Investment Making Your First Overseas Real Estate Purchase: 8 Tips By An Ex-International Property Marketer
- April 20, 2022
- 13 min read
“Let me make cars. You stick to making tractors.”
Just these 9 words uttered by Enzo Ferrari changed the course of supercars forever.
He was speaking to none other than the now world-famous founder of Lamborghini.
The story goes that Ferruccio Lamborghini, a tractor manufacturer, went to Mr Ferrari to complain about the clutch of his car.
And because he was rudely turned down, Ferruccio Lamborghini went on to create his own supercar.
It’s a real classic cause-and-effect story.
So you might be asking, how does this relate back to investing in overseas real estate?
Well, did you know that property cooling measures in 2010 caused a flurry of local buyers to purchase properties overseas?
Likewise, the same situation is likely to happen now, with the recent cooling measures raising the Additional Buyer Stamp Duty (ABSD) to 17% for buying a second property.
Based on that, you’re going to pay an extra $340,000 if your second Singapore property costs S$2 million, and half a million if it’s your third.
I don’t know about you, but I don’t have an extra $500k lying around just to pay for taxes.
Not only does it eat into your returns, but the runway for capital appreciation also isn’t as strong as other opportunities out there. Singapore real estate ran an average 2.21% rental yield in 2021. Considering other cities could draw around a 5.5% gross yield – it’s a choice between returns vs stability.
In my previous job, I was dealing with international property marketing so I’d say I know a fair thing or two about investing in overseas property.
And to be fair, I did consider including a second property in Singapore in my portfolio, but with the recent ABSD spike and the insane property prices, going international does seem like a better idea.
Maybe I’m just greedy (and crazy), but to me, real estate is an important asset class to balance out my riskier crypto or stock holdings. (I can even do a re-financing on them = more equity to do other things).
So today, let me take you through my personal 8 tips on investing in real estate overseas.
The World is Your Oyster
As they say, “It is better to aim high and miss than to aim low and hit.”
As such, my personal goal is to own a door in every city in this beautiful world, and choosing my first few doors would lay a good foundation for building a healthy real estate portfolio.
I always think:
- What are the risks that come with this property? Legal risk? Lack of demand? Natural Disasters? Crimes?
- Who are my renters? The profile of your tenants will likely translate to the growth of the area.
- Can I exit the market easily? If it’s an Airbnb town, there are its own implications. If its legal restrictions only allow you to resell it to a certain group of citizens, how will that affect you?
Risks are high as a landlord, ya know.
Then again, there are other considerations that can make or break your choices. Some are personal, some are practical. So tread wisely.
Here are some considerations that I’m always asking myself:
- Having A Clear Budget
- It gives me a good idea of which cities would be most suitable.
I mean, if your budget is US$200K, it wouldn’t make sense to look into cities like London or Hong Kong.
You could get a much better quality property if you look into regions like Indonesia, Vietnam, or Thailand. And by better quality, I mean a better neighbourhood, amenities, healthy demand, and growth potential for capital appreciation. It could also be easier to exit when the time comes as well.
It’s also important to factor in potential renovation, fittings, or additional costs when doing your budgeting. That’s why never take due diligence for a particular property lightly in its initial stage.
Can you imagine being stuck with a unit that you can’t rent out or liquidate… While paying for the mortgage. Yikes. That’s gonna cost you your next steps forward.
Use this interactive map to see what’s the average cost of a flat in different parts of the world and you can shortlist your options from there.
- Motivation Plus Property Timeline
Though I ain’t no real estate mogul (yet), I always emphasize the need for a realistic objective and roadmap for EACH property you acquire. Is this property for your children to live in when they study overseas? Or is it mainly for rental investments? When do you plan on acquiring or liquidating it?
Here are some factors to take into consideration:
Were you aware that HDB owners can only invest in overseas residential property after the 5-year MOP mark? Or the fact that Singaporean PR owners have to sell their HDB flat within 6 months if they choose to buy any local or overseas property?
So it’s important to know your reason for acquiring, and when do you expect to exit the market. Is it based on a certain time frame? Or when your property value hits a certain price?
If you expect yourself to exit the market in a short period of time, always check if there are restrictions or additional costs to that decision.
Remember, “If You Fail to Plan, You Are Planning to Fail”
- Risk Appetite
As with many investments, risks can vary in different countries.
Just off the top of my head, I’m thinking about political stability, crimes in the area, how prevalent are natural disasters, or is there enough demand to ensure the unit is always occupied.
And if I’m a first buyer, am I buying into a shoddy project? What if I can’t sell it in the future? What will the neighbourhood look like in 10 years? What about currency risks?
These considerations are especially important when you are considering buying into emerging countries. It’s scary because it is true – there have been so many first-hand experiences by scammers (scammers everywhere, beware) where it’s a pump and dump kinda scheme.
Just like how some people prefer investing in something “safe” like Bitcoin, while some others are prepared to shoot for the moon with Shiba Inu – it’s exactly the same with real estate. Some might be comfortable getting into speculative real estate, whereas some might prefer to protect their principal equity.
The future is also uncertain, and the value of your property would be subjected to unforeseen circumstances. You might need to fork out more money than you made (that’s too bad) or deal with an outdated neighbourhood.
The less developed the area, the more changes will be subjected to, and the riskier the investment.
It’s like the news of the release of €1 Italian homes? What do you think the risks are to these homes?
Hint: cheap isn’t always better.
Sometimes buying overseas real estate may seem to be so “affordable”.
A $200,000 bungalow in Indonesia may seem like it’s so cheap as compared to a $1 million shoebox in Hong Kong.
But remember, it’s all about value.
I’d rather own a second-hand $40,000 Rolex Daytona today than a $500 Casio watch.
Which do you think has a better chance of future appreciation?
- Beginner’s Key Pick – Gateway Cities
If you have a good budget, gateway cities are always good places to consider when looking at overseas investments. They are safer, have stricter regulations, and have less volatile demands. Think first-tier large metropolitan cities that are well known with strong economic backgrounds, like New York, Tokyo, or London.
Demand for quality rental flats is always there, so if you have a quality flat to offer, chances are it will command a pretty high rental yield and you don’t need to worry about it not being rented out. Your property is probably more liquid with more buyers in the market. The downside is that you’re probably paying a premium for its purchase value for its perks.
Regulation and law enforcement are very important when it comes to purchasing property – you need to know that your rights as a landlord are protected and upheld. Ever heard of “property hijacking”? It’s a move where fraudsters pose as the legitimate owners of a property and sell it before you even know it – leaving you with a mess to deal with.
It also determines the general profile of your rental pool. If you bought an apartment in San Diego, California, the rental pool would most likely be students as it is a college town. College students have certain spending power and that translates to the rental yield you’ll command.
In my case, I prefer the UK residential market as my first property investment because:
- It has a very constant demand for rental units – especially with the student population and expats,
- Transactions are in English
- Pretty reliable
- Regulated by the common law (similar to Singapore),
- Great records in terms of real estate transactions,
- Easy to liquidate assets with high demand,
- Looks good (and credible) to the bank,
- I might want to move there in the future.
Though there are more tax-savvy options, it’s either a lack of demand that worries me or exit restrictions that I don’t want to risk in the future.
- Beware of Expenses
This is probably one of the key variables that I’m most concerned about and can really mess you up: acquisition cost, monthly recurring expenses, and exit costs.
Why are some people choosing to buy their property under a company? Or even change their citizenship? Saving costs – it’s really crucial.
When I analyse a property, I like to look at it in stages.
- How much do you have to pay when you are buying it (acquisition cost)
- What’s your monthly damage from just owning this property (holding cost)
- How much of your rental income do you have to give away? (letting costs)
- How much of your gains are taxed? (exit costs)
And it’s important to do accurate calculations of these so that you don’t find yourself losing money. Probably those non-believers in real estate faltered at this point.
Here’s a really brief example of the various cost roadmaps if you decide to acquire a property in these countries under your name:
I once heard nightmare stories of people not being able to pay off their monthly payments on their first investment property and they had to find equity by refinancing their fully paid home. Not cute and I won’t ever wish this on my worst enemies.
Scary, huh? Before you pay for anything, confirm with your agent on the costs & legalities.
- Upcoming Government Plans & Masterplans
Okay, I can’t stress how important this is.
Identifying the potential of your neighbourhood and aligning it with upcoming plans from the government can literally predict the future of your property price, especially within less well-known neighbourhoods. Okay, maybe not literally but it gives you a pretty good idea of the opportunity if it’s in the greens or reds.
Take London for example, neighbourhoods like Belgravia probably will price most people out and are more of a trophy asset than an investment piece. Considering other up-and-coming postal codes like Hanwell could be a better option. Lower equity, a higher runway for a capital uptick, and more liquid – sounds like music to any novice real estate investor.
Especially if the government is pumping in money to upgrade its connectivity, its amenities, and its attractiveness – it’s a good idea to ride the wave and enjoy the capital appreciation. It’s a cycle – better amenities and connectivity lead to businesses rooting in the neighbourhood. This then leads to more people opting to stay nearby, resulting in higher demand. Higher demand then translates to a higher value for your property.
LTV? TDSR? Yep, these ratios will probably determine if you’re able to take a loan for your next property investment.
Just a brief refresher, the TDSR in Singapore (which is the amount you can borrow from the bank) is currently at 55% – this means that you can only have a total monthly debt repayment of 55% of your gross monthly income. This includes car loans, credit card bills, and student loans.
A monthly salary of $10,000 can have a maximum combined loan of $5,500 based on this TSDR. Gotta be wise on every penny you loan.
If you’ve safely passed the TDSR round, it’s important to consider the loans offered by the different banks. Generally, local banks offer a 60% financing on the purchase amount and foreign banks 70%. The tenure of your loan also depends on your age – either a maximum period of 25 years or the maximum age of 70.
Different cities also offer various types of loan structures, from deferred monthly payments to structured payments. Check with your advisor to see which choice best suits your overall investment goal.
- The Golden Numbers
Okay, let’s say I aim to rake in S$10,000 into my pocket every month from my real estate investments – how many keys would that take me? I know that every new unit I acquire brings me closer to that number, isn’t it?
Not exactly. It only applies when your income from these properties is more than the expenses you make – that’s why a “margin of safety” is so important. In any case, I like to underestimate my income and overestimate my expenses, so I can have some buffer to play with.
I love this read on BiggerPockets, it shows exactly the numbers and variables that you need. Here’s a summary of some expenses and variables you should consider:
It may seem tough to venture overseas to invest. Singapore is so small and yet there are already so many laws and nuances to know and think about. What more in a massive city like New York for example?
Or what about a country closer to home like Australia? Did you know that when you sell your home with a seller agent, they can typically be paid a commission plus any selling costs incurred? (video, online advertising, and the like). Sounds like we have it good in Singapore, doesn’t it?
Well, we do have one advantage in today’s modern world.
Google is your friend, and there’s so much that can be learned about investing in overseas real estate.
I hope that this has been an effective piece in priming you to think beyond Singapore. In my next, I’d be showing you the various useful sites to look at when investing overseas so stay tuned!