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Evaluate the Risk of Purchasing a Home Abroad

Over time, international real estate has proven to be a popular vehicle for people looking to diversify their investment portfolios. In fact, international buyers snapped up $82.5 billion in U.S. residential real estate during the 12-month period ending in March 2012, up from $66.4 billion in 2011.[1]

The international real estate market offers plenty of opportunities to reap big gains. However, it’s important for investors to note the risks that come into play when putting cash into overseas markets.

Know the Market

“Prior to making an investment in international real estate, it’s important for buyers to know that, above all, the state of the housing market is the most important factor,” says John Di Pietro, a real estate broker with Montréal-based Sotheby’s International Realty. “Gather as much information as you possibly can because the security of that market will be indicative of the potential of your investment in the long term.”

“Property investors should take the time to do research and ensure that a country’s governmental climate is stable.”

— Cliff Perotti, director of the International Services Division at Frank Howard Allen

Beyond the state of the housing market, one of the best indicators of a sound foreign property investment is the economic stability of that country at large. To capture growth potential and minimize risks, buyers should consider limiting their foreign property searches to countries with relatively stable economies such as Germany, the U.S. and Canada. Stable economies are typically marked by qualities such as low inflation, relatively low unemployment and stable currency values. In addition to tapping financial news outlets, investors can turn to the International Monetary Fund for information on how a country’s economy is fairing.

Keep Tabs on Political Shifts

“Property investors should take the time to do research and ensure that a country’s governmental climate is stable,” says Cliff Perotti, director of the International Services Division at Frank Howard Allen, a luxury real estate company based in San Francisco. This is especially important if changes in the country’s governmental structure threaten to wipe out foreign buyers’ property ownership rights.

“If a country is in flux from one regime to another, I would probably stay away from buying real estate there,” Perotti says. “If the country has a stable political system, such as the U.K., Australia, Canada, etc., and there is simply an election process going on, I wouldn’t let that influence the timing of an investment.”

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In addition to tracking news stories about the country, potential investors can learn about a country’s political climate by visiting the Central Intelligence Agency’s (CIA’s) The World Factbook, which is updated on a weekly basis.

Study Growth Trends

Investors should pay close attention to a country’s potential for long-term growth in the residential and commercial property markets, Perotti says. He suggests that buyers look for properties that show a high gross rental yield multiplier or annual rental returns.

A metric commonly used by brokers in the United Kingdom and throughout the world, the gross rental yield multiplier (GRM) is calculated by dividing the total rental earnings from a property in a given year by the total cost or value of the property itself. The GRM can help buyers quickly compare properties and gauge whether the foreign property will be a profitable, stable investment — that is, the higher the rental yield, the better the overall quality of the property and stability of the revenue stream for the buyer.

“However, buyers should be careful to remember that this calculation does not include the operating expenses of a property,” Perotti says. “Investors comparing different types of investment properties — for example, an apartment building versus a shopping center — should not use the GRM to compare them.”

Buyers can seek out the gross rental yield for a given area within a country by consulting a local real estate broker or research outlet, such as the Global Property Guide, which breaks down rental yields for each respective country and region.

It’s also worth finding out whether there are certain times of year where it is easier or harder to rent out a foreign property. For example, undesirable weather in Portland, Ore., during the months of December and January may pose a challenge, Perotti says. On the other hand, “If someone is buying property in a resort area, where [vacation rental by owner] is impactful to the rent revenue stream, then high traffic vacation months would be great for renting — at higher prices for the short term — while off-season rates would be lower,” Perotti says.

Vet Your Broker

Because brokers play such a crucial role in finding and purchasing a property, buyers should take the extra step of verifying their credentials and following up with references. Buyers can check the integrity of a broker’s license and credentials by requesting official license and title documents from the country’s real estate and broker registration and licensing authorities.

Purchasing a home abroad can be a great international investment opportunity, as well as a personally satisfying experience. By knowing the risks, property investors can make choices that minimize their costs and maximize their gains on international real estate purchases.

[1]“Profile of International Home Buying Activity 2012,” National Association of REALTORS.® June 12, 2012

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