Pros and cons of buying an overseas investment property

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By Julie Cazzin with Andrew Dobson

Q: Just curious as to what your thoughts are on buying overseas investment properties. What are the pros and cons to doing this and what are the tax issues related to it? — Neran

FP Answers: There are both opportunities and challenges that come with investing overseas, Neran. As we have seen a significant increase in the value of Canadian real estate, it has become increasingly difficult to find properties here that are viable from a cash-flow perspective due to their relatively high cost. With the higher interest rates of the past two years, many are cash-flow negative or require a high down payment to be cash-flow neutral or positive.

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Diversification away from the Canadian real estate market means investing capital that is not as sensitive to the Canadian economy or dollar. The logic Canadian investors use to buy foreign stocks to diversify their portfolio can also be applied to overseas real estate.

Canada has long been one of the world’s most expensive real estate markets due to its political stability, strong infrastructure and sophisticated financial markets. One of the benefits of looking outside this country is that you may find that some countries share similar traits to Canada, but without the sticker price on real estate.

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Higher capitalization rates, or annual rent divided by market value, in foreign markets could lead to higher net rental income. There could also be fewer restrictions on short-term rentals compared to Canadian cities. This may help support the cost of a vacation property that can be used as an investment property since the net rental income, even over a few months, could cover the property’s annual fixed costs. There could also be stronger protections for landlords in other jurisdictions.

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Cost, diversification and flexibility are some of the key advantages to looking abroad for real estate, but there are several cons to consider, too.

First, the unfamiliarity of the real estate market that you are targeting should not be underestimated. For example, there may be more stringent regulations in some countries about who you can rent your property to. Rent control, a contentious issue in North America, is very prevalent in other parts of the world, such as Europe.

There could also be safety and environmental standards that differ from Canada. In that scenario, there may be a lower relative cost to acquire a property, but higher ongoing costs in the form of maintenance since some markets may have a large proportion of older homes or ones made of lower-quality materials compared to Canada.

In some regions of Europe, you may find livable properties in the tens of thousands to purchase, but they may require significant capital investments to fix up or have higher ongoing maintenance costs.

Logistical considerations such as property location and financing requirements should be thought through prior to targeting any real estate market. Owning property overseas would lead to a higher likelihood that you will need a property manager or other agent to attend to the property if you are out of the country and unable to visit it on short notice.

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You may also find that obtaining credit in the jurisdiction where the property is located could have more stringent criteria than Canada. Then there are language considerations for many international markets that may make it more challenging to communicate with potential renters, lawyers, city officials, etc.

In many larger markets in Canada, you may find that there are hundreds, if not thousands, of realtors who market their ability to communicate in non-official languages. This may not be the case in foreign markets and could increase your costs as you’ll need to hire an interpreter or specific professionals with those skills.

Finally, there are tax considerations to keep in mind with foreign assets and income. There could be taxes that apply to foreign buyers, similar to what we have in Canada. There is also the likelihood that you would need to file a tax return in the country where you earn the rental income, meaning you will need to file multiple tax returns and ensure that reporting is properly coordinated.

On your Canadian tax return, you must convert foreign income to Canadian dollars, though you can generally claim a foreign tax credit for foreign taxes paid and the cost of your foreign tax return. You also need to report property with a cost in excess of $100,000 Canadian on Form T1135 Foreign Income Verification Statement.

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These additional filings, on the domestic and international side, increase costs and complexity and should be considered prior to a purchase.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at [email protected].

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