A charming Andalusian white villa with a hilltop view of the Mediterranean. A stunning beachfront condo on the Pacific with yearlong surfing conditions. A piece of snow heaven in British Columbia that is just a stone’s throw away from world-class ski trails. Wherever your dream overseas property lies, you probably have the same question we all have: how can I finance an international home purchase?
Financing is one of the trickiest aspects of buying a vacation or rental home overseas. Living abroad can offer many advantages, such as a lower cost of living, exposure to a new culture, and lower home prices. Purchasing an overseas rental property can also help diversify an investor’s financial portfolio. However, the headaches of battling with foreign ownership laws and different banking standards are enough to dissuade the most enthusiastic of would-be expats and real estate investors.
This article will outline the main financing methods available and provide tips from real estate investment experts in Central America, Europe, South America and Canada.
Seek help from experts
The first step when considering an overseas purchase is to accept that a lot of what you know about real estate does not apply to other countries. Even experienced investors require local professional help when buying a property abroad.
“It’s always best to find a local agent or partner who can give you the best advice about local laws and requirements for home financing,” says Glenn Carter, a Canadian real estate investor who works for Condo.Capital. In his native Canada, Carter provided advice to foreigners looking to invest in Canadian properties, but he looked for help when he decided to buy his dream home in the sun in the U.S.
“I bought a house in Florida, and as a Canadian, the financing was obviously trickier than if I were a U.S. citizen,” Carter says. “We partnered with a local realtor and lawyer that specialized in overseas buyers. Not only this, we found a Canadian bank that had a presence as well in the U.S., which facilitated the financing process very nicely. Before this, we had asked U.S.-based banks for a loan, and the interest rate was astronomical because we were foreign buyers.”
Why don’t foreign buyers qualify for the interest rates available to residents? “The problem is a foreign credit score doesn’t count for anything,” Carter explains. “So they assume you have no credit score. I’ll never forget one bank telling me, ‘It doesn’t matter if you’re from Siberia or Canada, we treat you as if you have no credit.’ The interest rate I was quoted from a U.S. bank was 9%, versus the 3% we got from the Canadian bank with branches in the U.S. [RBC Georgia].”
SuperMoney tip: Look for a bank that has a presence in your country and the country where you want to buy a property.
Finding financing in different country
Finding a bank overseas that is willing to work with you is a challenge, particularly in the beginning.
“Taking out a loan can be beneficial, especially in countries such as Austria, Germany, Switzerland and France, where APRs rarely exceed 2% per annum. But to become a risk-free client of a European bank as a non-EU national, you will first need to prove your worth,” says George Kachmazov, founder and managing partner of Tranio, an online real estate broker for overseas properties.
Kachmazov recommends investors buy their first couple of properties outright, with no loans.
“When they are making a profit, you will have verified income and assets you can leverage,” he says. “Then, when you’re ready to buy a third property, refinance the whole asset portfolio to increase the chance of getting 70% LTV [loan-to-value ratio].”
Buying a property outright without a loan is, of course, ideal, but what if you don’t have enough cash to do so? Although banks are unlikely to finance an overseas property directly, there are ways around this.
“I generally see people take a cash-out refinance mortgage or a home equity line of credit on their residence in the U.S. to buy a second home abroad,” says Vincenzo Villamena, a CPA and managing partner of OnlineTaxman, a firm that offers tax advice to U.S. expats. Villamena specializes in helping people moving to South America, particularly Colombia.
“I can say from experience this is by far the most difficult region of the world to get financing,” he says. “Leveraging your property is smart because it uses the U.S. banking system to finance your home purchase abroad. In Colombia, yearly mortgage interest is roughly 12%-18%, which is extremely expensive.”
The downside of refinancing your U.S. home or getting a line of credit is you are putting your property at risk. If you can’t make payments, you could lose your home.
Another option is to finance your overseas purchase with an unsecured personal loan.
“I have had many people get personal loans in the U.S. from banks and family, and it is certainly a cheaper source that the Colombian banks,” Villamena says.
Borrowers with excellent credit can qualify for loans of up to $100,000 with interest rates under 10%. Although $100,000 won’t buy you a chateau on the French Riviera, it’s more than enough to purchase a charming home in many countries.
In her book, “How to Buy Real Estate Overseas” (John Wiley & Sons, 2013), Kathleen Peddicord recommends new investors select modest properties because property taxes will usually depend on the size of the property and you won’t be so worried about potential renters damaging upscale fixtures. “Big and fancy means heavy carrying costs,” Peddicord says.
“This is not to say you don’t want charming,” she adds. “In the Old World, even $50,000 to $100,000 can buy you a lot of charm.”
SuperMoney tip: Start small when investing overseas. If possible, buy with cash. Using your current home as collateral is a way to get low rates without the need for a local bank or a regular mortgage, and also consider the benefits of a personal loan.
Consider local rules
Even when financing from a local bank or lender is an option, banking and legal requirements for overseas home purchases are a challenge for new investors.
For instance, financing a property in Mexico with a local bank is an option. But you need an immigration card, a Mexican source of income, a Mexican bank account with three to six months of deposits that amount to approximately 2.5 times the monthly payments of the mortgage you request, and at least two open lines of credit in Mexico. This means that buyers who are just getting started with the buying process have to wait about a year before they are ready to close on a property.
You don’t always have to become a resident to qualify for a mortgage, but it may limit how much you can borrow.
“In Austria, the United Kingdom, Hungary, Germany, Portugal, France, the Czech Republic and some other countries, nonresidents are generally eligible for 50%–60% LTV at most,” Kachmazov says.
Kirill Schmidt, the head of financial services for Tranio, points out that “some countries also have minimums and maximums on mortgage amounts. For instance, in Italy, a property bought using a mortgage cannot be cheaper than 50,000 euros [about $54,400 U.S.], and in Switzerland, the minimum is 580,000 euros [about $631,100].
“By contrast, in other countries, mortgages are difficult to obtain to buy expensive property. In Hungary, mortgages are not issued for purchasing real estate valued at over 130,000 euros [about $141,450]. In Bulgaria, the magic number is 220,000 euros [about $239,400], and it’s 830,000 euros [about $904,140] in Cyprus.”
SuperMoney tip: Check local banking requirements before deciding on the best source of financing. Buying with cash, or at least having enough to reduce the loan-to-value rate of the mortgage, can improve your chances of success.
You have five options to consider when financing a property overseas.
Getting a local bank to finance your property is unlikely unless you have assets within the country you can use as collateral, or the bank also operates in your current country of residence. However, when bank loans are available, they can be the cheapest form of credit. If you go down this path, hire an expert who can walk you through the local banking rules and legal requirements.
Buying with cash is, of course, the fastest and cheapest option.
While traditional IRAs can only invest in mutual funds, stocks, bonds, and money market funds, a self-directed IRA can contain other types of investments, such as real estate (source). The benefits of buying real estate with an IRA include delayed taxes on investment gains, tax-free growth, protection against inflation, and the chance of diversifying your IRA portfolio. However, there are important restrictions to consider. The IRS only allows you to use an IRA to invest in real estate if you and your family don’t live in the property. This restriction expires when you reach retirement age (source). Another disadvantage of buying property with an IRA is you don’t benefit from some of the tax benefits that come with owning an investment property, such as the deduction of property taxes, mortgage interest or depreciation.
“A self-directed IRA can be a good and a bad thing,” says Vincenzo Villamena, CPA. “Good because it allows you to use an IRA to purchase real estate, which is particularly helpful in foreign countries where the cost of credit is high. However, you also need to look at the local tax laws to check whether it is worth it. While the rental income and capital gains from a rental property are tax-free within the self-directed IRA, that does not dictate what the local taxation would be.”
SuperMoney Tip: The rules regulating IRAs and real estate are complex. You should talk with a qualified tax expert before you use your IRA to purchase an overseas property. To illustrate, if you buy a property with a Roth IRA and you’ve held it for 5 years, and you are now 59½, it’s yours to live in or sell with no tax penalties. However, if you bought it with a traditional IRA, you will have to pay taxes on the property value of the house before you can live in it.
When cash is not an option, tapping into your home equity is one of the easiest forms of funding an overseas property. If you’re investing in a country without a developed banking industry, it may also be the cheapest. Getting a HELOC has the additional benefit of making you a cash buyer, which provides leverage when negotiating a price.
It is also possible to finance a property by borrowing directly from the seller. Seller financing is an option you often find in developing countries in which bank financing is difficult to get (source). Developers know how hard it is for non-nationals to qualify for credit and will offer foreigners the option of making a down payment, then monthly installments during construction, and a balloon payment when the property is ready.
For example, a developer in Belize recently offered five-year funding with rates under 5% APR to investors in their beachfront condo resort if they made a 30% down payment. (source).
Buyers with excellent credit can sometimes fund an overseas purchase with an unsecured personal loan. Interest rates can be in the single digits for qualified buyers.
Financing with a personal loan avoids the risks that go with leveraging your property with a HELOC or a cash-out refinance. This type of funding is particularly attractive when you’re investing in a developing country in which mortgage rates are high, and the cost of property is relatively cheap.
If you’re serious about investing in an overseas property, find out the rates and terms for all available funding methods. SuperMoney has already done part of the legwork for you by creating a network of lenders that are ready to compete for your business. Check them out here.