BEST REAL ESTATES BLOG

By investing abroad, not only can you get the benefit of a cross-fertilization of ideas, but you can also benefit from a cross-fertilization of projects. In New Zealand I am involved with a boutique hotel and a small vineyard. To many people, this may just be of passing interest, but my colleague and friend Rich Lamphere recognized a tremendous opportunity to link the New Zealand operation to his extensive project in northern California that also includes a vineyard and boutique hotel.

Rich is a true visionary with a big heart, and is living proof of Zig Ziglar’s maxim that “You can get whatever you want, so long as you help enough other people get what they want.” By offering guests in either country wines from both projects, reciprocal hotel perks, combined frequent-user benefits, and an excuse and incentives to use the other country’s facilities, both projects benefit.

As for the claim that real estate is so complex, and the laws so involved, that it is difficult to keep up with the regulations in your own turf, let alone a foreign country, these critics need to get a passport (I would put money on it that they do not have one), jump on a plane, and go somewhere where they have never been before. Of course real estate is complex, even at home. In fact, it is so complex that even at home you should barely do any of it yourself.

A few years back I was shown a property by Craig Donnell, a colleague who consistently ferrets out opportunistic deals, in Melbourne, Australia. The building was located directly opposite the University of Melbourne, and comprised 12 stories of student accommodation (277 rooms) along with ground-floor retail space and a basement. (See Figure 22.1.) There was a new 10-plus-5-plus-5-year lease in place to the university at a starting rental of A$950,000 per annum, with annual reviews in line with the consumer price index (CPI). To an outsider looking at market cap rates, returns, location, strength of lease, and in deference to the fact that the building had been completely renovated, it appeared as though the building was being offered at a price substantially above market. This would also explain why it had not sold.

However, this building also highlights the need to conduct thorough due diligence. It turns out that despite the recent renovations, the building did not comply with the fire code. Before long, the students had to be evacuated and relocated, and the university commenced legal action against the owner. We were informed that an offer would be entertained by the owner, who was eager to extricate himself from the situation.

Bear in mind that one of the tremendous advantages of real estate is that you do not need most of the money required to buy a property—banks willingly provide those funds in the form of a mortgage. In general, banks will not lend money on real estate purchased abroad,1 so if you were to buy a NZ$10 million property in New Zealand, you may only need NZ$1 million or less as a down payment from your own country—the rest is financed locally.

If the value of this investment over time goes from NZ$10 million to NZ$20 million, then not only have you made a 1,000 percent return on your cash investment of NZ$1 million, but the NZ$10 million profit, expressed in U.S. dollars, will also have gone up (or down) according to the change in exchange rate.

Secondly, many people claim that investing overseas is unpatriotic, as it diverts resources away from your home country to other countries. This is pure nonsense for two reasons. As we have just been reminded, when you invest in real estate in a foreign country, most of the funds required for an acquisition are provided by a locally sourced mortgage. Furthermore, claiming that investing abroad diverts funds away from your own country ignores the fact that the explicit purpose of any investment is to generate a return and (should you ever sell) a capital profit, both of which will eventually be brought back to your country.

Not all properties in Panama are in the private domain. Many beachfront properties, islands, and real estate in special tourism zones and historically protected areas are owned and managed by the national or local municipal governments. In those areas, possession rights are granted for a determined period of time. Two such protected areas are the archipelago of Bocas del Toro (mouth of the bull), which to many visitors fits the description of tropical paradise, and Portobelo, a beautiful harbor on the Caribbean visited by Columbus and the final resting place of Sir Francis Drake. Some beachfront property is available for purchase but is subject to the law that all beaches are public. All beachfront properties must provide a right of way starting twenty-two lineal meters from the highest tide to the property line.

Because of the lack of uniformity regarding the granting of possession rights, possession rights should be approached with caution.

When considering properties located in such areas, you should ensure that the possession right has in fact been granted by the relevant national or local government authorities and that the length of the time right is adequate for the purpose of the investment. The possession right should also contain a complete description of the property, including boundaries, encumbrances, and any other significant features or details (with an accompanying complete blueprint drawn and approved). You should make sure that any anticipated construction, activity, or improvement is acceptable by the national or local government. Transferring a possession right can take up to six months, depending on many factors, such as the date of recognition of the possession right and inspection by the granting entity.

Although tax shouldn’t be the most important consideration when choosing a property, it’s not to be overlooked. The tax implications vary in complexity and impact according to the country you are investing in and what you intend to do with the property. In addition, you need to take into account that the United States taxes you on your worldwide income. Taxes levied on international property investments usually fall into the following categories:

• Capital acquisitions tax, inheritance tax, stamp duty, or transfer tax for purchasing, inheriting, or transferring property
• Local and national property taxes and land tax for owning and/or residing on the property
• Income tax on rents received, of which there may be additional taxes imposed on nonresident or foreign landlords
• Capital gains tax, gift taxes, or death duties and estate taxes for disposing of the property

To avoid or minimize taxation, there are countries or jurisdictions with no taxes on income or capital gains, such as the Turks and Caicos Islands. However, some of these tax havens are an option only for the very wealthy who are willing to contribute substantially to the local economy and purchase luxury real estate, and some of these locations limit the number of foreigners permitted residence or work permits. In comparison, governments in nontax-haven countries tend to impose fewer restrictions on nonresidents purchasing property, yet the likelihood is that you will face more taxes on your investment. But some high-tax countries provide advantages over the long term. For instance, in France rents over the last fifty years have averaged a net operating income (NOI) of about 7 percent, which is not terrific. But if you hold onto the property for at least fifteen years, your tax on capital gains is vastly reduced. And when you consider that property values have gone up about the same rate as rents, you will have an enormous gain.

With exchange rates, one day can make a difference, so know when the funds will be transferred and when they are to arrive. Verify the receiving bank’s rate of exchange and how many days it takes the bank to handle the transfer. Calculate this into your purchase price.

One of our clients learned the hard way. Tom was ready to purchase his pied-?-terre in Paris, so he transferred funds directly from the United States to the escrow account at the bank in France. He calculated the exchange rate on the Internet on the day of transfer and expected to receive i425,000 (euros) to pay for the apartment. At the closing, he discovered that he had only i414,000. Tom protested that someone had shorted him on the exchange rate. Unfortunately, here is what happened.

Tom transferred the money on a day that the exchange was indeed favorable—if the exchange had taken place on that day. The money was sent from his U.S. bank on the day he requested, but the French bank didn’t receive the funds until two days later. And then the bank did not exchange the money until four days later, when the rates went against Tom. The funds were actually credited to the bank on the date it received the dollars, but it disintermediated the exchange to profit from the lower rate.

Tom complained to the notaire (legal agent) who was helping him with the transaction, but there wasn’t anything to be done. The bank had chosen when it wanted to exchange the money, and Tom was out i11,000. The notaire would not, of course, close the deal unless another i11,000 was forthcoming. Then Tom also discovered that there were wiring fees and conversion fees that totaled another $30 from his U.S. bank and i25 from the French bank. But at least these were small surprises in comparison to the i11,000 exchange
difference.

To make your real estate investment opportunities fare well in other countries and societies, consider the following.

Learn the language. Having just a small vocabulary goes a long way in the success of your investment. Knowing past, present, and future tense is very helpful. After all, that is the time line in which your real estate deal operates.

Learn the culture and local customs. Read up on and experience the culture. The culture you see on vacation is different from day to day. Religion makes up a large portion of culture and society.

Whether it is nonexistent, polytheistic, monotheistic, all have an influence on the society in which you plan to do business. Failure to understand and respect the nuances and roles that culture, customs, and religion play can cause your deal to fall apart or change adversely. Knowledge and understanding is power. Humility on your part is not weakness.

Understand the local economy. The local economy is usually different from the national economy. What makes the local economy self-sustaining: building aircraft, growing wine, services and to whom, education, fishing, tourism, a combination thereof? How does this fit into your personal and real estate goals and objectives, in both the short and long term? Is the local economy working, and what is its future? Will the area be deserted or abandoned in a few years? All these factors can affect your investment.

Investing outside of the United States adds another tax dimension, so it’s a good idea to understand the tax codes of the country that you are investing in. When determining whether an investment property will generate positive cash flow, you must include the tax implications of the income in your calculation, because U.S. taxpayers are taxed on their worldwide income. You should also take into account that there are certain legal tax advantages available in the United States when investing in property. For example, you can acquire investment property with your retirement funds, which offers tax-free or tax-deferred opportunities, or you can make tax-deferred 1031 exchanges of like-kind property. Some of these tax advantages are not available outside the United States. You cannot do a 1031 exchange for property outside the United States. You can, however, invest selfdirected Individual Retirement Accounts (IRAs) and 401(k) money everywhere, but you may still be obligated to pay taxes in another country. For instance, with a Roth IRA, you pay tax once and then any profits made are tax free—tax free forever in the United States, that is. It does not mean they are tax free outside of the United States. No country outside the United States recognizes American retirement plans and so local taxes may apply.

Not just house builders, but also the tenant may have been recently on an entirely legitimate form of tax savings are happy: The operating costs for a rented property in the tax may be specified. New rules for household services make it possible - even retroactively. Unless the outstanding tax can also operating costs for 2003 through 2005 be claimed. But how does it all?

Material costs are not included
Those who work in the apartment by professionals it leaves, can be 20 percent pure wage settle. Material costs remain ignored. But the operating expenses of the landlord to the tenant continues, there can be claimed for tax. Caretaker costs and repairs in the house belong to the garbage disposal is not.

Wage and material separately indicate
Since this year, a landlord wage and material cost of operating separately in payroll specify. Thus, it is easier for tenants, wage costs in the cover sheet indicated the tax return. Older settlements are often not separate costs. It remains the only tenant left, the wage cost estimate. A test compass of the German Federal helps tenants here, the corresponding cost for the chimney sweep or caretakers correctly.

For outstanding tax applies:
Who operating in the outstanding tax assessments fit, you must note that for the years 2003 to 2005 only the work are deductible, the tenant would even work. , Professional work ‘(eg, maintenance of a heating system) can therefore for this period are not invoked.

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