The following article is from Canadian Real Estate Wealth Magazine.
A strong Canadian dollar, falling property prices in many overseas destinations, and government incentives to stimulate foreign investment are just a few of the reasons many Canadians are looking to buy international real estate.
Expanding your portfolio to include properties in foreign countries can provide a buffer against downturns in local markets. And with some research and due diligence, investors may even find opportunities to earn higher rental yields and long term capital growth.
Here is a step-by-step guide to help you along your international property investment journey.
1) Think strategy
As with any real estate investment you would make in Canada, deciding your strategy should be your first course of action. If you're looking for a second vacation home that you can rent out when you're not using it, then your buying decision will reflect that. Not only will you need a property that is attractive to you, but it must also be in a location and offer amenities that will appeal to other vacationers. By way of example, investing in vacation property on an English-speaking Caribbean island might have wider appeal to your target renter.
If you're looking for a property as a long-term rental then you might consider something that is more appropriate for local residents, which means considerations such as distance to the airport are less important and off-street parking is higher on the list.
If your game is renovations, then you really need to consider the variation in price of materials, labour and time it takes to complete a project. For instance, Kirk Sharpley, vice president of international sales for Hibiscus International, a company that helps Canadians buy properties in the Caribbean, says all the major islands in the Caribbean have similar services and supplies to Canada, but everything is a little more expensive as it has to be shipped by boat. "You also have to be prepared to deal with the island mentality and things might take a little longer. So if you're going to do it plan to spend some time and be there, or you want to make sure you hire someone local who you know you can trust who is going to look after it in your best interests."
2) Research the location
"In the Caribbean a lot of people go down there stay in an all-inclusive resort and after two weeks think wouldn't this be great to live here and some people make the decision to buy. Well, living on the islands on a full-time basis or even two or three months a year is entirely different than going to a resort," Sharpley says.
It's just as important to do your due diligence when buying overseas as it is buying properties in Canada. The only difference is there are so many more factors to consider.
In addition to looking to housing market information, key economic drivers, government and private spending, transportation, amenities, population and demographics, you also need to determine is the country politically and economically stable. International investors also should research what, if any natural disasters the area might be prone to, for example, is there potential for hurricanes, flooding, or earthquakes?
If the property is serving double-duty as a vacation home/rental, then you need to determine if you can see yourself returning year after year for several weeks at a time.
"You want to make sure that the destination provides you with the activities that are going to keep you entertained. And you want to make sure it's something you'll enjoy for several years," Sharpley says. Maybe you're happy with a crime novel and a cocktail, but consider amenities that other holiday makers would enjoy – golf courses, cultural attractions, eco-tourism activities are all great draws.
And lastly, consider the effect of annual events – such as the running of the bulls, or Carnival, on your ability to earn great returns. Keep an eye out for irregular world events as well – the Olympics, the World Cup and Commonwealth Games are all good examples.
3) Choose the property wisely
Once you've narrowed your search to a particular area, you'll need to determine what kind of property best suits your investment goals. If you're looking to rent to vacationers in an area with a bustling tourism trade, you will need something that sets your property apart from the competition, such as a pool, hot tub, or boat use.
It's also a good idea to find out what the property is like year-round. Is it completely unbearable during the hot season or summer months? Buying a vacation rental close to the beach sounds great, but perhaps something on a mountainside will have the benefit of trade winds, which will not only save you on electricity bills, but also offer your renters fabulous views.
If you're buying a new build then do some research on the developer, find how long they've been in the business, what kind of track record they have, how long previous projects have taken to be completed, and get some references.
4) Rules and regulations
Once you've determined the ideal location to invest, then the next step is to familiarize yourself with the local rules and regulations. According to Sharpley, many Canadians are comfortable with the English-speaking islands in Caribbean because the buying process is similar to Canada.
If you're buying in a country where you don't speak the local language make sure you deal with someone that translate the information into English so you understand exactly what the local laws and regulations are.
And if you're renting out the property you need to determine what licenses you need to obtain, and what your responsibilities are as a landlord.
As well, you'll need to be aware of what is required in terms of passports, visas and residency permits.
Contacting an international real estate company that is regularly deals with Canadians can also help you to understand the differences in the buying process between Canada and the country of your choice. You want an agent that will represent your best interests. Sharpley describes a recent situation in which a Canadian buyer got burned by a deal that was perfectly legal but very advantageous to the vendor. "I got a phone call from an agent who had a client who was buying in the Bahamas and said can you take a look at their offer before they sign? So he sent me their offer and within five minutes I called him back and said tell them not to sign this off because the way it is worded it's going to cost them a bunch of money. And they called me back, but they had already signed. And they had bought a distressed property. It had been over $300,000 and they were getting it for about $200,000. However, because of the way the offer was written it ended up costing them $23,800 in additional fees that were added to the closing costs because they didn't have somebody looking out for their best interests. They got excited, they got anxious, they dealt with a local sales person, but the local sales person was representing the vendor. So that's the way the offer got written."
6) Legal advice
Investors should obtain legal advice from an independent English-speaking solicitor who is not connected to the developer, vendor, or real estate agent. A solicitor who speaks the local language and knows the local system is preferable. Never sign any documents or make any payments upfront without first consulting your solicitor. Buyers need to ensure that the person selling the property is actually the owner and there are no outstanding payments on the property. You will also need to establish that the agent can legitimately authorize the deal.
Depending on the country in which you are buying, you may find that you can work with a Canadian affiliated bank. For instance, Scotiabank and the RBC operate throughout the Caribbean. Mortgage rates vary widely and you are best off paying for international property in cash, or leveraging off the equity in your Canadian property. According to Sharpley, mortgage rates in the Caribbean can be anywhere from 6-9 per cent – significantly higher than Canada.
"By paying in cash you'll save some money and it also gives you a position of strength when you negotiate that this is going to be a cash offer," says Sharpley.
Any money you bring in must be properly identified and transferred legally.
Other financial considerations are exchange rate fluctuations. It's worth checking out specialist currency companies to see if they offer better exchange rates.
And lastly, each country will have its own set of additional costs such as stamp duty, taxes, and local fees. So be prepared for the extras.
8) Tax considerations
If you plan on renting out your vacation villa, then you have to take into consideration both the tax implications abroad and in Canada. It's important to check out the inheritance and capital gains tax laws of the country in which you are buying. Bear in mind that you may be required to make a separate will. Your best bet is to seek specialist tax advice from a Canadian international tax expert.
9) Ongoing costs
Don't forget to factor in the ongoing costs with international real estate investment. If you plan to rent it out you may need to pay property management fees, utility fees, maintenance costs, insurance, marketing costs, and local taxes. Also take into account periods when you may not have renters, such as the low season.
If everything goes to plan, one day you'll sell your property for a profit. Selling your property when it's performing at its best will help you get your money back, but that's easier said than done. At the very least, have all your legal documents ready and make sure there are no liabilities or other issues affecting the property, so when it comes time to selling the property you can do so quickly and with no surprises.
From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.