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Mortgages, currency exchange complicate the purchase process
While there may be similarities to the American market when purchasing a home abroad, there are also unique challenges on the financial side of the purchase.
Often times, Americans who buy real estate abroad end up financing the deal outright with cash, experts say. If you want to finance your home purchase, evaluate your options to consider how often you might be exposed to interest rate changes.
This is because mortgage structures in foreign countries are more likely to have variable interest rates, or short terms if they are fixed-rate loans. Boudreau, a member of CNBC's Council of Financial Advisors, said it's rare to encounter financing options similar to a 30-year mortgage, which is “a very American phenomenon.”
You also need to take into consideration the exchange rate of the foreign currency you will be dealing in, as well as the cost of trading the US dollar. Fluctuations in prices, and differences in bank rates and fees, can make a big difference in how far your dollars go.
Boudreau said a bank transfer is often the “least expensive way” to exchange currencies, and with a large enough bank, they will have facilities that can reduce the cost of a foreign transfer such as a favorable exchange rate.
But in most cases, a US buyer will need to open a bank account in the country where they are purchasing real estate. This process is not always clear.
He explained that many banks will refuse to work with American citizens because the US Bank Secrecy Act requires foreign entities to report assets.
Additionally, smaller regional banks may not be equipped to handle these reports, so U.S. citizens will generally need to look to larger institutions, Boudreau said.
Before you acquire property outside the United States, it is also important to make sure that you have a clear picture of what you will use it for; Your tax responsibilities to the foreign country and the United States may change depending on that answer.
Here are three steps experts recommend taking before becoming a homeowner abroad:
1. “Do a lot of due diligence.”
When you visit the city or town you want to buy in, make sure you walk around a lot, said Bojan Mojcin, a real estate partner with Sotheby's International Realty in Barcelona and the nearby Costa Brava region.
“Get to know the city, get to know the streets… and do a lot of due diligence,” Mogin said.
Rent in that area for an extended period of time to get to know the place before you “buy something in a dream,” Boudreau said. Doing so can give you a better idea of what it's like to live somewhere.
You may also want to consider a country's political environment, because it can be important to the long-term investment value of your property, says Irene Poisson-Aries, a global luxury real estate advisor for Douglas Elliman.
“A little spontaneity and a little more study is important,” she said. “It's great to go on vacation and have a great time, but long-term geopolitical stability is very important.”
Boudreau agreed, saying: “There are political risks… and we have to be prepared for the risks that this may entail for our investments.”
2. “Understand what your needs are”
It will be important for you to “understand what your needs are,” Poisson-Aries said.
“Is this an investment? Are you planning to retire there? Are you planning to visit and rent it? … You have to really understand the environment you're buying into,” she said.
For example, if you plan to rent the property out for long-term or short-term stays, “zoning factors a lot into that,” Boisson-Aries said.
The rules determining which areas qualify for short-term rentals could change over time, Boudreau said.
“Buying these direct properties for this purpose is a lot more risky than people realise,” he said.
Boudreau added that if you decide to use the property for rental or commercial use, you may incur additional tax burdens in that country.
3. Connect with local experts and expat communities
“Make sure you have local experts and professionals advising you” when shopping in housing markets outside the United States, Boisson-Aries said. “There are a lot of variables that affect every purchase.”
These factors can include property rights, zoning implications, and investment opportunities, she said.
“You might visit a property and fall in love with it, but without really understanding the overall market, and all the implications of purchasing and ownership, you're flying a little blind,” she said. “Just as we are experts and consultants on the ground in Manhattan… you really need that level of expertise on the ground.”
Speak with legal counsel in the foreign country who can help resolve tax issues and other questions you may have, said Mogesen of Sotheby's.
“You definitely always need to have some legal support from some type of attorney in the deal,” he said.
It's also important to find out if there's an expat community in the country you're looking at, Boudreau said.
He added that it will usually consist of other Americans who have gone through a similar process and can provide recommendations and resources.
