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As the increase in rental yield in Australia fails to keep up with the increase in property prices, several investors have turned to greener pastures outside their backyard bringing overseas property investing in fashion.

“Indeed, investing in property overseas is a lucrative option for seasoned investors who do not want to limit their real estate investments to Australia. While the property market in Australia has been consistently performing until now, there is no guarantee of the upward curve, forever. Further, properties in some countries such as Malaysia in South East Asia may provide better rental yield on your investment due to lower entry price and barriers apart from doubling up as a vacation spot, if you please,” remarks [Patrick Morgan], a mortgage broker registered on the HashChing platform.

investing-outside-Australia

The global property market has become much more accessible, and apart from building a real estate portfolio across Australia, more and more Australians are diving in to realise their dream of owning a  spacious villa in Bali or a seaside property in Malaysia or a house in one of the scenic European cities.

“A lot of Australians bought property in the US after the great mortgage crisis, but the prices in the US have gone up since. Thus, instead of following trends, it is important to rely on research and professional advice to size up the returns on any potential investment before taking the plunge,” adds [Patrick Morgan].

What are the advantages of buying offshore? 

With property prices skyrocketing in certain cities in Australia, buying in a more affordable location could help young investors jumpstart their real estate portfolio. Additionally, buying in your favourite vacation spot means owning your vacation property – a great incentive. You can leverage the property further by letting it out to tourists for holidays when you are not using the property yourself. However, it is important to check before buying whether you are permitted by the applicable local laws to use the property as a holiday rental for tourists or not.

Property investment is a long-term strategy of creating wealth and especially if you decide to invest across borders, it is better to hold the property for a long term and generate rental income over the years. As currency exchange rates are hard to predict, investing in a country with an unstable currency poses a much higher risk to your wallet. Before buying a property overseas, you must understand that currency fluctuations affect the value of your property directly. For example, consider that your local currency lost 5% of its value in the previous year and your property in Country A recorded a 15% return in the same time. This means your gain will be much higher if you convert your profits in your local currency. However, the reverse of this situation is also true, and you stand the risk of losing much more if your national currency strengthens considerably.

Language, transaction costs and taxation- Things to consider

The language, transaction costs, taxation and even the political situation in your country of choice can affect your investment. It often turns out to be difficult to manage the property and tenants in your own country, and the same exercise overseas could be much more demanding. However, a common language and a reputed property agent in the foreign country where you choose to invest could alleviate the problem to a large extent.

Taxation and transaction costs are two of the reasons that make foreign property investments lucrative to some, however, very often, it is hard to predict the exact cost of buying a property in an unfamiliar jurisdiction. Thus, it may be important to spend a few weeks in the country where you’d like to buy a house to understand the property mechanics there, better. It is also important to apprise yourself of the tax rules as each country has different rules of taxation. The stamp duty, taxes, legal costs and all other expenses may differ from country to country, and it is best to find these out before deciding to buy a property abroad.

It makes sense to get in touch with a tax advisor to understand the implications of investing abroad. Note, as an Australian citizen, any income earned by you anywhere in the world is assessable income in Australia unless exempt. However, It may also be possible for you to negative gear your offshore investment property against your income in Australia.

What to keep in mind when you are buying overseas?

1. Location – When you decide to invest overseas, the first step is to find out whether it is possible for a foreigner to buy a property in that location or not. For example, if you decide to buy in Bali, you may face potential hurdles, but they can be overcome with the help of an expert. However, in Iceland, only locals can buy property. Malaysia, on the other hand, is a market open to foreign investors.

2. Gathering proper information – Often investors jump up on prices that seem too good to be true and more often it truly turns out to be the case. It isn’t always simple to gauge a market from a distance and lack of proper information can kill your investment. It is recommended to hire a reputed agent in your country of choice or visit the place to make an informed decision.

3. Taxation – How much tax does the country you intend to buy in levy on offshore investors? Many countries do not levy stamp duty that makes it cheaper to buy a property there. However, global investors must keep in mind that they need to declare all their income, including rental income and/or capital gains from their overseas property, to the ATO. Additionally, you may also be required to pay tax on your rental income in the country where you own the property.  It is best to consult a professional tax advisor when buying offshore, as you may be able to offset the tax paid overseas against your tax return in Australia.

4. Currency Fluctuations – Since global investors are dealing in currencies other than the Australian dollar, currency market fluctuations can lead to profit (or loss) depending on the way the market swings.

5. Financing – Securing finance for your real estate investment offshore may pose some problem, as lenders consider it a riskier proposition. It is not possible to use an ordinary home loan from an Australian lender to buy your property overseas and it may require some extra legwork before you could finalise a credible lender outside your country.

Where should I invest?

Buying real estate outside Australia can be beneficial for astute investors who are ready to put in much more effort, research and time in not only choosing but also managing and monitoring their investment. As, ‘with great power comes great responsibility’ (was it Voltaire or Spiderman who said that?), great returns often come with great risks you must be prepared to take. Start your research now if you intend to own that property in Malaysia or stick to more familiar locales of New Zealand or Britain depending on your choice and requirement.

While investing outside the Australian property market may seem lucrative to some due to lower upfront costs and lesser deposits in certain countries, others choose to diversify in various locations across Australia without the inherent tax and currency exchange related complications that may accompany the move to invest abroad. Financing your property in Australia is much easier now as the Australian mortgage market has become more borrower centric, especially with the appearance of Fintech’s such as HashChing that are committed to securing the most competitive home loan deals for their customers. In other countries, it may not be as easy to secure finance as in Australia.

If you wish to learn more about financing a property, whether in Australia or overseas, get in touch with our mortgage experts who will promptly answer your queries online, free of cost.

 

By Vidhu Bajaj

 

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