Purchasing an overseas investment can be daunting. In addition to factors like cost and condition of the property, commercial real estate investors who want to own property in another country must also navigate financial systems and regulations that might work differently than those in the United States.
Working with top real estate companies gives investors a good start, but in the end, successfully investing in rental property comes down to arming yourself with the information you need to make a sound decision.
AFIRE (Association of Foreign Investors in Real Estate) is the association for international real estate investment focused on commercial property in the United States.
AFIRE runs a yearly International Investor Survey, which was created to serve the needs of institutional real estate investors worldwide navigating the challenges of real estate investment.
AFIRE members are among the largest international institutional real estate investors in the world and have an estimated $2 trillion or more in real estate assets under management globally.
- Main Risks of Real Estate Investment
- Opportunities For Real Estate Investment
- 10 Best Countries to Make Money From Real Estate Investment
- Features of a Profitable Rental PropertyAnd How to Buy One
Main Risks of Real Estate Investment
Real estate investment can be challenging, especially during these times where we keep experiencing unprecedented challenges, such as the Coronavirus outbreak, oil prices turning negative and stock markets collapsing.
AFIRE members are cautious expressing concerns about where the industry is in the typical real estate cycle. They cited concerns about interest rate risks, high valuations, the impact of emerging technologies on retail and other property sectors, oversupply in some markets and property types, and possible economic and political missteps which could affect real estate by triggering an economic slowdown or disruption in the financial markets.
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Almost 50% of respondents included geopolitical and climate change issues among their primary concerns and about 40% cited currency fluctuations and interest rate risks.
Political risks
Geopolitical events, mainly including US tariffs and trade war with China; Brexit; protectionist policies; Hong Kong protests effect on trade in Asia. Moreover, respondents mentioned that the main events they are concerned about in the Middle East are the war with Iran and civil unrest in Latin America
US domestic political risks
The main real estate investment political risks In the USA in 2020 included the US political instability, the 2020 elections, the potential for intense policy changes, the volatile political climate and its impact on economic policies, and immigration and labour issues.
Currency Risks
The respondents also voted currency risks as one of the biggest challenges of real estate investment. These risks include currency fluctuation, forex market volatility, high hedging costs, interest rate risk and volatility and negative interest rates leading to currency imbalances.
Tax and regulatory environment
Participants of the International Investor Survey also showed tax and regulatory environment concerns for real estate investment in 2020. The main risks of this category include less certainty around municipal requirements for development, lack of knowledge and lack of transparency on local governance (fiscal and legal) and real estate markets.
In addition to this, there were also mentioned concerns for multifamily property, political risk at the state and local level, additional regulation and other restrictive policies that make developing and handling increasingly expensive and difficult.
Economic slowdown
The main risks related to economic slowdown that could affect real estate investments in 2020 include global coordinated economic slowdown, decelerating US Gross Domestic Product (GDP) growth, and decreased growth in some European countries.
Pricing issues
Here are the main pricing issues that could affect real estate investment and that worry investors: Late-cycle high pricing, compressed cap rates due to low interest rates and high competition for assets on the equity and debt sides
Other real estate investment concerns
Besides all the aforementioned issues that real estate investors are concerned about, there are few more that are uncategorised, such as: Technology disruptions, corporate high yield debt bubble, lack of action to improve climate change and infrastructure investment and exposing investments to increasing climate risks
Opportunities For Real Estate Investment
Besides the risks, this survey also identified the greatest opportunities for real estate investment in 2020. As already mentioned in previous surveys, the growth and strength of the US market represent a constant opportunity for real estate investors in 2020, as well as low-interest rates and attractive yields.
Diversification
Diversification is one of the most prominent real estate investment opportunities that resulted from the survey. In particular, scaling of the investment portfolio, the diversification to create long-term cash flow, market liquidity, and real estate quality.
Additionally, other opportunities mentioned include the exposure to sectors and opportunities uncommon in domestic markets and diversification into established and/or emerging markets
US growth and stability
Simple size of US market and greater liquidity means real estate investment opportunities are still there. Other opportunities are: Higher growth than in European countries; better cap rates in the US and positive debt financing.
In fact, Europe has become highly costly in the face of poorer economics. Moreover, the US also has a strong relative value compared to government and high yield debt, and the yield spread over government bonds is another opportunity.
Additional opportunities related to the US growth and stability include extra return over domestic investment and positive essentials on a relative basis in comparison to other countries, such as growth and tightening vacancy figures.
US-specific strategies
US-specific strategies are opportunities that real estate investors should take into account to make a good investment in 2020. When talking about US-specific strategies, it is intended the consistent growth in innovation centres across the country, the concentration of job and population growth in spite of all the regulatory risks previously mentioned.
Moreover, as hedging costs for European and Asian investors are decreasing, there are preferred opportunities in the US. Second markets are also developing strongly due to lack of new housing supply and increasing number of households. Therefore, there are higher opportunities for overseas investors looking beyond traditional markets in the US.
Additionally, the strength in many of the residential markets, such as senior care and student housing are also an opportunity for real estate investors in 2020.
Non-US-specific strategies
These include the global urbanisation and demographic changes as well as divergent interest rate environments decoupling economies and making overseas investments more attractive.
10 Best Countries to Make Money From Real Estate Investment
Whether you’re contemplating a first purchase overseas or looking to expand current foreign property holdings, here’s where you should focus your attention and your capital going forward. As we move into 2021, these locations dominate as markets of opportunity
Panama
Panama is by far one of the best places to buy real-estate overseas. We recommend Panama for two things specifically—apartments for rental and agricultural opportunities.
Panama City, where resale transactions have slowed, is and will continue to be a buyer’s market through 2020.
Yields continue strong… though not as strong as they were a couple of years ago, primarily because rents have softened.
Argentine, Colombian, and Venezuelan buyers have helped to keep the Panama City market stable and growing over the last 10 years, even while other markets in this region have struggled or even collapsed.
Today, North Americans and Europeans continue to invest, but it’s Panama’s new relationship with China that we predict will fuel this economy through its next stage of growth. If the Chinese come in volume, as they did in Vancouver in the 1990s, Panama City property prices will soar to new levels.
Investment Opportunity In Panama
The second big opportunity for making money from real estate in Panama is productive land. This country’s interior is a fertile bread basket. Individual investors can participate in organic plantations for turnkey agro-profits.
Brazil
Brazil is a big country of many different property markets, some more interesting than others. We recommend focusing on the Fortaleza area. This coastal region is a top destination among Brazilian tourists. Rentals targeting the local holiday market can earn better than 8% net yield reliably.
Also, we recommend an investment in beachfront along this coast, where lot prices are a global bargain.
The Brazilian real remains stable against the U.S. dollar (at around 3.81 reals to US$1, as of this writing) and historically weak relative to the rate of 1.6 reals to the dollar of a decade ago.
Good yields and a weak currency make this country a very strong buy for 2020.
Dominican Republic
In the Dominican Republic, we recommend focusing on the capital, Santo Domingo.
The Dominican Republic is enjoying continued strong growth, as well as increasing foreign direct investment. All those business travelers coming to get in on the country’s economic boom pass through Santo Domingo… and they all need places to sleep.
Meantime, tourism figures continue to impress, as well; this country saw more than 6.2 million tourists in 2017, up 3.9% from 5.9 million in 2016.
A furnished rental for either of these markets—the business traveler or the holiday-goer—can be an excellent source of cash flow and, if you buy right, should enjoy good capital appreciation.
Maximize Profits With A Pre-Construction Investment
One of the best opportunities, specifically, is to invest pre-construction in an apartment intended for the business traveler market. Business people staying longer than a week prefer an apartment to a hotel.
Note that it can be possible to qualify for financing as a non-resident. I don’t recommend financing property overseas, however, unless you are sure you can cover the mortgage payment even without any income from the financed property.
That said, Santo Domingo city apartments rent well, and you should have no problem covering your mortgage payment from your rental income.
Thailand
We like Thailand for agriculture primarily but think this country deserves attention for its strong economy and expanding tourism industry, as well.
The downside in Thailand is that restrictions are placed on how foreigners can own property. Foreigners are only able to own land leasehold.
A foreigner can hold freehold title to the construction on the land, but, unless your house is portable, you might not take comfort from that.
Foreigners are also permitted to own condos freehold as long as foreigners don’t own more than 49% of the total area of the condo building.
For this reason, the condo market is where most foreign investors focus their attention. A condo is also cheaper and easier to manage as a rental than an individual property.
Bangkok was the number-one visited city in the world in 2018, according to one survey. This city last year received more visitors than London or Paris. Again, that’s worth the would-be property investor’s attention.
Portugal
Property markets in Portugal have been on the move since 2015 making Portugal one of the best places to buy real estate. Some neighborhoods in Lisbon, for example, are now priced beyond what makes sense for property investment. Other areas of this city, however, continue to offer good value and opportunity, especially if you’re up for a renovation project.
Going forward, we recommend focusing on the lesser-visited areas along the country’s Algarve coast and the Porto region north of Lisbon.
Portugal is another country where it’s possible for a non-resident to get a mortgage.
France
Prices go up and down, as they do everywhere, but, for money, a piece of Parisian real estate is one of the surest imaginable stores of wealth long-term.
Though its strength is waning as we move forward into 2020, the U.S. dollar is still creating euro bargains for American buyers. Another good reason to be looking right now at both Portugal and France.
Another of the most appealing features of the French property market is that this is another country where foreigners are eligible for in-country financing. In fact, interest rates for French mortgages for foreigners are at historic lows of less than 2% interest… with loan-to-values as high as 85%.
Mexico
Put concerns about the drug cartels aside. Mexico remains a top destination among Canadians and Americans for both tourism and retirement and is enjoying good growth in the local tourism market as the country’s middle class continues to expand.
All that combines to make Mexico a top choice for a property rental investment.
Top markets include Puerto Vallarta on the Pacific coast and Playa del Carmen on the Riviera Maya. In both of these popular tourist towns, a rental property can generate an excellent yield.
Mexico offers financing options for non-residents, generally from U.S. lending institutions set up in Mexico specifically for that purpose.
Belize
It is believed that the tourism and resident expat markets on Belize’s Ambergris Caye will continue to expand through 2020 and beyond, meaning this still-undervalued Caribbean island is another good choice for a rental investment making Belize one of the best places to buy real estate overseas.
Elsewhere in Belize you should focus on Cayo, where quality rental accommodation at a reasonable price is hard to come by. If you were to build a high-quality rental, you could make a good yield by pricing your property competitively relative to the local hotels that you wouldn’t let your mother-in-law stay in.
Turkey
The attempted coup in this country in 2016 has kept many foreign investors away since. Meantime, values in Istanbul have surged.
Istanbul was the world’s 9th most visited city in the world in 2018. That was behind brand-name cities like Paris, London, New York, and Tokyo… but ahead of other major cities, including Berlin, Barcelona, Rome, and Los Angeles.
In addition to tourism growth, Istanbul and Turkey in general are enjoying strong economic growth as the population increases and the middle class expands. We see both tourism rentals and student rentals as appealing rental investment options.
One of the biggest selling points for such an investment in Istanbul is the low cost of entry. A rental unit in this market can be within most any investor’s budget.
Turks And Caicos
At the other end of the budget spectrum is the higher-end Turks and Caicos.
People might not agree this is one of the best places to buy real estate overseas. Ordinarily, a high-end property does not generate the level of net rental yield that can be possible from a lesser investment.
Long-term rents for a luxury-standard house in the United States, for example, don’t generally reflect the premium price of the property.
A luxury purchase in the Turks and Caicos can be an exception to this rule. It can be possible in this Caribbean market to earn a net rental yield of 8% even from a high-end investment.
Banks in the Turks and Caicos will lend to non-residents. At the price points of the luxury rentals in this market, you definitely want to be conservative with any mortgage you take out in case rental income slows for any reason.
Features of a Profitable Rental Property And How to Buy One
Investment properties can be exciting and very rewarding if you make the right choice. But income and rewards aside, the idea can be daunting for a first-time investor.
Real estate is a tough business and the field is peppered with land mines that can obliterate your returns. That’s why it’s important to do detailed research before you dive in so you’re on top of all the pros and cons of real estate investing.
Here are the most important things to consider when shopping for an income property.
Starting Your Search
Begin your search for a property on your own before you bring a professional into the picture. An agent can pressure you to buy before you have found an investment that suits you best. And finding that investment is going to take some sleuthing skills and some shoe leather.
This will help you narrow down several key characteristics you want for your property—type, location, size, and amenities. Once you’ve done that, you may want a real estate agent to help you complete the purchase.
Your location options will be limited by whether you intend to actively manage the property or hire someone else to do that for you. If you intend to actively manage it yourself, you don’t want a property that’s too far from where you live. If you are going to get a property management company to look after it, proximity is less of an issue.
Neighborhood
The neighborhood in which you buy will determine the types of tenants you attract and your vacancy rate. If you buy near a university, chances are that students will dominate your pool of potential tenants and you could struggle to fill vacancies every summer. Be aware that some towns attempt to discourage rental conversions by imposing exorbitant permit fees and piling on red tape.
Property Taxes
Property taxes are likely to vary widely across your target area, and you want to be aware of how much you’ll be losing. High property taxes are not always a bad thing in a great neighborhood that attracts long-term tenants, but there are unappealing locations that also have high taxes.
The municipality’s assessment office will have all the tax information on file, or you can talk to homeowners in the community. Be sure to find out if property tax increases are likely in the near future. A town in financial distress may hike taxes far beyond what a landlord can realistically charge in rent.
Schools
Consider the quality of the local schools if you’re dealing with family-sized homes. Although you will be mostly concerned about monthly cash flow, the overall value of your rental property comes into play when you eventually sell it. If there are no good schools nearby, it can affect the value of your investment.
Crime
No one wants to live next door to a hot spot of criminal activity. The local police or public library should have accurate crime statistics for neighborhoods. Check the rates for vandalism, and for serious and petty crimes, and don’t forget to note if criminal activity is on the rise or declining. You might also want to ask about the frequency of a police presence in your neighborhood.
Job Market
Locations with growing employment opportunities attract more tenants. To find out how a specific area rates for job availability, check with the U.S. Bureau of Labor Statistics (BLS) or go to a local library. If you see an announcement about a major company moving to the area, you can be sure that workers in search of a place to live will flock there.
This may cause housing prices to go up or down, depending on the type of business involved. You can assume that if you would like that company in your backyard, your renters will as well.
Amenities
Tour the neighborhood and check out the parks, restaurants, gyms, movie theaters, public transportation links, and all the other perks that attract renters. City Hall may have promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
Future Development
The municipal planning department will have information on developments or plans that have already been zoned into the area. If there is a lot of construction going on, it is probably a good growth area.
Watch out for new developments that could hurt the price of surrounding properties. Additional new housing could also compete with your property.
Number of Listings and Vacancies
If a neighborhood has an unusually high number of listings, it may signal a seasonal cycle or a neighborhood in decline—you need to find out which it is. In either case, high vacancy rates force landlords to lower rents to attract tenants. Low vacancy rates allow landlords to raise rental rates.
Average Rents
Rental income will be your bread-and-butter, so you need to know the area’s average rent. Make sure any property you consider can bear enough rent to cover your mortgage payment, taxes, and other expenses.
Research the area well enough to gauge where it might be headed in the next five years. If you can afford the area now but taxes are expected to increase, an affordable property today may mean bankruptcy later.
Natural Disasters
Insurance is another expense you will have to subtract from your returns, so you need to know just how much it’s going to cost you. If an area is prone to earthquakes or flooding, coverage costs can eat away at your rental income.
Getting Information
Official sources are great, but talk to the neighbors to get the real scoop. Talk to renters as well as homeowners. Renters will be far more honest about the negative aspects of a neighborhood because they have no investment in it. Visit the area at different times on different days of the week to see your future neighbors in action.
Choosing a Property
The best investment property for beginners is generally a single-family dwelling or a condominium. Condos are low maintenance because the condo association takes care of external repairs, leaving you to worry only about the interior. Condos, however, tend to garner lower rents and appreciate more slowly than single-family homes.
Single-family homes tend to attract longer-term renters. Families or couples are generally better tenants than singles because they are more likely to be financially stable and pay the rent regularly.
When you have the neighborhood narrowed down, look for a property with appreciation potential and good projected cash flow. Check out properties that are more expensive than you can afford as well as those within your reach. Real estate often sells below its listing price.
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For appreciation potential, you are looking for a property that—with a few cosmetic changes and some renovations—will attract tenants who are willing to pay higher rents. This will also raise the value of the property if you choose to sell it after a few years.
Of course, a key step in ensuring a profitable endeavor is to buy a reasonably priced property. The recommendation for rental property is to pay no more than 12 times the annual rent you expect to get.
Determining the Rent
How is the potential rent determined? You are going to have to make an informed guess. Don’t get carried away with overly optimistic assumptions. Setting the rent too high and ending up with an empty unit for months quickly chips away at the overall profit.
Start with the average rent for the neighborhood and work from there. Consider whether your place is worth a bit more or a bit less, and why.
To figure out if the rent number works for you as an investor, calculate what the place will actually cost you. Subtract your expected monthly mortgage payment, property taxes divided by 12 months, insurance costs divided by 12, and a generous allowance for maintenance and repairs.
Don’t underestimate the costs to maintain and keep the property. These expenses depend on the age of the property and how much you plan to do yourself.
A newer building probably will require less than an older one. An apartment in a complex for seniors is unlikely to be subjected to the same amount of damage as off-campus college housing.
Doing your own repairs cuts costs considerably, but it also means being on call 24/7 for emergencies. Another option is to hire a property management firm, which handles everything from broken toilets to collecting rent each month. Expect to pay around 10% of the gross rental income for this service.1
If all these figures come out even or, better yet, with a little money left, you can now get your real estate agent to submit an offer.
Making the Purchase
Banks have tougher requirements for giving loans for investment properties than for primary residences. They assume that if times get tough, people are less inclined to jeopardize their homes than a business property.
Be prepared to pay at least 20% to 30% for a down payment plus closing costs. Have the property thoroughly inspected by a professional and have a real estate lawyer review everything before signing.
Don’t forget to pay for sufficient insurance. Renter’s insurance covers a tenant’s belongings, but the building itself is the landlord’s responsibility, and the insurance may be more expensive than for a similar owner-occupied home. The property’s mortgage, insurance, and depreciation are all tax-deductible up to a certain amount.
Finally
Every country and state has good cities, every city has good neighborhoods, and every neighborhood has good properties. It takes a lot of footwork and research to line up all three.
When you end up finding your ideal rental property, keep your expectations realistic and make sure your own finances are healthy enough that you can wait for the property to start generating cash.
