It sounds so glamorous, owning a second home overseas. Many people justify the expense by calling it an “investment,” contorting the cash flow figures to make them look like income as a vacation rental will cover your annual ownership costs. In the real world, it rarely works out that way.
Trending Now: 3 Best States To Buy Property in the Next 5 Years, According to Experts
Check Out: How To Get Rich in Real Estate Starting With Just $1,000
Before indulging in foreign real estate folly, consider well the following risks and costs. Also check out these dangerous cities you shouldn’t buy a home.
1. Cash Flow Fundamentals
Before diving into the risks of overseas ownership — and there are a lot, from tax complications to currency risk to political risk and beyond — let’s start with the fundamentals of the vacation rental business.
That one word says it all: it’s a business, and one you probably don’t know well. People who don’t own rental properties may rant about “evil” or “greedy” landlords, but they don’t understand how rental cash flow works.
Landlords don’t pocket “the rent minus the mortgage.” In any given year, non-mortgage expenses typically eat up around 50% of the rental income. In the industry, we refer to this (not so creatively) as the “50% Rule.” These expenses include repairs, maintenance, vacancy rate, property management costs, accounting costs, property taxes, insurance, and more.
Seasonality and higher property management costs add even more wrinkles among short-term rentals.
The bottom line is that few vacation rentals actually cash flow well, and those are mostly owned by people who make a business of hospitality. If you buy a second home overseas, do it for the right reason: you want it for personal use and prestige. Don’t justify it as an “investment.”
Try This: 8 Places Where Houses Are Suddenly Major Bargains
2. Tax Complications
Buying real estate in a foreign country makes you subject to their tax laws.
“Each country has its own set of tax laws when it comes to property ownership,” explains Austin Glanzer, real estate investor and founder of 717Homebuyers.com. “Beyond the obvious property taxes, you could run into surprise expenses like having to file income taxes, and other taxes that eat into your profits such as capital gains taxes or inheritance taxes.”
“These hidden costs can make your overseas investment a lot less appealing than it seemed at first glance.”
3. Political & Economic Risk
How do you think it worked out for foreign property owners in Cuba in the 1950s? Or in Venezuela in the 1990s? Or even in Lebanon after the economic collapse of the late 2010s?
“Some countries aren’t as stable as they appear,” notes Ryan Hess of title company Capstone Land Transfer. “If the political climate changes or the economy takes a nosedive, your property’s value could drop fast. Or even worse, you could end up losing ownership entirely.”
That doesn’t require the state to seize assets (although it can). Political instability can cause violent unrest, recessions, a withdrawal of foreign investment, and of course currency collapse.
4. Currency Risk
“Before diving into an overseas property, consider the risk of fluctuating currencies,” advises veteran real estate investor Seth Williams of R.E.tipster.
I spent a month traveling Patagonia in Argentina in late 2022 with my wife and daughter. In our time there, local businesses took to handwriting their prices on whiteboards each day — because the currency was losing value so quickly that they literally raised prices every day.
While real estate makes a reasonable hedge against inflation, weakening local currencies can reduce property values indirectly in several ways. First, they make banks tighten up on lending, because they lose money when inflation exceeds a past fixed interest rate. Good luck getting a mortgage in Argentina. That in turn means fewer prospective buyers and lower inflation-adjusted prices.
Runaway inflation also leads to economic instability, as Argentina has suffered over the last three years. Which, again, drives down real estate values.
And currency risk cuts the other way too. Cody Dover of Little Rock Property Buyers points out the risk of strengthening foreign currencies: “If the local currency gets stronger, your mortgage payment, maintenance costs, and pretty much every expense tied to the property could end up costing way more in US dollars than you originally budgeted for.”
5. Long-Distance Headaches
Seamus Nally, CEO of landlord software TurboTenant, notes that long-distance ownership comes with plenty of challenges.
“Having a house overseas makes things tricky if something happens to the property if you aren’t there. If something serious does happen, like a fire or flood, being in another country means you can’t get there quickly to handle the recovery and repercussions.”
For most overseas property owners, that means having a team that includes a property manager, maintenance worker, cleaner, specialty contractors, and landscapers all available when needed. It also requires deep trust, because you aren’t there to double check either the quality of their work or the need for it in the first place.
6. Financing Challenges
Think you can just put down 20% of a foreign property and call it a day?
“Getting a mortgage overseas can be a headache, if possible at all,” explains Cameron Love of StrykCam Real Estate Investors. “Most banks aren’t eager to lend to foreigners, and if they do, expect a bigger down payment and interest rates that are through the roof.”
7. Distraction from True Investments
Money you spend on your foray into foreign property ownership is money not available for true investments like stocks, bonds, or true passive real estate investments.
“I’m in my third decade as a real estate investor, and I’ve spoken to roughly 3,000 investors over the years,” shares Paul Moore of private equity real estate firm Wellings Capital. “Those who bought properties in faraway places got way off track from their true priorities: their career, family, hobbies, and retirement planning. Most regret it in the end.
“If you want an overseas home as a status symbol, fine. But realize that, for the vast majority of people, this is not a good investment. It will be a time and energy drain, and you will likely lose money.”
Buyer beware.
More From GOBankingRates
- 10 Costco Fall 2024 Items To Stock Up On Before They Sell Out
- Florida's Retirees Are Fleeing: Experts Predict These 5 States Will Be Top Retirement Spots in 10 Years
- Here's How To Become a Real Estate Investor for Just $1K Using This Bezos-Backed Startup
- 3 Things You Must Do When Your Savings Reach $50,000
This article originally appeared on GOBankingRates.com: 7 Reasons You Shouldn’t Buy a House Overseas
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
