Foreign Real Estate Investment - An Example

By Eric Hammer

Foreign real estate investment is one of those areas where you can make a fortune and you can also lose a fortune. Consider Europe for a moment. Many people invested heavily in real estate in Eastern European countries and former Soviet republics, believing these to be up and coming places where their money could grow. Unfortunately, when the real estate market overheated in these countries, the value of their investments fell and they were left holding underwater mortgages reminiscent of those many Americans are dealing with right now.

However, let's take a specific example of a foreign real estate investment which many people like to use and analyze it for a moment. Many Jewish Americans (and some non Jewish Americans with connections to Jews such as actor Leonardo DiCaprio whose girlfriend is Israeli model Bar Refael) like to purchase second homes in Israel. Some do so because they want to spend a few weeks in that country each year while others make the purchase purely for investment purposes. For this example, we'll look at those who do this for investment purposes.

The Israeli real estate market, as of this writing in December, 2010 is extremely hot. Prices have been rising steadily for the past few years and the Bank of Israel has been working together with several government ministries to find a way to cool down the markets. Ironically, one of the main culprits they tend to point to is foreigners who buy homes there.

However, in spite of the fact that buying in Israel can be a good deal from a purely economic perspective, there are a number of peculiarities of the Israeli real estate market that could flummox average Americans who want to invest. For example, land ownership is often not so clear. In most cases, you will be purchasing a condominium rather than a house, however the land under the condo is often owned by the Israel Lands Administration which leases it to you for 99 years at a time.

If you actually want to purchase the land underneath your home, be prepared to work with a local lawyer (actually, work with a lawyer either way) because you'll need to register with something called the tabu, which is a deed registration dating to Ottoman times which delineates ownership of various plots of land.

No matter where you purchase or what you purchase by the way, Israeli banks will often loan you no more than 60% of the value of the property you wish to purchase (which is one reason that Israeli banks emerged largely unscathed from the recent financial crisis – they required such large down payments that fewer people could end up going bankrupt and needing to be foreclosed upon).

How Much Can You Make?

The Israeli real estate market is just one example of course, however in Israeli it is not impossible to double or triple your money in a span of just a few years. In Tel Aviv for example, were you to purchase an apartment in the year 2000 for $150,000 that same apartment today might easily fetch around $400,000 because of the real estate bubble developing in that country. You need to be careful however about that word, "bubble." Many Israeli newspapers are now referring to a real estate bubble which they expect may deflate soon. This means that those who buy and hold purely for investment purposes right now could lose money by making such an investment.

On the other hand, given that Israel is a small country with an ever expanding population clustered in a relatively small area of the country (More than half of the country’s citizens live within an area approximately 10 miles wide by 40 miles long along the Mediterranean coast line), prices may continue to rise in those areas simply because there is a limited amount of space on which to build.

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Consider when making your purchase, renting out apartment that you buy. This way, someone else will be paying the mortgage for you. If you purchase commercial real estate, make sure that it is an area which is well trafficked and which is likely to attract high rents.

Wherever you make a purchase, you need to do a great deal of research. The Israeli market, profiled above, has its own peculiarities but so do most markets anywhere in the world. You need to understand what land ownership rules and taxes there are on homes and commercial pieces of real estate you purchase before you take the plunge. Be sure to work with a local lawyer who speaks fluent English and who has been recommended by others whom you trust. There are many charlatans out there who will try to take your money and offer you nothing of value in return.

Qualifications / Requirements

The main requirement here is money. If you have the money to invest, then you can make purchases of foreign real estate. However, beyond money, you need to be careful and keep your wits about you. Even in a country where you may feel perfectly at home, say France or England, where it seems you ought to be able to get a good deal and make your way through the markets, you still need local help to make sure that you don’t get fleeced and that you are following all local laws.

First Steps

Start with lots of research on the country you want to invest in. Ideally, learn the local language if it’s not English and spend time reading local newspapers. It pays to know more than just that "my buddy told me that investments in Thailand can pay off handsomely." Take the time to visit in person and actually see, physically the property you want to invest in. Then, recruit local help. It goes without saying that you’ll need a local to manage your property while you’re not there and you’ll need a local lawyer to help you with the paper work and understanding the ins and outs of the deal you plan to make.


Check out these helpful resources to learn more about foreign real estate investment:

Kiplingers: Investing in Foreign Real Estate Goes Mainstream – An excellent examination of the risks and rewards of investing in foreign real estate. Also offers an additional suggestion for investing in foreign real estate for those who want a pure investment and not an actual property.

CNN Money: Tax Pitfalls of Investing in Foreign Real Estate – Good information to keep in mind. Remember that your foreign investment still has repercussions for your taxes here at home.

BusinessWire: Brazils Appeal as a Foreign Real Estate Investment – An interesting study on why Brazil has emerged as a strong contender for foreign real estate investment.

Overseas Property Mall – A guide to investments in overseas real estate.

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