5 Common (but Easy to Avoid) Pitfalls of Foreign Investment

Editor’s Note: This story appeared on Live and Invest Overseas.

Whether you’re buying from a distance or going to the field, there are certain things you need to be aware of as you consider any investment. Things that can make or break it.

To protect yourself as you maximize your potential real estate investment, avoid falling into these common (but easily avoidable) pitfalls.

Error No. 1: Making Financial Gratitude Your Main Goal

Appreciation is a good thing when it happens – as it happens in many of the markets we talk about here at LIOS. But “buying to turn” for some profit should not be the only motivation to pursue an investment.

Understand future growth potential, of course, but remember that trying to predict value growth is speculative. As you evaluate the investment, see what it can do for you over the time you hold it. In our ever-changing world, focusing on income – and building wealth slowly, year after year – is a safe move.

In researching potential markets, look for a net return from a rental investment of 5% to 8%. Do not buy unless you believe, based on reliable market data, that you can realistically expect a net return of at least 5%.

If an area produces more than 8% per year, consider yourself lucky, but understand that this situation will not last. You are making over 8% profit on rentals only because of some market distortions that will quickly reverse.

If you’re earning 5% to 8% annual income from rentals, that investment is solid. If it falls below 5%, it’s time to consider your options.

Error No. 2: Estimating the Importance of Location

In search of the highest rental yield, many property investors follow the short-term rental market.

Before you commit to buying any rental property, be sure to research the property.

It can be helpful to talk to property managers in the area to help identify which areas are getting the most space. You want a minimum of 70% to 80%.

If possible, spend time in the area. Walk around to see who’s hiring … and what they’re hiring.

Pay attention to the most popular tourist attractions, but don’t ignore those up-and-coming places that are easily accessible. A low entry price in an area with strong rental potential may result in a significant return on investment.

With temporary employment, mobility is essential. Foreign tourists in big cities usually don’t want to drive. They want to walk around to shops, cafes and restaurants. In big cities, being close to public transport (especially the metro or tramline) is an advantage.

Finally remember that, in this digital age, no matter how your property looks inside, you can’t hide a bad place. If you’re away from amenities, some disgruntled guest (or 10) will call you out on TripAdvisor.

Error No. 3: Overly Relying on Future Plans

Buying a pre-construction property can be financially rewarding, but you need to go in with your eyes open … and, as always, be prepared to do your due diligence.

If you buy one of the first properties in a new development, what happens if no one else buys or builds there? Although you will pay more for coming later, it is usually better to wait until there is some community.

In pre-construction, remember that the future value of your property is based on the community and amenities that surround it.

You can reduce your risk here by making sure you work with a reliable developer with a solid track record.

Error No. 4: Taking Property Title as Admitted

One of the most difficult aspects of investing offshore is ensuring that you have clean title. In North America, this is something you may take for granted. But overseas, ownership laws vary from country to country and can vary between regions of the same country.

Senior Real Estate Journalist Lee Harrison cites headline news as the biggest mistake he’s made in two decades of buying overseas property.

A few years after purchasing a beautiful riverfront property in Vilcabamba, Ecuador, Lee began studying the title document in detail. It was only then that he discovered that he had not bought the property outright, but had bought shares inherited from four generations of the original owner.

Lee solved it in the end, but he may have gone the wrong way.

Free title, sometimes called “fee simple,” is the highest form of property title. This is what you want. A freehold title provides the only absolute form of property ownership, and is, in general, the only form of land title that we recommend.

If you are buying property in Latin America, it is important that you have a complete title review done in accordance with the laws of the country you are buying from.

You should contact a qualified local attorney. A real estate attorney will have experience in obtaining liens and judgments and will know the types of real estate issues to look out for.

Error No. 5: Skipping Round Trip Expenses

It goes without saying that you will take the time to research the local market and make sure you are buying at a competitive price. But when investing with profit in mind, you need to look beyond the purchase price and the amount of acquisition and disposal costs.

We like to call these the round-trip costs of making an investment, and they go beyond agent commissions and vary greatly from country to country.

An investor who underestimates or underestimates the cost of acquiring and eventually selling may end up underestimating his investment before he invests.

Depending on the market, the cost of buying a piece of real estate in another country can include – in addition to agent commissions – legal fees, attorney’s fees, registration fees, title insurance, and transfer taxes (sometimes called “stamp duty”).

Going out comes at a cost, too. When you sell, you may have another agent’s commission to pay, and you will likely have additional attorney’s fees. Usually these are small, they are ignored. The most significant cost associated with exiting a foreign investment can be the tax involved.

Bottom line: In today’s world, there is no reason to buy intangibles. Seeing may be with the help of technology. But the necessary research is within your power.