Foreign Real Estate Investments for Americans: Why or Why Not?

When you think of foreign real estate, you might picture a retirement house by the beach. But for many of our clients, investing in property abroad is used for a great deal more.

In this article, we’ll talk about why you might want to own foreign real estate – be it a house, condo, raw land, etc.

We’ll also explain various pitfalls and restrictions in buying real estate abroad and show you how to avoid these traps.

And we’ll list popular jurisdictions based on investment potential, political stability, and – of course – the weather. The ones best suited for American clients.

The Benefits of Foreign Real Estate Investments

Investing in foreign real estate offers several benefits. Most simply, it helps to diversify your investments — a key strategy in uncertain times.

Foreign real estate can also offer opportunities not available in your local market, including unique properties with strong investment potential.

Here are some of the other benefits:

• Non-Reportable Asset: Purchasing foreign real estate in your own name (not in the name of a business or trust) means you don’t have to report that ownership to the US government. You’ll still need to pay tax on any rental income you make from the property, of course. And you’ll also have to pay capital gains tax if you sell it.
• Protection from Creditors: Foreign real estate is much harder for a domestic creditor to seize or foreclose on. To take it, they will have to go through a court process in the country where the property is located. That makes it less attractive to all but the most dogged creditors.
• Stretching Your Purchasing Power: Investing in real estate in certain foreign countries can allow you to get more value for your money compared to prime properties in your home country. Even if you can’t afford a beachside property in California, you might be able to in Mexico, Costa Rica, or Portugal.
• Investment Potential: Some emerging real estate markets are simply better investments than the equivalent in well-developed countries. For example, Panama has long been one of our favorite Plan B locations. Had you bought a condo in Panama City 30 years ago, you would have enjoyed an astronomical rise in value as wealthy economic refugees from Argentina, Venezuela, and other South American countries flocked there to protect their assets from their home governments.
• Protection from Government Seizures: It’s more difficult for the US government to seize foreign real estate compared to other assets like bank accounts and brokerage funds. While Uncle Sam can try to force you to sell the property, the government can’t simply confiscate it. That makes it less attractive to the government (or any other creditor) than more liquid asset classes.
• Protection Against Foreign Exchange Controls: The president has the power to impose currency controls, which could make it much harder to move assets overseas through the financial system. Keeping holdings outside the system – like foreign real estate – offers a lot of protection against foreign exchange controls.
• Tax Incentives and Financing Options: Certain countries provide attractive tax incentives and financing options to attract foreign real estate investors. For instance, in certain parts of Spain, Italy, and other countries, you can buy property for next to nothing if you’re willing to renovate it.
• Vacation Home and Emergency Bolthole: Foreign real estate can serve as a ready-made vacation home that can also double as an emergency refuge if needed.
• Residency and Citizenship Opportunities: In numerous countries, purchasing real estate can entitle you to legal residency, or even a second citizenship and passport.

That said, it doesn’t make sense to run out and buy something just because you like the way a project looks in a magazine. Every country has a unique real estate market, and the rules are always different from here in the US. To be successful, you need to understand the legal, financial, and cultural issues involved.

And any overseas investment should fit properly into your larger wealth protection plan.

The 10 Most Common Pitfalls When Buying Foreign Real Estate and How to Overcome Them

We’ve seen far too many foreign real estate deals concluded over a few mai-tais, with little or no due diligence. But not everything is orange groves and white sandy beaches. You also need to understand what can go wrong, prepare for it, and be happy if no unforeseen problems occur.

Here are the top 10 mistakes “newbie” international real estate investors often make.

Mistake #1: They overpay.

In most countries, no centralized listing service like a Multiple Listing Service (MLS) exists. So real estate agents may only show their own listings, sometimes at inflated “gringo prices.”

To avoid overpaying, it’s important to work with a trusted advisor who can investigate deals discreetly on your behalf.

Buying “off-plan” (pre-construction) can offer discounts but carries risks like developer bankruptcy or poor construction. To protect yourself, work with an experienced developer who already has a bank guarantee to ensure they complete the project.

Mistake #2: They buy something claimed by someone else.

In many parts of the world, real estate is sold without title insurance. This is partly because it’s often impossible to trace previous owners who may submit a claim over the property. In other cases, the owner is known but has abandoned the property because debts associated with it exceeded its value.

We sometimes see property sold only with “rights of possession.” You have the right to live or build on the property – but only if someone else with a superior claim never comes along and forces you off it.

An experienced advisor can help you conduct a thorough title search. They can unearth hidden liens against a property that the buyer is responsible for paying as well as help you navigate the local regulations.

(In our case, when we work with clients, we hire local lawyers to trawl through the records to look for any signs the deal is too good to be true.)

Mistake #3: They try to buy something foreigners aren’t allowed to.

Some countries, especially in Asia, forbid non-citizens from purchasing property directly. Others, like Mexico, have limitations and restrictions depending on where the property is located. Various strategies are available to bypass these restrictions.

In some countries, it’s easy to get around these restrictions. For instance, non-citizens of Mexico can’t take title to waterfront property in that country. But they can acquire title through a certain type of Mexican trust. This adds to the cost of your real estate purchase, of course. And in many cases, it means additional reporting to Uncle Sam. [You can find more information here on how to buy property in Mexico.]

Mistake #4: They don’t plan for the local transfer and property taxes.

Wherever you buy or sell property, you’ll need to pay transfer or stamp duties. In some Caribbean countries, they’re as high as 10% (or even more.)

There’s also property tax to consider. And some countries impose a tax on the rental value of the property, even if you don’t rent it out. And if the previous owner owed tax on the property, you’ll be expected to ante up what’s owed.

When you sell, you might have to pay local capital gains tax too. The good news is that you can credit that tax payment against the tax you owe Uncle Sam on the same gain.

Mistake #5: They don’t plan for how the next generation will get it.

Estate planning is a big issue that not all our clients have really thought through.

The rules for inheriting real estate vary from country to country. But in most jurisdictions, local property is automatically subject to probate. A structure you create to avoid ownership limitations can often do double-duty to bypass the probate process. But do your research in advance to make sure.

If you choose not to use a structure, your beneficiaries need to be prepared to go through probate to inherit the property. The first step they need to take is to legalize your will or trust in that country. That can be time-consuming and expensive, so you may want to prepare a local will to ease the transfer process.

How expensive? In Panama, for instance, the cost of probate can be over 10% of the property’s value, and it can take up to a year or more to fully convey ownership to your loved ones.

Mistake #6: They can’t spend as much time as they want in their property.

Don’t assume that when you purchase real estate in another country, you’ll be able to live there full-time. Unless you buy property that offers legal residency or citizenship through a real estate purchase, you’ll likely need a separate permit to live full-time in the dwelling you’ve purchased.

Many countries allow US citizens to stay for 30 days or more without a visa. A 90-day limit is typical. A few places will let you stay up to six months without extra paperwork.

In developments operated as hotels, you also won’t have the right to live full-time in the property you purchase. Again, understand the rules before you sign on the dotted line.

Mistake #7: They might not be able to rent it out when they aren’t there.

This one trips up plenty of new real estate investors — you might not have the right to rent out the property. An increasing number of cities restrict real estate owners from offering short-term rentals on platforms like Airbnb. And some developments prohibit rentals altogether. Make sure you understand the rules before you buy.

Mistake #8: They might not be able to evict a tenant, even if the tenant refuses to pay rent.

Many countries limit the ability of property owners to evict non-paying tenants. Price controls on rents are common, especially in European countries. You might not be allowed to demand a deposit from your tenant or prohibit subletting.

Here’s a helpful resource that will give you a sense of landlord-tenant law around the globe. But before you buy, hire an expert to make sure you understand your rights as a landlord.

Mistake #9: They might not be able to get a mortgage.

Mortgages for real estate outside the United States are more difficult to obtain than for domestic purchases. In most countries cash purchases are common — even for locals. In such cases, a non-resident investor has almost no chance of getting a mortgage.

Even when mortgages are available for foreign buyers, you’ll find the terms aren’t as good as in the US. And the interest rates will likely be higher.

Assuming you can get a mortgage, you’ll probably need to make a larger down payment – at least 20% but often as much as 50%. A typical arrangement is a five-year mortgage with a 30-year amortization. That means that while you’re making payments on a 30-year schedule, after five years, there’s a balloon payment on the balance. If you can’t or don’t want to make the balloon payment, you must requalify for another mortgage, possibly at a higher interest rate.

You may also need to purchase a local life insurance policy and keep it in effect until the mortgage is paid off. In many countries, life insurance is available to you only up to a certain age; typically, 75 years. In some cases, it might be less. The older you are, the less likely it is you’ll be able get a mortgage at all. And if you do qualify for a mortgage, you’ll need to pay it off by the time you reach the maximum age at which life insurance coverage is available.

Mistake #10: They don’t have an exit strategy.

We’ve covered some of the different ways getting out of a deal can be hard. And that leads to the last pitfall — not knowing how you’ll get out before you get in.

Why You Need an Exit Strategy

Our client Rosemary (name changed to protect privacy) purchased a $400,000 condo in St. Kitts to qualify for citizenship-by-investment. The citizenship program rules stipulate that she could sell it after five years. Since Rosemary bought the condo in 2013, she tried to sell it in 2018.

Rosemary first discovered that she couldn’t sell the condo to someone else seeking citizenship without first getting permission to sell it from the government. And there was a long waiting list.

Fortunately, she could sell it to someone not seeking citizenship without restrictions. But on the open market, the condo was now worth much less than the $400,000 she had paid. Her real estate agent suggested listing it for $300,000. But even at that reduced price, there were no buyers.

She had one offer for $200,000 but the prospective buyer wanted Rosemary to pay the 10% alien landholder’s tax that applied to all property transfers to a non-citizen of St. Kitts & Nevis.

In the end, Rosemary decided not to sell the condo. Instead, she rents it out to students attending a medical school in the capital, Basseterre. But the rental income barely covers the homeowner’s association fees and a 5% annual tax on the gross rental value.

The best exit strategy is to plan for an eventual sale before you buy at all.

Here are some tips:

• Only buy fee-simple ownership (versus into a “fractional-ownership scheme”, which is quite common in such things)
• Before you buy, do a thorough analysis of the income potential for the property. That includes checking sites like Airbnb to see what properties in your target areas are going for. Review the Airbnb calendars to get an estimate for occupancy rates. This will let you calculate an approximate annual yield for the property.
• Look for something that can generate a yield of 15% or more as a vacation rental; it will probably yield about half that much as a long-term rental.

This is a high enough return that (if it continues) will likely ensure the property will hold its value or appreciate, at least in local currency terms. So, when you sell, there’s a greater probability you’ll be able to lock in a profit.

Top Destinations for Buying Real Estate Abroad for US Citizens

While there is no perfect location, certain countries tend to be preferred by our American clients when purchasing foreign real estate. Here are six of the top contenders:

1. Mexico is perhaps the most popular option for Americans to buy foreign real estate. The country offers a wide variety of real estate in every price range. While purchase restrictions exist for non-Mexican citizens in coastal and border regions, you can use a Mexican trust to legally avoid them. And while a real estate investment won’t lead to legal residency, it’s easy to get residency if you can prove you have enough income from outside the country to live there without needing to work there. Probate can be a hassle but is easily avoided by purchasing property though a Mexican trust. [You can find more information here on how to buy property in Mexico.]
2. Panama offers excellent asset protection, privacy, and low taxes. And there are no restrictions on foreign ownership of real estate. You can also get legal residency through a real estate investment. And it’s not as vulnerable to natural disasters as some other countries. However, probate is time-consuming and expensive.
3. Belize also has no restrictions or limitations on foreign ownership of property. Plus, all transactions are completed in US dollars, making it one of the easiest places to buy real estate. It’s also easy to acquire legal residency. And the official language is English, which means it’s easy to communicate. But Belize is in the hurricane belt, which means it’s hit periodically by destructive tropical storms.
4. Argentina offers a unique combination of low-cost living and investment opportunity. Buenos Aires, the capital and largest city, is often compared to Paris but with a much lower cost of living. And there are no restrictions on foreign ownership of urban property, although they do exist for rural property. In certain cases, a real estate investment can also help you qualify for legal residency. The plunging Argentine peso, however, has led to substantial economic instability. Rent controls are another factor to consider, and probate can be expensive unless you structure the purchase correctly.
5. Cambodia is an attractive option because of the warm climate, ease of getting legal residency, and the low cost of living. Indeed, Cambodia offers the most flexible and accessible visa policy of any country in Asia. And the price of real estate is generally very low. While restrictions exist on ownership of real estate by non-citizens, they’re less onerous than in neighboring countries like Thailand. Also, if you purchase real estate valued at $100,000 or more in Cambodia, you can obtain a renewable 10-year visa. You can find more information here: Cambodia My Second Home (CM2H).
6. Portugal is one of the most popular European countries in which to purchase real estate due to its relative affordability. And there are no restrictions on real estate purchases by non-citizens. What’s more, mortgage financing is widely available. While real estate prices in the largest cities have been bid up by foreign demand, bargains are still widely available in smaller cities and rural parts of Portugal. Unfortunately, a real estate purchase in Portugal won’t qualify for legal residency. However, if you have sufficient income to live in Portugal without working, you can qualify for a residency permit.

Need Help?

Over the past 40+ years, we’ve helped thousands of clients build a better wealth protection plan. A good number of them have involved buying and selling foreign real estate.

If you’re thinking about buying real estate abroad and wondering which country is best for you, we can help.

It starts with a free, no-obligation consultation with one of our Associates. You can do that here.