Expat Property Investing 101: Why Buy?

Thinking about investing some of your hard-earned cash in a nice piece of real estate?

With the property market picking up in many countries around the world, expats are once again looking at real estate as a possible investment choice.

Expat Property Investing 101

Sweet digs. How much could this rent for?

The darkest days of the global property crash seem to be quickly fading into a distant memory, but those of us contemplating a property purchase would be wise to proceed with caution.

The fact is that many people – expats or not – jump into the property market without much thought or preparation.

They see a hot property market and want to get in on the action before it’s too late.

Unfortunately, more often than not this ends in complete disaster.  Like any investment, real estate is a long-term commitment of your money that should be made only after undertaking careful research and surveying the potential risks.

A Good Investment

Despite the warning above, we here at HealthyWealthyExpat do believe that real estate can be an excellent addition to your overall investment portfolio.

As expats, the world is our oyster when it comes to property investment, but our situation also means that the process of choosing, buying, and managing the investment is usually more complicated.

There is much to consider before you slap down your precious cash on a piece of real estate. With this in mind, we are starting this series on expat property investing to help us all be better informed property investors.

We encourage you, our community, to share your collective wisdom to make us all better property investors. Ask questions, share your experiences (good or bad!), and offer your advice.

The more knowledge we have, the higher the probability that we will all make successful real estate investments.

But first, a question.

The Big Question

What’s the biggest purchase that most people make in their lifetime?

And the answer (quite obviously….)

A home, a house, real estate, a humble abode, property, new digs, a piece of dirt, a place to call our own…

So why do so many of us do more research into buying a new mobile phone than into buying property?

I’m not 100% sure about the answer to this, but I think it has something to do with our deeply primal notion of the inherent value of shelter, of having a place to hang our hats, of having a refuge to retreat to in times of uncertainty or upheaval.

We actually believe, deep down to an almost genetic level, that having ANY property is good for us.

But of course, it’s not.

Expat Property Investing 101

Beware the risks!

Property values can go up or down, structures can be poorly built, tenants can be your worst nightmare, or an act of nature can destroy your investment in seconds.

There are ways to mitigate these risks to your property investment, which we will discuss throughout this series. But let’s not be too hasty to jump into things.  First things first, as they say.

Any successful property investment begins with you defining the reason WHY you are investing in property in the first place.

Define the Reason Why You Are Investing In Property

Just as it is important to define your reasons to save money, it is imperative that you clarify exactly WHY you want to invest in real estate. (Hint: The answer isn’t “Because my friend told me it’s a good investment.” 😕 )

This is because the reason that you want to invest in real estate is the determining factor in how you analyze your potential investment and the impact it will have on your overall financial plan.

Knowing WHY you are investing in real estate will allow you to determine HOW you will make the decision on WHAT and WHERE you are going to buy.

Why Would I Invest in Real Estate?

Following are the most common reasons why one might want to invest in real estate, accompanied by the types of decisions that are required during the purchase process.  Also included are some benefits and drawbacks of each type of investment for expat property investors.

Reason Type of Decision Benefits Drawbacks
Investment purely a business decision (you analyze the property for its income generation and potential capital appreciation)
  • monthly income
  • long-term capital gains
  • hedge against inflation
  • challenge of managing property from afar
  • tenant issues
  • extensive market research needed to find suitable investment
Home mostly an emotional decision (you buy your home because you love it, love the area, want to be near family, etc.)
  • relatively easy to enter market, as you are familiar with it
  • a foot in your home property market
  • a base for your expat family to create lasting memories
  • a place to return to on repatriation
  • long-term capital gains
  • hedge against inflation
  • substantial costs of maintaining a home while you are overseas
  • security while you are not there
  • finding someone to repair and maintain the property while you are overseas
  • tax and other issues if you are non-resident (some countries)
Second/Holiday Home mostly an emotional decision, but also a business decision if you plan on renting it out
  • a base for your expat family to create lasting memories
  • income may cover expenses
  • long-term capital gains
  • hedge against inflation
  • substantial costs of maintaining a 2nd home (potential money pit)
  • management issues if renting
  • market research and analysis needed to find suitable investment
Residency/2nd Passport mostly a practical decision (Which country will give me residency?), but also an emotional decision if you plan on living in it or a business decision if you plan on renting it out
  • residency in a country other than your home country
  • may be the only place you can live if you come from a war-torn country
  • this type of property usually has a high cost due to the permit/passport issued with it
  • management issues if renting
  • substantial costs of maintaining a 2nd home (potential money pit) if you don’t live there full time

 

Which one is you?

Around 8 years ago, when we were new to real estate investing and were contemplating our first property investment, we originally thought we would buy a holiday home in southern Europe.  It would be a great base for our expat family in a part of the world that we love, would be a good long-term investment, and would perhaps provide some income each year. However, after much thought, careful review of our long-term goals, and a lot of research into the economy and rental market in the area, we decided to make a pure investment in rental property in Canada.

In short that’s our story.  After making the decision, we spent the next 6 months devouring all the literature we could on the subject and taking a course on real estate investing in Canada.

We also joined a real estate investing group that offered us the support and education we needed to make the right investment decisions.  That summer we bought our first property, and in the following years we went on to buy two more, all of which we hold to this day.

So, if you are thinking about investing in property in the near future, begin by spending some time thinking about the purpose of your investment. 

There is a lot to learn, but our hope is to discuss the key fundamentals of property investing that we (and our community) have learned in digestible chunks in future posts.

These fundamentals apply no matter where in the world you are thinking about investing.

Except maybe Antarctica. 😀

Expat Property Investing 101

The next property hotspot after it all melts?

How about you? Do you have some real estate investing experiences or advice to share?  Or maybe you have a question that our community can answer.  Give us a shout in the comments section below.

Comments

  1. As an alternative to investing in physical property, what do you think of real estate investment trusts (REITs)? They provide passive income in the form of dividends and are less volatile than stocks. They’ve also been hammered lately in the US and Canada from fears of interest rate hikes, so it might be an opportunity to buy units at a discount. I’m thinking specifically of ETFs that hold a basket of REITs, such as VNQ in the US or VRE, XRE and ZRE in Canada. My only concern is that they’re sensitive to interest rate fluctuations, but then again so are bonds.

    Just a thought, but it might be an alternative to folks who don’t have enough capital to invest in bricks-&-mortar real estate.

    • I think that REITs are an excellent way to invest in real estate for those who don’t want the hassle or risk of managing their own properties. You can leave the management to the professionals.

      One of the biggest benefits of the REIT ETF’s are that they are not only diversified across many companies but also across all the real estate sectors. So even though we have 3 residential properties, we also own REITS, including XRE. In this way, we also have exposure to the office, commercial, and multi-family property market. And with dividends usually being above 5%, they are also excellent income generators.

      Yes, they are interest rate sensitive, but held over the long-term as a small percentage of a basket of ETF’s, the ups and downs even out.

  2. John Rousseu says:

    Take note that REIT’s are “interest rate sensitive”. That is as interest rates rise, which they will be soon, the REIT’s cost of operation rise (they all operate on borrowed money, ie
    mortgages) and therefore the value of the ETF or stock falls.
    REIT’s have been great the past few years, but their capital appreciation will begin to
    erode soon
    As the interest rate environment changes, a switch out of REIT’s to the Lifeco’s (
    Life insurance ) will prove beneficial, as their profits will rise with rising interest rates

    This is already evident, as most REIT’s are currently stagnant, while the Lifeco’s
    are coming back to life, as evidenced by Canada’s Sun Life & Manulife

    John Rousseu
    Vancouver BC.
    Canada

    • That is an excellent point about REIT’s being interest rate sensitive. When bond rates rose very quickly about 6 months ago, the REIT ETF’s in Canada dropped about 20%. While this might scare some investors off, we long-term investors shouldn’t even blink an eye, as over the long-term the price will go back up. Along the way, we will be getting our dividends. The fact that the REIT’s dropped and have since leveled off also suggests that the market has already priced their interest rate concerns into their valuations of the stocks.

      If anything, a person looking to get into the real estate market without taking on the risk and work of owning their own property should be looking to buy now when the price is low. For the average investor, buying a REIT ETF will be a long-term investment just like buying a property, and should be held 10 years or more.

      That’s not to say the life insurance companies aren’t also a good long-term investment as part of a well-balanced portfolio.

  3. Hi Scott,

    I was just wondering, at what point in someone’s financial life to do you think they should buy a property? Is it a prerequisite (for the prudent) to have the full price in cash? What percentage of someone’s net worth should be invested in a property? Is it OK to borrow for a property?

    Here’s the context for my questions: I’m in Dubai. I’m European; my wife is from SE Asia. We have a solid income, but at age 30, we are early accumulators with only 60k euro saved and invested. Specifically, we currently have an emergency fund of 20k euro and the rest is in stock and bond ETFs. We have no liabilities or debts. By the end of 2015, our savings and investments figure will be 116k euro, and we predict that by the end of 2016, it’ll be 200k euro.

    The other consideration is that we intend to be expats for as long as possible, so does buying property for a home in my home country make sense? On the one hand, I’ll probably never be able to buy a home as easy as I can while an expat, thanks to healthy cash flow. On the other, I may never relocate to my home country, and a property will consume capital that I could otherwise deploy in ETFs. It’s probably 50-50 (or 60:40) that we will some day relocate to my home country, though we will only do so at a young age if we have to. What is your advice for people like me?

    Thanks and keep up the great work.

    • Hi Shane,
      Welcome to the site and thanks for your question. It’s a tough one! Buying a home is really a personal decision. I’ve read your question quite a few times trying to think of how best to answer it. I think what I read from your question is you are thinking of this purchase as your home, i.e. you might go back and live in it someday. However, you also seem to be a bit like me in that you have no idea when you will be moving back there, but it will probably be years from now. My personal feeling is that it doesn’t make sense to buy a “home” if you have no idea if you will ever live there. That is why we haven’t bought a place to call our own in Canada yet – we just don’t know the “where”, “when” or even “if” of our move back there. However, if you are thinking of purchasing a property as an investment which you will rent out for income and hold for a long time for capital appreciation, that is another story. That is a good investment, given you do your research and are prepared for the time it will take to manage it or manage the manager, etc. And in the case it is an investment, yes, taking a loan is fine – we have mortgages on all our properties. The rates are all below 3%, so it makes more sense to get a mortgage and invest the rest of the cash in ETF’s for a higher return. Does this help? Please let me know if you have any more questions or even if you want to meet sometime. We are just across the line in Sharjah.

      • Hi Scott, thanks for the response. I’ve been considering the pros and cons. Because they likely apply to every expat thinking of making a property purchase, here they are:

        Pros:

        – I get paid in a dollar-pegged currency. With the euro as low as it is, I will get an excellent exchange rate if I borrow the money from a local bank, convert it to euros via my brokerage, and send it to my country.
        – Although the property is first and foremost an investment vehicle, if my wife and I did repatriate, we would have a place to live (we don’t particularly want a house as our needs are quite simple).
        – As an expat with a healthy cash-flow, I will probably never be able to buy a property as easily as I can right now due to said strong cash flow.
        – The purpose of the property (in a scenario where we would rent it out indefinitely) would be to give us part of our required monthly income during retirement. (in other words, we’re not looking flip it)
        – The city in question is well known to me; there are employment prospects there for me if ever we decided to leave the Middle East.
        – Although I’d borrow the whole amount required to purchase the property, I would like to get a reducing interest rate and aggressively pay it down. I could probably clear it within 24 months, versus 15 years like many of the folks back home. The cost (in terms of interest) would be around 8 to 9k euro.

        Cons:

        – There is an opportunity cost, namely, if I borrow to buy an apartment, and I aggressively pay it off, I would not be able to contribute to my stock ETFs during the period when paying it back. So that’s a big opportunity cost in my view. (I’m utterly allergic to debt and would be the sort who would want to pay it off quickly rather than do so over a longer period)
        – There is the stress of taking on a big debt.
        – There is the difficulty of managing a property from afar. I realize friends or even a manager could do that – but that’s another cost.
        – There is the fact that unlike a diversified portfolio of ETFs, property is not very liquid.
        – There are costs – maintenance, vacancy, management fees, property tax, rental income tax – associated with the property that frankly do not exist for me with my stock ETFs. In other words, the total expense ratio (TER) of property is much higher than that of a Vanguard ETF, and the returns are not guaranteed to be better, and often won’t be.
        – Finally, there is a slim possibility that my family and I will never repatriate to my country.

        In other words, think there are strong pros and strong cons. No single factor seems to clinch it.
        BTW: I’d be delighted to meet up some time.

        • Hi Shane. Thanks so much for laying out the pros and cons for all of us to ponder. It’s great coming from someone who is currently mulling over the question and thinking deeply about it. As you show, there are strong pros and strong cons – and I guess that is why it was hard for me to give you a straight yes or no.

          On pro that I would add is that buying a property gives you further diversification that is outside the stock markets. It is real bricks and mortar, not a paper asset. I see that quality as one of the prime reasons I hold investment property.

          If you decide to go ahead and buy something, I suggest that you do a lot of reading and research about buying, owning, and managing property. I spent every spare minute for about 8 months trying to learn everything I could before making my first property purchase.

          Best of luck!

          • Thanks Scott. Can you point me to some good resources for reading up on property buying, owning, and managing? Is there some property book equivalent of Andrew Hallam’s stock-and-bond strategies for expats?

          • Surprisingly, I haven’t been able to find any books specifically for expats on property investing. That’s why I started this “Expat Property Investing 101” series. There may not be a book yet because a lot about property investing is country-specific. The buying process, landlord-tenant laws, taxes, etc, etc. What I did when I wanted to start investing in Canada was do some online research and I found a great educational organization called REIN (www.reincanada.com). I took their home-study course and subsequently became a member and have been getting their monthly workshops ever since. While their focus is on Canada, the principles taught in their home-study course could be applied anywhere. However, you need to know about non-resident taxes, the buying process, etc in your target country, so try to find as much country-specific literature as you can. I can tell you from experience that the most important part of owning property isn’t the buying, it’s the managing. You need a good property manager. Find one with a good reputation first, before you buy.

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