Investing in property overseas can be fruitful, however you need to be careful. Here are five handy tips to keep in mind if you are thinking of diversifying your portfolio abroad.
1. Do your homework on tax and deductions
There are tax implications and if it’s not structured correctly you can end up paying double taxes - as you are likely to be subject to tax in Australia, for income earned abroad. Since 2008 Australia introduced the Foreign Income Tax Offset (FITO) which can reduce such duplication of tax. This is a simplification of the system and should be checked carefully by an accountant.
If you’re paying tax on the overseas property in Australia, you can claim deductions for repairs etc. but if you are claiming deductions in the country of purchase, care should be taken as they may not have the same range of dedications.
2. If I make a profit, will I pay Capital Gains Tax?
Before purchasing overseas you’d need to thoroughly research any Double Tax Agreements (DTA) similar to the FITO general preventions of double ups of taxation. Some countries do not have Capital Gains Tax, so again this would have to be something researched on a case by case basis and thoroughly considered before investing large sums of money overseas.
3. Large amounts of cash or capital up front is usually necessary
Investing in property abroad generally requires 'cash purchases' due to lending restrictions. Borrowing is the first thing to consider as obtaining credit overseas is not the same as borrowing in your own country.
If you decide to apply for finance abroad, for example in the U.S. you will need to consider building up a credit score which can be lengthy and complicated.
4. Property types are different in each country so investing overseas can be risky.
Each country has different demographic breakdowns, locations, infrastructure, dwelling styles and property class.
Taking the same fundamentals for investing in Australia could be risky if applied abroad, as Australia is a very different market to most others. For example, in Australia investing close to train lines is very important, convenient and highly sort after by renters as it is a quick connection to areas of employment, the city and infrastructure.. Whereas purchasing near public transport in the U.S. is not quite the same. Train lines in the U.S. attract a different demographic. This should be well researched and considered.
Another point to consider is the different class structure of properties. Each property class reflects a different risk level and income return. For example the below three categories are widely accepted by the industry in the US:
· A – Newer high quality buildings, with high income earners
· B – Older building with lower income earners
· C – Are typically more than 20 years old, located in less than desirable areas.
5. Re-balancing global positioning can work in your favour
Following the 2007 US housing collapse, large properties could be picked up for a 'steal'.
However to make a profit, you had to buy at the right time. It appears to be passed that time generally for the most fundamentally supported markets. Keep an eye on up and coming countries which are expected to boom in the next decade.
Do your research to see which countries have peaked and which are expecting further growth.
Investing overseas generally involves far higher risks due to the inherent uncertainties of finance availability, political stability, currency fluctuations and differing demographics. Whenever investing abroad is being considered, it is important to complete thorough due diligence and make all investment decisions, informed decisions.