Buying Property Overseas

With talk of first-time buyers looking overseas for properties, we thought it was high time The Fool looked at what to consider when pursuing such a bold investment strategy.

How trustworthy are developers in Dubai? Should you use British estate agents or local ones for property in the US? Is it a good time to buy in Bulgaria? Will my beneficiaries have to hand over death taxes on my Spanish property when I die? And to whom? The Spanish or British Government? Or both!

If you're thinking that property in the UK is just too expensive and want to look abroad, then think carefully. Here are some of the many things to consider.

Taxes

You may have to pay stamp duty on a purchase, or capital gains tax on a sale, as in the UK. Or you may find you have to pay income tax on rental income. Other taxes may include land taxes or property registration taxes (as in Dubai, although they say it's not a tax but a 1.5% land registry 'fee'). There might be local taxes for turning on utilities (as in Spain). You may have to pay a sales or exchange tax, such as VAT. You may also have to pay a death tax.

You may have to pay income and death taxes both in the UK and the country where your property is; for example, death taxes on US property (called estate tax) are charged at 46% on property worth over $2m. Plus, if you're still living in the UK you may be subject to our own death tax, Inheritance Tax, at 40% on everything over £285,000. (This threshold may go up after next week's Budget.)

Mortgages

Mortgages in this country are a minefield, but now you're going to have to learn a whole new set of rules. You may have to grapple with Sharia-compliant mortgages, for example.

In the past few years we've become familiar with relatively stable mortgage interest rates. Do you know how stable your chosen country's interest rates are in the long-term? Do they have a good system for keeping inflation under control? How much are rates politically influenced?

Currency

Currency is a whole other minefield. Consider what would happen if currency rates change and you suddenly get 10% less foreign currency for your pound. If you used to pay around £500 per month for your overseas mortgage, you'll find you need to pay more like £560, an increase of £720 per year. If you're unlucky and are hit by interest-rate rises too, you could easily be paying, who knows, perhaps 25% more by the end of the year.

You can often remove this variable by getting a mortgage in foreign countries in sterling. Removal of this uncertainty usually comes at a premium though, as you'll pay higher interest rates.

Legal costs and the law

Of course, you may need to pay legal costs. Not only that, but you will need to have a basic understanding of property law, so that you understand your rights and responsibilities. If you're buying to let, you'll have even more responsibilities.

Consider also the risks. In part of Spain, for example, developers have the right to compulsorily purchase properties that are in the way of major developments. Consulting a local, English-speaking lawyer seems like an idea!

Location

Not only do you need to consider the local area, but also how the property market in general is going to perform. If it might perform badly, perhaps you might find it's not worth straying from the UK market.

Whilst researching this article, I've found that there are legitimate concerns about the short-term house prices in all four areas I concentrated on: Bulgaria, Spain, Dubai and the US. You should ensure you're satisfied with the direction of the property market over five to ten years. A general upward path is preferable!

Regulation

The property industry in some countries may not be regulated, as is the case with Dubai, so be wary!

Third parties

You'll need to establish the reliability of estate agents and developers. If you're not at all familiar with property in the area, you'll probably need to find a reputable buying agent too.

The issues stack up!

There are myriad other things to consider, including visas, languages, culture and religion, the time difference, the climate and even opening hours.

So do your research. Personally, I wouldn't invest in property overseas because of the effort involved compared to good old index trackers. If you're a first-time buyer who wants to get on the ladder and use gains in overseas property as a deposit on a property back in the UK, you could spend the extra time you would have spent as an overseas landlord on a second job, which is a less risky way to build up a deposit for a UK property.

If I was to invest in overseas property though, I doubt I'd do so without establishing contacts with a decent local property lawyer. I'd also want to be able to travel back and forth to deal with lawyers, agents, property developers and so on.

Finally, wherever you decide to buy, make sure you're prepared to be in it for the long haul; in the short-term, property is far from a sure bet!

> Use the power of our community! See if other Fools can point you in the right direction to the country of your choice. Visit the Property Investing - Overseas discussion board.
> Read A Bulgarian Bubble?
> Compare mortgages through The Fool.