It is not possible in much of the world for a foreign buyer to borrow money locally for the purchase of real estate. No bank will lend to you. And, in places where it is possible for a foreigner to borrow locally to buy property, you won’t find the terms as appealing as they can be in the United States.
In the final years of the real estate bubble in Ireland, banks in that country were offering 110 percent loan-to-value (LTV) financing. The extra 10 percent was to cover stamp duty (a tax charged of the buyer at the time of purchase in Ireland) and other closing costs. This very aggressive approach to mortgage lending was one of the factors contributing to the collapse of Ireland’s banking industry. It goes without saying that you can’t borrow 110 percent of the purchase price of a piece of property in Ireland today. In the current global climate, I don’t know any bank in any country is offering 110 percent LTV financing (though some banks in Spain will lend you 100 percent, as a resident).
And, when you can get financing overseas, your options as a foreign buyer are limited. Mortgage industries, in countries where they exist, are less sophisticated and less competitive than in the United States. And, in the wake of what the real estate investment world has witnessed over the past six years, they are also very conservative.
Specifically, outside the United States, fixed-rate mortgages are rare, as are 30-year terms. In some European countries, your options can include 5-year fixed and occasionally 10-year fixed rates on 20- or 25-year mortgages, but adjustable-rate loans are the norm. Also typical are loan-to-value ratios of 50 percent to 80 percent.
One cost to getting a mortgage overseas that you may not expect can be life insurance. Banks in most countries where you’ll be able to borrow as a foreigner for the purchase of property are going to require you to take out a life insurance policy for the amount of the mortgage (usually a declining balance policy) naming the bank as beneficiary. Foreign banks don’t want to worry about getting paid or foreclosing if you die.
What are your options if you’re interested in purchasing real estate in a market where bank financing is not available to you as a foreign buyer? Here are three:
1. Negotiate terms with the seller, be he an individual owner or a developer. Developer financing is more common today in many countries than it has ever been. Developers in developing markets understand that Americans (one of their biggest pools of potential buyers) no longer have access to the ready cash they once had in the form of a second mortgage or line of credit for real estate they own in the United States. In Panama, Nicaragua, Belize, Uruguay, Colombia, Ecuador and Argentina both developers and private sellers are willing to allow you to stretch out payments over time.
2. Look for formal developer financing. This type of financing is not negotiated on a one-off basis but available to all buyers from a developer. Again, this is an increasingly possible option and can require less in the way of a down payment, even (on occasion) zero down.
3. Tap your IRA funds. Most IRA custodians don't allow for "non-traditional" types of investments such as foreign real estate. It's not that you can't use your IRA funds to invest in real estate overseas, but often your custodian doesn't want you to. This is either because he doesn't want (or understand how) to deal with the required paperwork or, more often, because he makes more money if you invest in one of his preferred investment products.
To buy real estate, foreign or local, with your retirement funds, you can set up what's called a "self-directed IRA" or "self-directed 401(k)." In theory, this means you're in a position to "direct" the investment of your account funds. However, you still must go through the custodian, asking him to make the investment for you. He can refuse. Depending on what you want to do, sometimes the only way to take control of your IRA funds is to establish what is sometimes referred to as a "checkbook" IRA.
To do this, you set up an account with a self-directed IRA custodian that allows non-traditional investments. Then you create an LLC (I'd recommend an offshore LLC if your intention is to purchase foreign real estate), in which your IRA invests all its funds. Then you, as the managing member of that LLC, invest the funds of your IRA as you like (keeping in mind that you still have to follow the IRS investment rules, such as no “self-dealing”). This structure allows you to eliminate the paperwork and review process otherwise required each time you invest in something "alternative." You simply write a check from the LLC's bank account to make the purchase.
Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 28 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring and investing overseas in her free e-letter. Her newest book, How To Buy Real Estate Overseas, published by Wiley & Sons, is the culmination of decades of personal experience living and investing around the world.