What do you do when bank financing is not available in your destination country? This article explores other options to finance your foreign property investment.

You’re not getting the same mortgage deal you’re used to

Bank financing abroad will be different from what you’re used to at home. Here are some ways in which the terms will likely be different:

1. Loan-to value ratios will be around 50 to 75 percent of what you're used to.

2. Terms may be shorter. It's almost impossible to get a 30-year loan when buying abroad.

3. You will be offered adjustable interest rates, rather than fixed.

4. You might be required to get a life insurance to secure your loan for foreign property. This isn't good news if you're already around 60, as banks wouldn't borrow you loans of more than 15-year terms. The reason being that insurance companies, as a rule, wouldn't cover you when you're above 75 years old.

Hence, there is need to check out other financing sources.

Financing tips from experts

Generally, here are some financing tips from foreign property experts:

1. If possible when starting out; start small and pay in cash. If this isn't possible, you can use your current home as collateral, without having to rely on banks or regular mortgages. Depending on the amount of equity in your home, you might get lower rates.

2. Research bank financing terms, requirements and laws in your destination country to decide which financing option would work for you. 

3. Since most of what you know about real estate might be ineffective in your destination country, it would be wise to get a partner or local agent. You'll need someone who can offer useful advice regarding financing and home ownership laws in the country.

4. If you'll be transferring funds denominated in your domestic currency, either to make a down payment, full payment or mortgage payments, don't go through the local bank. Local banks, with their wide dealing spread and limited transaction sizes, offer poor Forex services. Foreign exchange services would offer a better deal. 

Options to finance foreign property without using the local bank

Here are three options for foreign property investors who don't want to go through the local bank:

1. Personal loans.

Potential buyers with excellent credit will often fund an overseas purchase with an unsecured personal loan for foreign property. Interest rates can be in the single digits for qualified buyers.

Financing with a personal loan avoids the risks that go with leveraging property with a HELOC or cash refinance. This type of financing is particularly attractive when you are investing in a developing country where mortgage rates are high, and the cost of property ownership is relatively cheap.

2. Seller financing.

Some private sellers might be willing to pay part of the price. The conditions will be whatever you and the owner decides, and an average term is up to five years. In most cases, the longer a bit of property has been on the market, the better conditions you can negotiate. Much like bank funding, don't expect the owner to provide the deed until you've finished paying the loan.

3. Home equity (HELOC).

When cash is not an option, tapping into your home equity is one of the easiest ways to finance a property abroad. If you are investing in a country without a developed banking industry, it can also be the cheapest. Getting a HELOC has the added benefit of making you a cash buyer, which provides leverage when negotiating price.

What’s the crucial thing when making an investment? Simple! Protect your investment. Whether you’re buying stocks or putting money down on real estate? Whether you are buying property abroad or locally? Whether you are buying overseas property for investment or just looking to relocate? You need to recognize that there are risks. Heck, buying property abroad is like running a hurdle. You’re crossing hurdles like investment restriction laws, taxation, paperwork, exchange rate changes etc. Real estate investing comes at a risk, especially when you are going into relatively uncharted territories. You need to ask yourself some crucial questions.

1.     WHY AM I BUYING THE PROPERTY?

Any decision you take subsequently will depend on this to an extent. Are you buying just to relocate or as an investor. You need to make up your mind. Your choice of mortgage, your budget and the type of insurance you go for would depend on this.

It’s easy to say I’ll move into the property for some time, get a feel of the place for a while then I’ll sell out when the market is steamy. Seems like a good strategy but guess what? Your guess may be wrong? You may have to stay with a property you don’t like for years or just bear the big loss. Hence you need to make up your mind beforehand. Am I relocating or investing?

2.     HOW WILL I GET FINANCING?

Financing is a big deal when it comes to buying property abroad. You can’t just carry cash around, you need to select a reputable bank in your destination to deal with. If mortgages are available by the destination bank, you need to ascertain what types of mortgages are available and what contingencies. In a case where a deposit is required by your seller, make sure that an ‘opt out clause’ is signed to make sure your deposit will be returned in case the mortgage falls through.

3.     SHOULD I BUY A NEW BUILD PROPERTY?

If you are buying a new construction or an off-plan property, be sure to choose the developer carefully. Ask a lot of questions. Initially, focus these questions on the agent or company itself, not the properties. Ask about customer testimonials and check what is included in their service. Ask for details in writing. You might be tempted to make a deposit on an attractive new-build property right away. Cool down and think before you leap.

4.     WHAT ABOUT RENTAL YIELDS?

Property specialists caution against getting sucked in by claims of developers. ‘There is huge capital growth’, ‘rental yields are off the roof’ etc.  Always remember: with big returns come big risks.

Don't just think about the profit to be made. Put some effort into your calculations and note that interest rates change over time, also include the tax implications of renting out your property abroad.  You should consult a tax expert or lawyer.

5.     WHAT WOULD BE THE ADDITIONAL COSTS?

Budget for extra costs to be between 8 - 10 % of the house value. This may often be far more in a few countries. Make sure you are, therefore, alert to the costs incurred for investing in a property in your selected country.

Whether you want to relocate abroad or create a global real estate investment portfolio, it's important to keep in mind that even the best strategies occasionally fall flat. You are going to therefore need an appropriate contingency plan and exit strategy, as this will lessen any inconvenience triggered and the prospect of financial loss. Hence, for those wanting to relocate, it is important to hold on to ties in your country of origin and ideally preserve a preexisting property for a predetermined time frame. Investors will also have to keep a keen eye on the global market and prevailing economic trends, as these factors may determine the necessity to sell or change strategy.

BUYING PROPERTY ABROAD: HOW TO CURTAIL RISK WHEN MAKING OVERSEAS PROPERTY INVESTMENTS

Many people are buying property abroad today because of the investment potential. The price of foreign property can be especially attractive when exchange rates tip the balance in favor of a prospective buyer’s currency. Imagine buying a beachfront house in Brazil for $50,000 when you’d spend $400,000 for the same house in a place like Orange County. Buying property abroad is a way to get actively involved during retirement.

If you don’t want a hands-on management, this type of investment would still generate passive income for you, an income not depending on the US dollar, denominated in another currency. There are reputable property management companies that can help you take care of your new investment and help you make consistent rental income from your investment. The fact that many Americans are not preparing adequately (or even preparing at all) for retirement means many Americans are not living out their dreams after retirement. “About 60% of Americans have no savings in retirement accounts like 401(k)s or IRAs,” reports Business Insider. The Employee Benefit Research Institute (EBRI) estimates the shortfall in retirement savings to be at $4.13 trillion for heads-of-households aged 25 to 64.

One of the reasons why many Americans lack sufficient retirement savings is that the traditional means of saving are unreliable, according to USmoneyreserve.com. If protecting your retirement is important to you, buying property abroad can help you get the ideal retirement and offer the kind of security that other asset classes cannot provide.

Moreover, there are wasteful aspects in some markets that haven't worked themselves out yet, and those inefficiencies can work further bolstering your good fortune. For example, there are some markets in the world with restricted wellsprings of capital where people need money. Without access to easy credit, they frequently offer their property at a much lower cost to have fast access to money.

Furthermore, when you spend money on overseas property you do not just get the benefit for those market inefficiencies, you additionally have the advantage that a lot of shareholders are so concerned about risk that they create no real hazard, nor create any competition. But even though overseas properties offer a chance to diversify your investment and can help you get the retirement of your dreams, there are some risks. Here are some tips to help you curtail risk when buying property abroad.

1.     Read the books.

The key to successful property investments overseas is to do your homework and not cut corners. By all accounts, read books about the country you are considering buying an international investment property and read relevant forum posts online but do not get sucked in by the sellers and never overlook the power of local knowledge. Even a simple walk around the area can give you a great insight into the events and settings that take place on a daily basis, giving you a real feel for the place.

2.     Beware of overseas investment property in "emerging markets".

This term can be used to dress up areas of neglect. Look around for signs such as closing shops and boarded up houses, as these may suggest a struggling economy. If you come across something else that you do not feel at ease with, do not go with the property investment. Foreign buyers should feel 100% safe in the area before taking the plunge. Likewise, if you look at a series of new developments that are beginning to emerge, this could be a sign that the real estate market in the area is about to take off.

3.     Do not leave yourself at the mercy of the laws of the country when buying property abroad.

Buying investment property on foreign soil requires the advice and guidance of a local lawyer. Before you sign on the dotted line, make sure you are accredited and credited as well as fluent in English and the language of the country you wish to purchase.

4.     Don’t take the risk of using cash.

Using a bank with an office abroad to conduct large transactions is always the best. Foreign investment properties and those that sell them must be approached with caution and due diligence.

It’s normal to be apprehensive when buying property abroad for the first time or trying anything new. And yes, the risks are there but to be successful in property investing, you mustn’t let that hold you back.