First I will explain the general rule why retired expats should not buy real estate overseas. Then, I will explain a few exceptions to the general rule–a few examples of when you should buy real estate overseas.
I am usually “Mr. Positive” and I promise to return to my normal positivity before I end this post, but first I want you to know why most of us should not buy real estate outside of our home country (Why Not Buy). Then, I will explain a few reasons why some of us should buy real estate overseas (Why You Should Buy).
Why You Should Not Buy Real Estate
Some of these reasons are more relevant than others depending on what country you are thinking of buying real estate. But if any of these happen to you, you will wish you were a renter. If you were a renter you could just hand the keys to the property owner and walk away to another part of town or another part of the world. Tenants have more flexibility when these problems show up.
If you grew up somewhere like the United States, Europe, Canada, etc., you have likely not lived through a down market that extended for a decade or two when you or your family members were completely unable to sell real estate. In many of these retire cheap countries, it is not unusual for markets to go through political, economic, or banking emergencies that dry up the demand for real estate. You probably think of real estate as a safe place to keep your money temporarily until you decide to sell and move someplace else. That level of liquidity of real estate assets that you enjoy at home is much less stable historically once you get outside the economic powerhouse countries. You may not be able to sell the place and seek greener pastures if your plans change.
There are many examples in world history when political groundswells of nationalism rise up. During recessions and depressions, middle class and low-income workers often suffer a reduced standard of living. Although foreigners are rarely the true cause of these economic cycles, politicians often scapegoat foreigners because they are easy to see as ‘different’ by the locals. It is not unusual for such politicians to propose law changes that target foreigners. They could refuse to let the proceeds of foreign owner sales from leaving the country or just tax the proceeds so substantially that you may not even get your investment back. They could also just take the property from foreign owners. Nationalism is a social disease that has been repeated many times throughout history at varying degrees of severity. You will not see it happen as often in western democracy so it may sound extreme when you hear this. But it happens every 70 years or so in western democracies and potentially more often in developing countries.
If you decide to marry a local, and things don’t go well, you may later find out that the local laws may be unfavorable to you. Speak to a local lawyer before marrying or buying local real estate.
If you finance the purchase, whether, through the seller or through a finance company, the truth-in-lending laws vary enormously between countries. If you don’t understand the local laws and customs, you could easily end up with a balloon payment or floating rate at some point in the future. Are the documents even in English? Get your own local lawyer before signing on the dotted line. Don’t rely on advice from a lawyer that has a conflict of interest with you, such as a friend of the seller or your broker.
Land Use Restrictions
Some countries do not have land-use restrictions as you probably have in your home country. You could wake up one morning to unlivable conditions. A slaughterhouse could open down the street. A dusty windblown farm could cause dust in the air after harvest, they may burn the crops instead of till the soil, or a live music venue could prop up across the street a few months after you buy. Or you could build a beautiful home and have people living in cardboard boxes across the street in a few months. I am not kidding. You’ll wish you could hand the keys to the landlord? Once land-use conflicts occur, your beautiful house may become worthless.
Water, Electricity, Roads, and Internet
The city may be promising to put in roads, electricity, water, and the internet in the “near future?” The seller might tell you that the water and electricity are scheduled to be installed in the neighborhood in about 6 months. That may be the truth when they tell you. But, what if the city’s budget gets changed next year to account for other improvements.
Police and Government Corruption, Taxes
What if you end up in a dispute with a neighbor that says they own part of your land? Are the police straight shooters where you want to buy? Do you want to fight that out in court as a foreigner when not all governments around the world follow the rule of law? Don’t assume title insurance will just pay this in a foreign country. You have to sue to get reimbursed in some parts of the world and trials can be very expensive. You may not get reimbursed for your lawyer’s fees in many countries. Even if you win, it could take years. Will the taxes change once the property transfers into a foreign’s name? Can they attach your sales proceeds if you don’t pay?
Monetary Devaluation, Inflation, or Deflation
What if you are relying on your pension to pay the mortgage payments? Are you relying on a great conversion rate from the Euro or Dollar into local currency? What happens if the foreign source currency or the local currency devalues or inflates? Will you wish you could just hand the keys back to the landlord and seek greener pastures?
Repairs and Improvements, Corruption
What if you something breaks like the plumbing or electrical? Will you be charged double because you are a foreigners ad you don’t know what it should cost? What if you need to make changes to the structure? Can you do that without a permit? Will the official that comes out to inspect the improvements expect a bribe? Will they charge you triple because you are a foreigner? Did you know that if you pay a bribe to an official in a foreign country you are breaking US federal law? Does the city official know that you aren’t allowed to pay a bribe? Will they threaten to tell the US embassy that you offered a bribe to a foreign official if you don’t pay them even more?
Low Gross Rent Multiplier
Because of higher savings rates and higher mortgage rates in many foreign countries, real estate is often not a good investment. It is often overpriced relative to the gross rent multiplier.
For example, a house in Portland, Oregon that sells for about $500k will rent for about $1800 month. If you divide $500k by $1800 month, you get about 278. That means that the monthly rent multiplied by 278 gives you the value of the house.
In Kuala Lumpur right now, you can rent luxury condo for about $500 USD per month. If we use the Portland gross monthly rent multiplier of 278, that condo would sell for no more than $139,000 in the USA. But it is selling for about $400,000 USD in Kuala Lumpur.
That means Portland Oregon is a better return on your investment than Kuala Lumpur Malaysia. In reality, Kuala Lumpur should be a better return on investment to pay you for the additional risk of investing in a foreign country that is not pegged to the dollar.
Put more simply, would you rather pay $500k and get $1800 a month return or pay $400k and get $500 per month return? But it is even worse than that. The interest rates are lower in the USA. Figure that out?
Do this calculation if someone is asking you to invest offshore. If it is like most places around the world … it is better to keep your money in your own backyard. Have a property manager collect the rents and wire you proceeds into your account each month. This is a no-brainer for most foreign countries.
When You Should Buy Real Estate
There are some expats that need asset protection. You may have heard that the USA is the lawsuit capital of the world. If you own or owned a business in the USA and there is a possibility that someday you might get sued, you might not want to have all of your eggs in one basket. But you need to talk to your lawyer before trying this because the law in this area is complex and nuanced. If you don’t have more than enough money to hire a legitimate US lawyer to solve this problem, then this exception does not apply to you–so do not buy expecting this protection.
Small Investment Eliminates Accommodation Costs Permanently
We have all read the stories when someone buys a small piece of land for $7000 USD and builds a small house on it for another $13000 USD. If the land has enough space to grow most of your own food then you might be able to eliminate 80% of all expenses permanently. If you save $300 per month in rents by paying cash for this place, it wouldn’t be long before you had your $20,000 USD back.
Rents Are Disproportionately High
If the rents are disproportionately high as compared to the mortgage payments and all other expenses of owning that property, then you may consider buying. That means you could run a very positive cash flow after making a low down payment. If that is true, then, if you had to leave, you could give the property to a local property manager and the property would pay its own payments. There is still some risk here. What if the tenant’s trash the property, or a recession makes the place go vacant for 30% of the time? Then you will wish you were a tenant.
When you start investigating the best retire cheap in paradise locations around the world, there are organizations that will try to convince you to buy real estate overseas. The funny thing is … that recommendation to buy, often comes from organizations that will get paid a commission or kickback if you buy. So I think their advice may be biased.
I am not a professional. I am just a guy that reads a lot when I travel. And I have a different recommendation for you. I recommend you buy in your home country, rent it out, and live off the rents in one of these retire cheap in paradise destinations. Why would I say that? Because all of the problems that I mentioned above are less likely to happen to you in your home country. Why is that? Because you probably know whether or not it is hard to sell a place in your home country (liquidity). You know whether or not financing has any tricks in your home country (truth in lending). You know whether or not the land-use restrictions will protect your investment in your home country. You are not a foreigner in your home country so nationalism may not be as big a threat to you. You lived there your whole life. If you buy at home, you could hire a property manager. They could take care of the place while you are in another country. You are not as likely to be surprised by anything in your home country.
So most people should own real estate in their home country and live off the rents in a retire cheap in paradise destination. If you already own property, you should just keep it. Have your property collect rent and wire it into your account.
Then if political, economic or other troubles pop up in a retire cheap country, you just hand the keys back to the landlord and head to greener pastures. You have probably heard about all the expats exiting Thailand. Imagine if they had to sell their Thai property before leaving town. This is not a good time to sell real estate.
Don’t turn your retirement into a financial mess. Just live easy-peasy now. Grad a few of our retire cheap reports and find your own retire cheap in paradise heaven. Come to VagabondBuddha.com and relax into all the research and ideas we have for easing into your international retirement. Okay, thanks for listening.
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