How to Finance Foreign Real Estate

Since mortgages generally aren’t available to U.S. buyers overseas—and most U.S. banks won’t lend for purchases abroad—what are some alternatives if you want to buy a home in a foreign country? Here, we look at four ways to finance your foreign real estate purchase: using cash, development financing, a self-directed individual retirement account (IRA), and a reverse mortgage.

If you are in the market to buy real estate abroad, chances are you won’t be able to secure a local mortgage to finance the property. Even in places where mortgage lending exists, the terms may be far less favorable than you would typically find at home. Depending on the country, you could pay a higher interest rate and need a much larger down payment, perhaps between 30% and 50% of the property’s value. Also, you might be required to take out a life insurance policy for the mortgage, naming the bank as the beneficiary. Depending on the country and your age, this could be a deal-breaker since insurers in some countries place upper age limits on who can take out a life insurance policy. 

Cash

They say cash is king, and this can certainly be true when buying property abroad. Not only will you be able to close the deal faster, but you will also likely get the best price through discounts or upgrades.

In general, paying cash is recommended only if the property in question is already built—but not in the preconstruction stage. If you pay cash upfront for something that’s not built yet, there is always the risk that the developer might run out of money or have some other problem that would delay or prevent project completion. In these situations, it could be challenging, or at least time-consuming, to get your money back. 

Paying cash comes with foreign exchange risk. Any appreciation or depreciation in your currency at home or where you're investing can greatly affect the profitability of your transaction.

Developer Financing

Depending on the country, you may qualify for developer financing if you purchase a lot, home site, or preconstruction property in a development. Developer financing typically involves little paperwork, and there are no age restrictions or life insurance requirements. Another perk is that sometimes, developer financing is interest-free.

With one type of developer financing, you make payments on fixed dates, such as 10% when you sign the purchase agreement, 10% after six months, another 10% after 12 months, and the balance when the project is complete. You may find another arrangement where you pay according to construction stages, such as paying 10% down, 20% when the foundation is complete, 20% after the first floor is complete, etc. With another type of developer financing, you make regular payments each month. If you purchase a $50,000 lot in Costa Rica, for example, you might pay something like $1,200 each month for four years, depending on the interest rate, if applicable.

Self-Directed IRA

Suppose you have your sights set on a house overseas and plan on using it solely as a rental or investment property. In that case, you may be able to use funds from your self-directed IRA to make the purchase. The Internal Revenue Service does not specify which types of investments are allowed in a self-directed IRA and only states what is not, including collectibles (e.g., artworks, stamps, and antiques), certain coins, and life insurance.

Unlike traditional IRAs, which are limited to stocks, bonds, and mutual funds, funds from a self-directed IRA can be invested in a broader set of assets, including real estate—either at home or abroad. Because the property must be treated as a real estate investment, you won’t be able to live in the home until you are old enough to start receiving distributions from the account. You can’t use it for vacations either, and if you try to circumvent the law by renting it to yourself, the IRS will not be happy. While waiting for retirement, however, you can use your self-directed IRA funds to pay for the property and any expenses related to maintenance.

Tax laws are complicated and change periodically. It’s always a good idea to work with a qualified tax specialist or real estate attorney, including one in the locality overseas where you plan to buy, to ensure you understand the risks and implications of investing in foreign real estate with your self-directed IRA.

Reverse Mortgage

A reverse mortgage can be a good way for older adults to access equity invested in a home, but the rules and regulations can vary based on your geography. With a reverse mortgage, homeowners aged 62 and over with considerable home equity can borrow against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit.

For example, reverse mortgages are available in both the U.S. and Canada—with some small differences in how these work in the two countries. Canada’s age limit for a reverse mortgage is 55, while it’s 62 in the U.S. Canada allows you to borrow up to 55% of your home’s value. In contrast, in the U.S., the maximum amount that you can borrow depends on the age of the youngest borrower as well as interest rates. If you think you may want a reverse mortgage in the future, check the local laws.

Rules, Laws, and Extra Fees

If you buy land abroad, keep in mind that transaction costs may add quite a bit to the overall cost of the property. One of the more considerable fees is a transfer fee or stamp duty: a tax levied by many countries that can add more than 10% to the sales price. You might also pay an attorney, notary, and registration fees, plus your share of the real estate agent’s commission.

Before buying any property overseas, it’s important to check local laws to ensure you are even allowed to buy real estate. Even if you can buy real estate in a specific country, there might be limitations on the type(s) of property foreigners can buy. In the Philippines, for example, you can buy a unit in a condominium project—as long as Filipinos own 60% of the units. Foreigners, however, generally aren’t able to own a house or land.

There may also be rules regarding what happens if you want to sell the property. In Malaysia, foreigners are welcome to buy property, but if they ever sell it, the money has to be kept in a Malaysian bank account.

Differences in Property Rights Internationally

When purchasing real estate overseas, it is important to consider how property rights differ worldwide. Examining the laws on private property, especially for foreigners, is crucial since this tells you what you are, in fact, buying. Unlike in the U.S., where property owners get the title to the property, and the process of buying property is relatively standard, other countries may have different legal frameworks, cultural practices, and regulatory procedures that significantly impact ownership rights.

It's common for countries to put restrictions on foreign ownership. For instance, certain nations may allow foreigners to buy property, but there are limits on the type or location of the eligible properties for purchase they can own. Some countries require foreigners to obtain special permits or go through additional legal procedures, and many have local laws that heavily favor residents over foreigners in property disputes. Therefore, it’s critical if you're considering buying property abroad to meet with qualified real estate professionals and legal advisors well-versed in the property laws of the specific country.

Here are a few examples of the different kinds of ownership rights:

1. Collective ownership in China: Real estate development in China involves two types of land ownership, either by the state or village collectives. When purchasing property, you are not getting a title to land but a right to use the land for a specified number of years, typically 70. After this period, land-use rights can be renewed, but this is not a given.
2. Leaseholding in the U.K. and Singapore: A substantial portion of real estate is sold as a leasehold in these countries. This means that the buyer owns the property, but not the land it stands on, for a set period ranging from decades to centuries. Once the lease expires, ownership reverts to the landowner. In the U.S., most property is sold as freehold, granting permanent ownership of the buildings and land involved.
3. Mexico’s restricted zone: In Mexico, land within 100 kilometers of the border and 50 kilometers of the coast cannot be directly owned by foreigners. Instead, non-Mexican investors can hold property through a fideicomiso, a bank-held trust, or a Mexican corporation for nonresidential properties.
4. Owning land in the Philippines: In the Philippines, foreign nationals are not allowed to own land, but they can own a residence, such as a unit in a condominium complex, so long as Filipino citizens or companies own 60% of the building or project.

These examples underscore the importance of understanding the local laws and cultural norms concerning property, as they considerably affect the rights and responsibilities of foreign property buyers.

The Bottom Line

Investing in foreign real estate can be worthwhile and diversify your investment portfolio. Nevertheless, doing so offers distinct challenges and requires careful consideration. You'll often have to navigate unfamiliar financial landscapes, and traditional mortgage options might not be available or have favorable terms. Alternative financing methods, such as cash purchases, developer financing, or using a self-directed IRA, could be viable options.

However, it's important to understand and adhere to the foreign country's specific legal and regulatory frameworks to protect your investment. Consulting a qualified real estate professional and an attorney will help ensure the process goes as smoothly as possible, your property rights are protected, and all necessary paperwork is completed. They can conduct due diligence, verify the lawfulness of property titles, and confirm that the property is free of liens or disputes. This can help secure your investment and give you some peace of mind in an unfamiliar legal environment.