy it.
If you are buying in a planned development or condo building, a property management company will already be in place.
14. What is the capital appreciation potential?
Buying in undervalued but up-and-coming areas close to proposed improvements like new transport routes can increase the chances that your investment appreciates better than the rest of the local market.
15. What types of properties can you purchase?
- Off-plan: You can get great discounts by buying property off-plan, but there are several pitfalls to be aware of, including possible delays. See my article on buying off-plan here.
- Fixer-uppers: This can be a great way of getting a deal or building equity. Or it can be a nightmare. Before buying a fixer-upper get firm quotes and references from reliable builders and know what it will cost and how long it will take. If the renovations will take years, your ROI will plummet in the medium term.
- Move-in-ready home: These are the easiest to buy and have fewer unknown factors. They also cost more.
- Condo or house: Talk to local realtors about what rents best in the area you are looking at and understand that while a house can have more rental appeal, it comes with additional security and upkeep.
16. Is the property in a planned development?
Buying into a planned development has advantages and disadvantages, including occasionally overly restrictive HOAs.
Buying outside a planned development is often cheaper and comes without HOA fees.
However, being in a planned community can offer quieter living and additional security and management services that aren’t as easily available outside planned developments.
17. Does the property have a homeowner’s association?
If you live in a condo or planned community, get a copy of the HOA agreement and ensure the rules are sensible. Ask to see the HOA’s accounts.
You need to be sure they have contingencies for major infrastructure overhauls when necessary. Big ticket items like roof replacements and swimming pool renovations need to be factored in over the long term. A very low HOA fee might mean basic maintenance will suffer in the long term.
18. Do you need to have the property inspected?
Have your property inspected by an engineer if you’re buying second hand. Get a builder to do a snag list for you if it’s a new build.
19. Does the area you’re buying in have any short-term rental moratoriums?
Many cities have banned short-term rentals. Verify that you can rent on Airbnb if that is your plan.
20. How many resale units does the development have?
If you are considering buying into an existing condo building or planned community, beware if too many properties go for resale at once. This could be a sign that the current owners know of something bad about the building or the neighborhood that you don’t.
21. Do you know the developer’s track record?
If you are buying off-plan or into an incomplete housing development, always do your due diligence on the development company and the development itself.
If the developer has a history of financial or legal troubles, be careful.
If infrastructure plans for the development have been scaled back or delayed for years, it means the development is struggling, and the developer probably won’t deliver on the amenities that they promised you.
22. Is the fund for the future amenities of the property based only on unit sales?
While most off-plan and housing developments fund some of the promised community amenities through a percentage of ongoing sales, developments that rely 100% on future sales often don’t build any of the promised infrastructure.
That’s why I always advise to buy what you see. If the developers never build the amenities and facilities, would you be happy with what you’re paying for your unit? You must decide if you are willing to take the risk.
Legal Considerations Before Buying
- Closing costs: Lawyers’ fees, title transfer fees, stamp duty, and other fees can increase the cost of your investment property (and lower your projected ROI) significantly. Get these expenses in writing from your lawyer before you make a down payment.
- Foreign ownership restrictions: A critical question you must ask is whether you can hold title to property in that country. Countries like Thailand and Vietnam only allow foreigners to own condos and not land. Even then, there is a restriction on how many foreigners can own units in the same condo building.
- Title issues: Are you buying titled land or leasing it? If you’re buying a condo, does the development own the land underneath? Do the development and HOA own the green spaces or the amenities?
My parents bought a condo in Croatia and later found out that the developer had kept ownership of the green spaces and tried to build another condo block on top of their pool area. The HOA had to buy him out at a not-insignificant expense.
- Title search: Your lawyer should conduct a full title search to ensure there are no title issues.
- Types of title: There are different legal systems abroad and many different types of title. Ensure you know what you are getting.
- Landlord and tenant law: Get a copy of your legal rights as a landlord from your property manager and understand any legal obligations you might have to your tenants.
Editor Overseas Property Alert