Updated: Nov 3, 2022
International real estate investing has fantastic potential. But then we would say that. To underline why it can be such a rewarding experience, we've detailed 11 reasons why it can be a life-changing opportunity. From the financial to the personal, here are all the big reasons why you should consider investing in overseas real estate.
Even if you only invest domestically, portfolio diversification is always a sensible method to mitigate risk. By spreading your investments, you won't lose too much if one fails.
For many, this is the number one reason to invest abroad. You’re not just spreading your risk across different assets but across alternative markets. What’s more, property values only go up in many markets, which is not a phenomenon seen too often in the stock market.
Investing in international real estate is still about finding growth opportunities driven by prevalent market conditions. But those factors may be easier to understand, and the rewards far more tangible. After all, you'll own a brick-and-mortar property, probably in a place you share an affinity with.
All seasoned investors adhere to the cliché that putting all your eggs in one basket is risky. Diversifying into international real estate offers a greater chance of managing risk-adjusted returns.
Property Taxes Are Often Lower Outside The US
Taxes make the world go round...if they’re well spent. They also significantly impact property portfolios in the USA, so it can be a revelation that some countries have low to zero property taxes. Even within the domestic market, property taxes vary by state. And this is replicated on a global scale.
According to the OECD, US citizens enjoy a lower tax burden than the global average (25.5% vs. 33.5.) Property tax is an exception. Annual property tax in the USA averages 1.1% (2020). New Jersey is the highest, where a whopping 2.21% of home value is charged. The lowest is Hawaii, at just 0.3% of the home value. (source: USA Today)
In contrast, some countries charge zero annual property taxes. Here's a small sample:
Croatia, Malta, Thailand, Liechtenstein, Seychelles.
Remember that taxes are generally still paid on property transactions (aka stamp duty), so anticipate the government taking its cut when buying and selling your international investment.
Property taxes are not likely to make or break your property investments abroad, yet it's another compelling reason to look beyond the US.
Other Tax Benefits Of International Real Estate Investing
US citizens are hit with a double whammy when investing abroad, as income is taxed in the US and, most likely, in the country you've invested in. For stocks, shares, and other investments, there's the Foreign Tax Credit to offset what Uncle Sam collects. It's a little more complicated when looking at property investments abroad...
Your accountant will help you navigate the murky waters of taxable income from international real estate investments. However, the key takeaway is that you receive similar tax treatment as owning additional homes in the United States.
How does that help you? Mortgage interest can be deducted for up to $750,000 ($375,000 if married and filing separately) of secured mortgage debt.
The catch? It will depend on whether the property is a second (or vacation) home and whether it earns rental income. Income is taxable if you rent for more than 15 days.
Even within that dark cloud, there is a silver lining. You can deduct the cost of maintaining and servicing the property. This includes:
• Property taxes
• Mortgage interest
• Operating costs
• Property maintenance costs
• Depreciation in value
• Other operating costs
The IRS has a precise summary here.
For many international real estate investors, rental income is just one consideration. Property appreciation, which can be significant in some countries, is a crucial factor too.
Yes, the IRS will apply Capital Gains Tax if you sell. Don’t forget the Foreign Tax Credit when looking at Capital Gains Tax. If you have to pay Capital Gains Tax in the country you’ve invested in, you should be able to offset this.
The US is among a handful of countries that tax their citizens on international earnings. In principle, it's no different from investing in real estate at home but pay a tax advisor or accountant with a genuine smile, as the correct information can make a big difference.
Inheritance And Estate Tax
A sensitive subject, inheritance tax is something investors need to think
about. Even if they hope it won't matter for many years.
There is no federal inheritance tax, and only six states in the USA deduct inheritance taxes. If you're wondering, they are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. And Iowa is phasing it out after 2025.
If you inherit a property from a foreign relative or are a beneficiary of funds arising from the sale of a property owned by a non-US citizen, you are usually not taxed. If the amount exceeds $100,000, you must declare it as a foreign gift.
For US citizens receiving an inheritance from another US citizen, estate tax laws apply as detailed by the IRS. However, that only applies to estates valued at over $12.06 million. Read more about the tax here.
Leveraging Low Entry Costs And Strong Capital Growth
Investing in international real estate should be treated like an investment in your local market. And leveraging is a widely used tool to help investors grow their property portfolio.
In a nutshell, it involves acquiring credit (a mortgage) to cover the bulk of the cost. In the US, 80% is a typical amount to borrow, meaning the buyer provides the remaining 20% from their own funds.
Assuming the property appreciates in value and covers your costs and mortgage interest, you can profit.
To illustrate, property values in Portugal skyrocketed 13.8% in 2021. That has been attributed to a post-Covid surge. But even before the pandemic, growth was around 5%.
The risk is that property values may depreciate. But with careful research, this risk can be strongly mitigated. And don’t forget #3 on our list, which looks at how you can deduct expenses and mortgage interest from your tax returns.
It's fair to observe that houses also rapidly appreciate in value in the US (30% from 2020-2022 on average.) But the cost of buying a property will be prohibitive for many, especially compared to prices in other countries. The median house price in the US was $428,700 in 2022, whereas a 3-bedroom townhouse in Portugal might cost €210,000. Other countries like Bulgaria, Slovenia, and Estonia are comparatively cheaper.
The key takeaway is that there is much more choice when you look at investing globally, both for initial entry costs and long-term ROI (Return On Investment.) Leveraging can turn that dream into reality.
Steady Passive Income
Combined with property appreciation, rental incomes provide another compelling reason to invest in property abroad. Slow and steady is a tried and tested path to a secure future.
There's no one size fits all approach to international property investment. But if you have the cash or credit to invest it can generate a reliable passive income. Simply covering the mortgage and property management costs will yield a sizable return once any mortgage is paid off (if you even need one.)
Interest rates are starting to climb in 2022 after years at almost zero and savings have suffered in recent years. Had you invested in US property rentals, the ROI on residential properties was 8.6%.
To help you make an informed assessment, the folks at Global Property Guide have compiled a list of estimated rental yields by capital cities. It's a skewed list due to a focus on major cities. But it gives you a sense of what to expect and pinpoints where to dig deeper.
Above all, the figures show that international property investments consistently outperform passive saving almost everywhere.
Higher Rental Returns Are Possible With Overseas Real Estate
Talking of ROI, we can't ignore vacation rental sites. Airbnb, Vrbo, and others have altered the landscape for international real estate investors.
You will need to be more involved with managing your property if you go down the vacation rental route (unless you contract out the entire process.) But vacation rentals are higher yielding than standard rental incomes. The difference is pronounced in some places, especially during the height of the vacation season.
Here's an example:
Average Airbnb rental in Croatia for just 9 nights of rental per month (4 beds) = €965
Average standard rental in Croatia = €541 per month.
It's not all dollars in the bank all the time. There may be periods when the property is empty and earning zero income. How you manage your property will make a big difference in whether you will see consistent rental income. But the market is coming around to this problem. Airbnb, Vrbo, and Vacasa all let you advertise longer rental periods.
If you plan to spend time vacationing in your second home, a few empty weeks might be ideal. Just try to avoid staying during peak vacation season if you want to maximize your ROI.
Whether you go for vacation rentals with higher yet more volatile returns or a steady passive income, there is literally a world of opportunity.
Vacation Home (or plan B, let's get out of here)
With all the talk about investments and taxes, it's easy to overlook why many US citizens buy property abroad: to have a home from home to vacation in.
Like any property you buy, even your primary residence, the bottom line is crucial. But don’t lose sight of the enjoyment of owning a property in a beautiful part of the world. In many countries, real estate is relatively cheap for US citizens. And, all being well, should appreciate in value.
A rarely discussed benefit is how much easier it is to get away from the US with a second home. We’re not saying you should copy the billionaires building apocalypse-proof bunkers in New Zealand. But even if you just need a break from the familiar, a property near the beaches of Portugal or Croatia will never go out of fashion.
#9 Dual Citizenship And Golden Visas
There are reasons to invest in overseas real estate that goes beyond growing your nest egg. One compelling reason is to obtain a second passport or permit to live in another country.
If you obtain citizenship or residency visa to live in a European Union country, you've effectively got the right to travel anywhere in the EU. That’s 27 countries (plus 3 EEA countries) stretching from the Mediterranean to the Northern Lights.
It’s not as simple as buying a property and automatically being handed a shiny new passport. There are two key ways to gain dual citizenship by investing abroad.
Citizenship by investment – better known as a ‘golden passport,' is awarded to investors in only a handful of countries.
The rules vary, and investment requirements can be significant, although some include a real estate purchasing element. Here are some countries that currently offer 'golden passports’:
• Antigua and Barbuda
• North Macedonia
• St. Lucia
Note: ‘golden passport’ schemes can be controversial and subject to change. Malta is currently under pressure to end its scheme, as Cyprus did in 2020.
Residency by investment – 'golden visas' are issued by several countries.
Residency does not confer a passport but does give you the right to live and work in the host country, usually for up to 5 years and for your immediate family. In most cases, they can be renewed.
Happily, many countries count property investments towards the investment minimum. Even better, some countries are prime destinations for investments and vacations.
Minimum property investments can be high. Here’s a selection that rewards property investments with golden visas alongside the minimum investment:
Grenada ($220,000 in a government-supported real estate project) Portugal (€500,000, lower in certain regions)
St. Kitts ($400,000)
If you're investing in international real estate and want the right to live and work in your host country, check whether they operate a scheme. Golden visas can be the ticket to a new life, even if you don't plan to live on the property.
Do you dream of retiring in a centuries-old farmhouse in the European
countryside? Or perhaps a villa looking out across the Caribbean?
Most of us have one eye on our retirement nest egg when investing our hard-earned money. International property investments are no different, with one notable exception: once you 100% own the property, you've got a potential new retirement home. And if you used listened to your heart and your head, it will hopefully be somewhere you can imagine spending your golden years.
Investing In Overseas Real Estate Can Be a Life-changing Adventure
We’ve left to last what is arguably the best reason to invest abroad. No sensible investment guide should begin with how much fun you can have, even if some people enjoy riding the peaks and troughs of their investments.
But investing in real estate abroad is inherently adventurous and can be a life-affirming experience. It's your chance to experience an unfamiliar world, discover life beyond our shores, and make new friends. Above all, it will be something that will keep you engaged in a world beyond the horizon. In our view, it is far more exciting than watching numbers move up and down on a tracker!