If sandy shores and comfortable living quarters are calling your name, you might be tempted to invest in foreign real estate to use as a vacation home or rental property. The key is to make sure you do your research first, so you don't end up with a liability instead of an asset. Here are two things you should check before you buy foreign real estate:
1: Foreign Real Estate Restrictions
Just because you have money to spend doesn't mean that you can buy property anywhere in the world. To protect their local economy, some nations place strict regulations on foreign real estate transactions. For example, if you are planning on buying a vacation home in Australia, you can only buy a single-family house if you plan on spending at least 50% of the loan on renovations. The local laws also state that foreigners are barred from buying more than 50% of residential developments, which means that your ability to invest completely depends on who else has bought or sold property recently.
On the other hand, some nations welcome foreign real estate investments with open arms. For example, the Cayman Islands have absolutely no restrictions on foreign real estate transactions. To further incentivize foreigners to invest, the Cayman Islands also don't charge annual property taxes or property gains taxes.
Before you decide on a destination, take a good, hard look at the local regulations regarding foreign real estate transactions. Work with a real estate agent who specializes in foreign transactions, so that the process goes as smoothly as possible. In addition to understanding potential snags, the right real estate agent might also be familiar with traditional American living standards, so that you can find a property that you feel comfortable with.
2: Your Potential Return On Investment
That neighborhood might seem serene now, but how will it look in twenty years? If you think that you might sell the property in the future, think carefully about your potential return on investment. Analyze local housing trends, and visit properties in real life to get a feel for the neighborhood. If your area has a high crime rate or a reputation for seedy business practices, it might be hard to make your money back if you ever decide to sell your vacation home.
Also, think carefully about how you plan to use the property. Because your second house will be factored into your annual taxes, using the house the wrong way could hurt your financial portfolio. Here are a few examples of how you might be taxed depending on how you use that second home:
- Use As A Rental Property: Think twice before you rent out that vacation home to earn a little extra money. If you rent that vacation home more than 15 days per year, the Federal Government will consider it a rental property, and you have to pay taxes on your business proceeds.
- Use As A Second Home: However, if you plan to use that second home as a vacation spot for your family, you can deduct your mortgage interest just like you would for your place back home. United States law states that you can deduct 100% of any loan interest on up to $1.1 million dollars worth of property, which means that a second home might significantly bolster your next tax return.
Before you invest, think carefully about your current and future budget. If you plan to rent the property out, adjust the nightly rental rate to accommodate potential taxes. On the other hand, if you want to use the place as a second home, make sure that you are comfortable with the cost of the mortgage, and that the property will appreciate in value over time.
By doing your research and investing in the right property, you might be able to enjoy that second home—without worrying about what the future holds. For more information about foreign real estate, contact a company like IRG International Realty Group Ltd.