The decision to diversify your financial portfolio by investing in property abroad can be financially rewarding if the process is well-thought-out and forms part of an overall financial plan.

3 Key Factors to Consider When Investing in Off-Shore Property

1. Capital Growth vs Cash-Flow Strategy Considering property as an investment means that an investor includes real estate in their investment strategy. There are many different strategies and investment objectives within the category of real estate investment but the most popular would be either a Capital Growth Strategy or a Cash-flow Strategy.

• Capital Growth Strategy A capital growth strategy is buying a property with the expectation that the value will increase over time. Identifying up-and-coming real estate markets and cities heading for the next ‘boom’ is key to be able to maximise capital appreciation. Other factors include following the real estate market cycle and waiting for a buyer’s market or investing in a buy-to-let property by keeping the property for a couple of years, and selling when the property has appreciated. Another popular growth strategy would be the fix-and-flip strategy which includes buying an older property and fixing it up in order to make a profit. However, you should be careful not to spend too much on the fixes: the cost of fixing should always be significantly less than the difference in the sale and purchase price.
• Cash-Flow Strategy Some investors want their investments to work for them by generating an income. They might be retired and need the annuity to supplement their pension. The objective for this type of investor is to have an investment that preferably generates income that is secure and sustainable. With a cash-flow strategy, the priority is to be cash-flow positive from day one, meaning the property earns more rental income than the monthly expenses such as a home loan, property management fees, rates, and maintenance.

2. Long-Term vs Short-Term Investment Some investors want to invest for the long term, for example, pensioners or retirees. They want to buy a property that will perform now and is likely to perform at the same level over the long term. They do not wish to speculate or change assets over the short term. This type of investment can double-up as a retirement or second home in the particular country where you would like to live or spend most of your time. Most investors however have a strategy based on speculation, where they aim to sell the asset at a profit within a shorter period. Short-term rental property investments are aimed at properties within the main districts of major cities with a more stable real estate market. These types of properties not only offer good yields but are also properties that are easy to rent, given the increasing demand, and have tremendous capitalisation potential.

3. Buying Off-plan vs Buying to Improve

• Buying Off-Plan This entails buying a property before it has been fully built or, in many cases, before construction has started. In thriving markets, such purchases can produce significant rewards. For example, it is not uncommon for the launch price to be 20%-30% less than the fully developed price. There are multiple reasons for the possible lower prices of off-plan properties. First, developers need capital to launch a project and often cannot raise bank finance. They, therefore, sell their first few properties at heavily discounted prices to generate the necessary funds. Developers (and their banks) also like to have confirmed sales, making other sales easier and raising finance less challenging. When considering buying your property off-plan, it is vital that you utilise a trusted and reputable property investment specialist who will conduct thorough research on your behalf with regards to the developer, the location, and the actual property plan.
• Buying to Improve Some investors like to buy and then improve a property before selling it, potentially for an even bigger profit, however, the fix-and-flip strategy is potentially risky when you overspend on repairs and are not able to get the selling price you imagined. Pros of buying to improve: – You can physically see what you are actually buying – No risk linked to a developer – The landscaping and surrounding is in place – Once purchased, you immediately get the benefit of the investment whether it be by living in it or by being able to rent it out and generating a return.

10 Pitfalls to Avoid When Investing Off-Shore

1. The First-Time buyer’s considerations

First-time buyers should determine how to transfer funds offshore if they don’t have access to offshore investment vehicles yet.  If an investor has offshore funds,           determine whether the institution requires any notice to access the funds. Investors who do not have funds offshore will have to apply for tax clearance.

2. Currency exchange risk

Currency exchange rate risk is an inevitable risk of foreign investment and is caused by fluctuations between the investor’s local currency and the foreign investment currency. Currencies are volatile and, for most investors, dramatically affect what they can afford to buy offshore. Therefore, it is essential to research exchange rates and consider consulting a specialist FX broker as they usually offer a more competitive exchange rate than commercial banks.

3. Guaranteed returns/rental guarantee

Real estate developers offer guaranteed returns to attract investors looking for a hassle-free and zero-involvement property. However, investors should proceed with caution, as these schemes often promise a return that is not market-related. In addition, developers tend to build these guaranteed returns into the property’s purchase price, which inflates the purchasing price and adversely affects the potential of selling at a profit.

4. Tax liability

Buying property as an investment has tax implications that are different from primary homeownership. There are certain taxes to consider when purchasing an international property like Transfer Tax, Income Tax, Property Tax, and Capital Gains Tax. You need to ensure you select the services of a property investment specialist who will best advise you on the tax implications and best way to structure your property deal, the income you will derive from such purchase as well as the eventual sale thereof as and when the time comes.

5. Research & due diligence

Investors should research the legislative aspects and legal environment of the potential country of investment to ensure that they are compliant and that the transaction is completed within the legal requirements of that specific country.

6. Exit strategy and liquidity risk

Investors should consider how they plan to turn the investment into a profitable one. Liquidity risk occurs when an investor cannot meet short-term debt obligations. The investor might be unable to convert an asset into cash without sacrificing capital value and revenue due to a lack of potential buyers or an inefficient market. It is crucial to employ the right exit strategy at the right time to avoid liquidity risk.

7. Language

Language differences could present major obstacles. For example, when purchasing property in a foreign country, investors have to interact and communicate effectively with individuals and businesses in that market. Therefore, the investor should learn the language or employ an acceptable method of translation.

8. Title deed and ownership

The title deed of a property refers to the legal rights an owner has to a property. Investors should ensure that they can receive a copy of the title deed when investing in a property in another country and that ownership rights are protected for foreign property owners.

9. Location

Location is one of the main determinants of property value. Therefore, investors must research the property’s location to learn about any potential aspects that could detract from the value of the property, such as a high incidence of crime in the area.

10. Management

Working with a professional team of property consultants can simplify the investment process and avoid disastrous consequences. Property consultants with an end-to-end service will add the most value to the process, including an introduction to the banks, attorneys, and accountants the investor could appoint.  It is vital to appoint a property specialist that will guide you through the journey and assist with the day-to-day operations of your investment when you are not around.

Safcom Investments has in-depth knowledge of investment property and can provide investors with specific property data analysis and recommendations to make informed decisions about investments. With our unparalleled specialist knowledge of the international property market and an extensive network of professional contacts, we are uniquely equipped to help investors reach their capital growth objectives.

Learn more about how to grow and diversify your International Property Investment with SAFCOM Investments by downloading our guide.

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