How to Finance an International Property Investment

Saturday, Jan. 12, 2008

Read more about international real estate in International Living Postcards–Saturday Edition

You can make (or lose) a fortune in real estate thanks to the power of leverage. No money down means you can pocket big returns from just a little market appreciation.

But with leverage comes risk…both for you (the buyer) and for the bank.

In very liquid markets (in terms of both real estate and the money supply), banks are willing to take risks depending on market circumstances…but take big risks only when lending to residents. These markets include the U.S., the U.K., Australia, and New Zealand.

A couple of years ago, the average guy could easily borrow up to 103% from a U.S. bank. (The 3% was to cover closing costs.) As you know, those banks aren’t as eager to lend so much today. Banks in less-developed markets never lent that much. In less liquid markets…and, critically, in markets where it’s no easy thing to foreclose on a deadbeat borrower…banks are more conservative.

If you can get financing as a non-resident in a country, expect far greater scrutiny of your financial situation when you submit a loan application. Even if it’s possible for a bank to foreclose on your property (which can be a long and complicated process), banks aren’t in the business of owning real estate. They want to feel comfortable that they’ll be able to sell the property on quickly after foreclosure–which could mean selling it well below its value (hence the reason for a nice down payment)–or (better) that you’re a reasonable risk and will be able to make every scheduled payment from your personal cash flow.

The would-be international real estate investor, therefore, is limited. He can’t put together as many highly leveraged deals as can the U.S. property investor. You won’t get no-money-down loans as a non-resident…even if you’re an American buying, say, in the U.K., where such loans are available to residents.

In non-U.S. markets, expect, best case, a loan-to-value ratio of 80% and a mortgage term of 20 to 25 years (this is the norm in Western Europe). In some cases, you won’t do better than a 15-year term and a 50% loan to value. (And if your leveraged property is a rental, you are likely to have negative monthly cash flow.)

Most countries require you to take out a life insurance policy naming the lender as the beneficiary should you die before the loan is paid off. But these insurance companies will insure your life only until age 75. So if you’re 70 when you apply for the mortgage…you’ll be able to secure only a five-year loan (to age 75)…and the cost of the life insurance could make your total monthly payment unattractive.

These limits are a good thing. They force an investor to do a better job qualifying an investment before thinking about applying for financing. You must do more due diligence and be more conservative in your expectations and projections.

Where can you get a mortgage as a non-resident foreigner? Readily (but with restrictions), in much of Western Europe, Australia, New Zealand, South Africa, Panama, Croatia, and Mexico. You may be able to arrange financing in other countries (such as Uruguay) if you have a good relationship with or an introduction to a local bank. And if you are a legal resident of the country where you are buying property, your prospects improve.

Remember, though, that leverage is a double-edged sword. If your property appreciates, you could be looking at fantastic returns. If the market doesn’t appreciate…but does that thing that markets also sometimes do (that is, fall), you could be looking at significant losses…even more than the amount of your initial capital investment.


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