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Mortgages and currency exchange make buying difficult
While there may be similarities to the U.S. market when buying a home abroad, there are also unique challenges on the financial side of the purchase.
Experts say Americans who buy property abroad often finance the transaction directly with cash. If you're looking to finance your home purchase, consider your options and consider how often you might be exposed to interest rate changes.
This is because mortgage structures abroad are more likely to have variable interest rates or short terms when it comes to fixed-rate loans. It's rare to find financing options similar to the 30-year fixed-rate mortgage, which is a “very American phenomenon,” said Boudreaux, a member of the CNBC Financial Advisor Council.
You also need to consider the exchange rate of the foreign currency you are transacting with as well as the cost of trading in US dollars. Fluctuations in interest rates and differences in banks' interest rates and fees can have a significant impact on how far your money goes.
A bank transfer is often the “most cost-effective way” to exchange money, and a large enough bank will have facilities that can reduce the cost of international transfers, such as a favorable exchange rate, Boudreaux said.
However, in most cases, the US buyer must open a bank account in the country where they are purchasing the property. And this process is not always easy.
On the one hand, many banks refuse to work with U.S. citizens because the U.S. Bank Secrecy Act requires foreign companies to report assets, he explained.
Additionally, smaller regional banks may not be equipped to handle this reporting, so U.S. residents generally have to turn to larger institutions, Boudreaux said.
Before purchasing a property outside of the United States, it is also important to have a clear idea of what you plan to use it for. Depending on this answer, your foreign and U.S. tax obligations may change.
Here are three steps experts recommend you take before becoming a homeowner abroad:
1. “Do a lot of due diligence”
“When you visit the city where you want to buy, be sure to walk around a lot,” says Bojan Mujcin, real estate associate at Sotheby's International Realty in Barcelona and the nearby Costa Brava region.
“Get familiar with the city, get familiar with the streets…do a thorough check,” Mujcin said.
Rent in this area for a long time to get a feel for the place before “buying something for a dream,” Boudreaux said. This can give you a better feel for what it's like to live in a place.
You may also want to consider the country's political environment, as it can be important to the long-term investment value of your property, said Erin Boisson Aries, a global luxury real estate advisor with Douglas Elliman.
“Less spontaneity and more learning is important,” she said. “It’s wonderful to go on vacation and have a wonderful time, but long-term geopolitical stability is very important.”
Boudreaux agreed: “There is political risk… and we need to be prepared for what that could mean for our investments.”
2. “Understand what your needs are”
It is important for you to “understand what your needs are,” said Boisson Aries.
“Is this an investment? Are you planning to retire there? Are you planning to visit and rent it out? … You have to really understand the environment you’re buying into,” she said.
For example, if you plan to rent out the property for long-term or short-term stays, “zoning plays a big role,” Boisson Aries said.
Rules determining which areas are eligible for short-term rentals can change over time, Boudreaux said.
“Purchasing these direct properties for this purpose carries far greater risks than people realize,” he said.
And if you decide to rent out the property or use it commercially, you could face additional tax burdens in that country, Boudreaux added.
3. Reach out to local experts and expat communities
“Make sure you consult local experts and professionals” when shopping in real estate markets outside the U.S., Boisson Aries said. “There are so many variables that influence every purchase.”
Those factors can include property rights, development impacts and investment opportunities, she said.
“You might walk by and fall in love with the property, but without really understanding the overall market and all the other implications for the purchase and ownership, you're a little blind,” she said. “The way we have local experts and consultants in Manhattan… you really need that level of local expertise.”
Speak to legal counsel abroad who can help you navigate tax and other issues, Sotheby's Mujcin said.
“You definitely always need the legal support of a lawyer during the transaction,” he said.
It's also important to find out if there is an expat community in the country you're considering, Boudreaux said.
Typically it will consist of other Americans who have been through a similar process and can provide recommendations and resources, he added.