5 Things To Do Before Buying An Overseas Investment Property

Published 30 November 2021 by Team :Different

Investing in overseas markets can be a smart way to build your property portfolio and tap into booming property conditions. 

But, rushing into a property purchase can expose you to unwanted risk, leave you liable for a big tax bill and make it tricky to find long-term tenants. Instead, it’s worth getting your ducks in a row before you score the keys to your first (or next) overseas investment property.

To help you make a wise move, we’ve rounded up five key things you need to sort out before you make a purchase, as part of our overseas and Australian property guide series.

1. Clarify your reasons for investing in overseas markets

All of the most successful property investors have one thing in common: they know why they're investing in specific properties and markets. Especially if you’re looking to invest overseas (or buy property in Australia as a foreign investor), you need to know what the local property market has to offer. 

Here’s just some of the reasons why investors choose to invest in Australian real estate:

  • Capital growth: the Australian property market has exploded by 412% over the past 25 years (and has only kept rising in 2021). If you’re ready to hold your investment property for the long-term, you could earn a generous capital gain to help you build your property portfolio.
  • Secure an early retirement: a big drawcard for investors is the ability to live off your investment property’s rental returns. Take this example: say you had $3 million in real estate, you’d be earning roughly $75,000 per year in rental income, which might be enough for you to speed up your retirement plans.
  • Passive income: especially if you choose to positively gear your rental property, you’re likely to be earning extra income each month (all without having to work extra hours). The good news is that Australia has plenty of positively geared suburbs you can consider investing in. 

Every real estate market is different and will deliver different benefits to you as an investor. So, it’s important to do your research and match up your investing goals to the type of property you decide to buy into.

2. Understand the local laws that apply to overseas property investors

Every country has its own rules and regulations that foreign property investors need to follow. While many places have tough restrictions that make it tricky to score an investment property, Australia actually welcomes overseas investors who can help to stimulate our economy and create local jobs. 

Here in Australia, foreign investors need to apply to the Foreign Investment Review Board (FIRB) to gain approval before purchasing a property. This is mandated by Australian property law and outlines what type of properties overseas investors can and cannot purchase. 

In broad terms, overseas investors are generally only allowed to purchase new properties or vacant land in Australia (unless they’re purchasing an existing property with the plan to knock it down and rebuild multiple properties on the same lot). 

If you don’t follow these local laws, you may be charged with an infringement notice by the Australian Government or even run the risk of civil and criminal penalties.

The best way to figure out what local laws apply to you is by chatting with an experienced property lawyer. They’ll be able to walk you through all the relevant laws and regulations that apply to you and help you avoid any nasty fines or penalties.

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3. Figure out how you’re going to fund your overseas property investment

Buying a property is a big investment, which is why you need to figure out how you’re going to fund your purchase. While home loans can be a straightforward solution as a citizen or permanent resident, it can often be challenging to score approval for a home loan as a foreign investor. 

That’s the case in Australia, with many lenders and banks choosing to only approve loans for Australian citizens or permanent residents. 

However, there are a few options open to foreign investors who want to secure a loan in Australia:

  • If you have a 30% deposit ready for a new property in Australia, some lenders will offer you a loan (with an interest rate of roughly 6.5% to 8.% per annum).
  • If you have a 45% deposit (or more) ready, you can score an interest rate of 5%, but you’ll also need to have a high net worth and earn a primary currency (such as Canadian dollars, British pounds or American dollars).
  • If you live in Australia or are married to an Australian citizen, you may be able to borrow more at a lower interest rate.

If securing bank finance isn’t an option for you, some other ways to fund your foreign property investment are:

  • Borrowing equity from your existing home or refinancing an existing loan and using this as a line of credit to make your next investment. 
  • Using your own capital or savings to purchase an investment property outright, which can work if you’re purchasing a rental property in an affordable area. 

Many investors choose to work with a mortgage broker when investing in overseas markets, like Australia. This local finance expert will be able to make specific recommendations about the best way to finance your property investment and what loan options might be available to you, too.

4. Check the tax implications of your overseas property investment

Nobody wants to be hit with an unexpected tax bill. Along with figuring out the local property laws, you’ll also need to understand what taxes you might need to pay as a foreign investor.

If you’re an overseas investor looking to purchase a property in Australia, here’s a snapshot of the taxes you might need to pay:

  • Stamp duty levy: in some Australian states (including New South Wales, Queensland, Victoria and South Australia) you may be required to pay an extra tax known as a stamp duty surcharge. The amount you’ll need to pay depends on where you’re buying property, the cost of the property and whether the property is residential or not.
  • Ghost tax: another tax you may need to pay as an investor is what’s been called a “ghost” tax. It can apply if you’re leasing your property for at least six months of the year, and starts at $5,000 per year. 

There’s also a few tax conditions that apply to overseas investors buying property in Australia. The capital gains tax (CGT) exemption has been changed to only those properties that are $750,000 or less. This means you may need to pay a higher tax rate on any capital gains you make from selling your Australian rental property.

The best thing you can do as a foreign investor is find out what tax rules apply to you before you invest overseas. By running the numbers ahead of time you’ll know what fees you might need to pay and will be able to choose the most tax-effective place to invest your money.

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5. Find the right local professionals

Investing overseas means you’re likely buying your investment property remotely. That’s why the most successful investors choose to work with local property experts to give them the local, insider knowledge they need to score the best returns. 

Before you decide where to invest, it’s worth finding an experienced, local buyers agent who can scout out good rental properties on your behalf. Not only can they make recommendations about what type of properties tenants are looking for in each suburb, but they can also bid for you at auction and manage the purchase process from start to finish. 

Once you’ve bought your rental property, you need to find a local expert who can help you find the best long-term tenants. The majority of Australian investors choose to outsource the leasing process and day-to-day management of their rental property to a good property manager. With in-depth knowledge of the local market, they’ll be able to host inspections, vet potential tenants, and get new tenants moved in (all while you’re living overseas). 

When it comes to investing overseas, working with local experts is what will help you make a smart investment decision. With a team of experienced professionals by your side (from mortgage brokers to a good property manager), you’ll be able to earn passive income and spend more time doing what you love, without worrying about your rental property.

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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.

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