Maintaining a diverse portfolio is key in protecting your investments from significant losses. Though this adage is commonly used in reference to liquid assets, diversification can apply to hard assets too. In addition to a potential vacation spot or second home, buying international property can be a way to diversify your assets in the event of a domestic economic downturn.
Consider the following and see if purchasing property abroad is right for you.
Benefits of buying property abroad
Diversification from domestic market: Owning property abroad, as well as earning potential income generated by the property, will diversify your investments and reduce having all of your assets tied up in one economy.
Owning a personal getaway: Buying property in another country doubles as both an investment and a place of residence. Owning a home abroad can provide you a place where you and your family can consistently vacation and also opens the door to a source of supplementary income should you chose to rent out your property.
Foreign Tax Credit: If you are considering buying property and renting it out, the Foreign Tax Credit may reduce your tax burden. To qualify for the Foreign Tax Credit, you must meet the following requirements (as provided by IRS.gov):
- The tax must be a legal and actual foreign tax liability
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be an income tax (or a tax in lieu of an income tax)
Risks of owning international property
Uncertainty of value: Evaluating domestic property is relatively easy given familiarity with the country and access to data on realty websites and smartphone apps. Monitoring the sale prices of similar properties in the surrounding area can give you a precedent for how much the property is worth. However, when looking at international property, some areas may not have the same breadth of tools available for determining the market.
Local economy: Once international property is purchased, the investment itself may be volatile. A downturn in the local economy or the country’s economy can erode the property value. While this is true of any economy, American investors may not have an in-depth working knowledge of the desired foreign economy.
It is important to note that nearly every country has different ownership laws. Laws, customs and ownership precedents may be different depending on where the property is located. Therefore, any action taken toward traveling and obtaining property in another country should be thoroughly researched before any final decisions are made.