How to Finance Foreign Real Estate

You’ve decided to diversify your portfolio and invest in some overseas property - a savvy financial decision in any investor’s book, but only if you do it right. Between international financing, local laws, foreign languages and rapidly changing exchange rates, it’s easy to feel overwhelmed. But the biggest challenge by far is coming up with the funds for this cosmopolitan investment.

Thankfully, there are several paths you can take to finance your dream home overseas. Keep reading our expert guide to find out more about your options and to make sure you’re making the most of this incredible opportunity.

How the Process Works

If you wish to finance foreign real estate, the most obvious solution for any U.S. investor – securing a local mortgage – won’t be available to you. Simply put, lender banks find it too risky and complicated to give loans to property abroad because, having no jurisdiction in foreign countries, they won’t be able to foreclose on it if you fail to pay off your mortgage. It’s also much more difficult to enforce any loan terms. 

This means that you have to find another way to get the funds for your dream abroad. Your first steps should always be to research the market and assess your finances, but then you should start thinking about which method fits the most with your needs and wishes. 

5 Ways You Can Finance Foreign Real Estate

Here are some of the ways you can get the money for your overseas investment.

Cash

If money talks, then cash is the loudest voice in the room. Paying in cash means you sidestep the hassle of mortgages and interest rates, which not only saves you money but also speeds up the buying process. You’re also likely to have priority over other potential buyers.

However, if you decide to go this route, you'll be investing a large chunk of your savings into one asset. That's why it's important to only pay cash upfront if the property is fully completed. Otherwise, you risk the developer running out of funds or encountering other issues mid-project, leaving you with reduced liquidity and a half-built construction. 

International Mortgage

As a foreigner, it can be very difficult to get a mortgage overseas. However, with an experienced broker and a foreign lender that knows the local laws and market, you could give yourself plenty of options and the chance to choose between the very best deals for U.S citizens. 

Furthermore, you can stretch your money quite a bit if your home currency is stronger relative to the local currency abroad and get more bang for your buck. 

Home Equity Loan

Since U.S banks are more inclined to sign off on loans secured against domestic assets, borrowing against your home’s equity can be a savvy investment maneuver. Equity is the difference between your home's market value and what you owe on your mortgage. With this type of loan, you’ll be getting a lump sum, which can then be used to purchase property abroad. 

So for instance, if you owe $400,000 on your mortgage but your home is worth $600,000, you have $200,000 in equity. 

However, it’s important to be careful with borrowing money against your home, since house prices do tend to go down as well as up. Be sure that you can afford your monthly payments to prevent your home from being foreclosed on.

Self-Directed IRA

If your entrepreneurial instincts have you honed in on an overseas property which you’re going to use for capital gain, you might be able to do this with a self-directed IRA. The IRS prohibits using IRA funds for life insurance and collectibles but allows them for other investments, including foreign property. It’s important to set up the plan ahead of time, since the most lucrative offers are almost always time sensitive. 

This method requires strict adherence to IRS rules: the property must be strictly for investment purposes, not personal use. In short, only your IRA can benefit from the investment, not you personally.

Things to be Aware Of

Make sure to do your due diligence before you make any final decisions. Here’s what you should keep in mind.

The Required Deposit

Be prepared for a heftier initial payout compared to what you'd usually expect back home in the U.S.  Many countries expect non-resident buyers to put down a larger percentage of the property’s value as a safeguard against potential risks. This deposit is usually 30%-50% of the property value. 

In this way, lenders reduce their exposure, since you, as a foreign investor, are seen as a bit of a gamble. So, when you're budgeting for that dream villa or apartment overseas, remember to account for this steep entry fee.

Foreign Real Estate Practices

One of the biggest hurdles to overcome when buying foreign real estate is navigating the country’s real estate landscape; and each country has its own set of hoops to jump through. For instance, depending on where you're buying, you might deal with notaries or attorneys instead of real estate agents like back home. 

There’s also a variety of fees, like transfer taxes, notary costs, and registration fees. 

These should also be taken into account as they add up to your total expense. Also, the buying process can vary wildly. In some places, it's a race to snag the best properties on a first-come, first-served basis, while with others it's more about how good you are at negotiating. 

Ownership Laws

Some countries impose restrictions on non-residents, limiting the type of property you can buy or where you can purchase it. For instance, in Thailand, non-residents cannot own land outright, but they can lease it for a long period of time. In other cases, non-residents only have condominiums and apartments at their disposal.

It’s also important to understand whether you'll be allowed to own the property in your name or if you’ll need to form a local company or partnership to make the purchase. Moreover, there may be limits on how much land you can own or the total value of property investments. 

Your Eligibility

Some countries have strict requirements for foreign buyers, including restrictions based on residency status or nationality. For instance, in some countries, only permanent residents or citizens are allowed to own real estate.

In others, you may need to obtain special permission from the government or meet specific financial criteria to be eligible. You also might be required to show proof of income, assets, or even a criminal background check. 

Additionally, some nations have agreements with the U.S. or other countries that might make it easier or harder for you to buy property. Mexico, for one, lets U.S citizens purchase property through a bank trust called fideicomiso, which allows them to manage and control property within the ‘’restricted zone’’ (areas near the coast or borders) as if they own it outright.

Local Currency

When buying property in another country, you'll be dealing with the local currency, which can make your budget shift depending on the exchange rates. Even slight shifts in exchange rates can mess with your buying power, meaning the total cash you'll need could go up or down unexpectedly. 

If you're considering a mortgage in the local currency, remember that rate fluctuations might change your monthly payments too. You may also want to explore the option of setting up a foreign currency account, which can help you manage the financial aspects of your property more effectively.

Language Barrier

When you're dealing with contracts, tax details, or any legal stuff, these documents will probably be in the local tongue. A slip in translation can lead to some pretty expensive errors. It's a good move to have a professional translator or a savvy attorney by your side to make sure you're totally clued in on every aspect of your deal.

Also, communication with local real estate agents, sellers, or lenders can be a challenge without a common language, and this can slow down the process or create misunderstandings. That’s why some buyers tend to go for locations where English is often spoken in order to sidestep these issues. 

But often, simply having a translator or a bilingual real estate agent is key to making sure everything goes smoothly. They can bridge the gap, helping you understand every step and ensure a clear, straightforward transaction.

Residency Requirements

Some countries offer residency permits or even citizenship through property investment programs, while others have strict regulations that limit your ability to stay long-term. Others may offer temporary residency that needs to be renewed regularly, or they may require you to spend a minimum amount of time in the country each year to maintain your status.

Getting advice from immigration and legal professionals can really help clear up the details and make sure you’re on the right side of the local laws. They’ll point you in the right direction and help you keep things smooth and stress-free.

FAQ

Can I get a mortgage from a U.S. bank for property abroad?

Typically, U.S. banks don’t offer mortgages for properties outside the country. This is because they have no jurisdiction over foreign real estate, which makes it difficult if not impossible to enforce loan terms or repossess properties in the case of default. However, some international banks with branches in the U.S. might offer loans for foreign property, but this is not common. 

Are there any tax implications when financing foreign real estate?

Buying property abroad can have tax implications both in the U.S. and in the country where the property is located. For example, you might be subject to foreign property taxes, transfer taxes, or capital gains taxes if you sell the property. In the U.S., you’ll still need to report any income from the foreign property, such as rental income, on your federal tax return.

Can I use rental income from the foreign property to help finance it?

Yes, in many cases, you can use rental income to help cover mortgage payments or ongoing property expenses. However, whether you can count that income toward securing a loan depends on the lender. 

Some foreign banks may take potential rental income into account when assessing your loan application, but others may not. Make sure to clear this up with your lender beforehand.

Take the Next Step

Investing in foreign real estate is a process with a lot of moving parts. It requires detailed planning and intricate knowledge of international laws, foreign real estate markets and all that jazz. It’s an exciting journey, but a challenge nonetheless. That’s where Kredium comes in. As your specialized mortgage broker, we are dedicated to smoothing out any bumps in the road to financing your dream overseas property. Ready to take the next step? Get in touch with Kredium’s team of experts and get access to professional advice and personalized loan offers within 24 hours. 

Photo Credits | Pexels