How to pay for Real Estate overseas
Buying real estate overseas is a prospect that many Australians think about. An investment in property overseas may be for a holiday home, income from renting out to tourists as an AirBnB, as part of your investment portfolio, or as a place to retire to.
Unlike investing in property in Australia where the financing and regulation is straightforward, to pay for real estate abroad may be difficult in foreign currency. Lenders in the UK for example may exclude Australians from getting approval for loans as they base their decisions on visa status. If you are asset rich but cash poor, international lenders may also want to see a minimum bank balance before you even consider applying.
Investing in shares or property overseas may be funded by an equity release in your current home.
One alternative is to apply for funds in country and pay for your real estate using foreign exchange.
Mitigating risk with foreign exchange to pay for real estate overseas
One of the biggest risks with paying for real estate overseas is unfavourable exchange rates. Buying property in the United States is a popular option due to some areas rebounding from the Global Financial Crisis. These areas are still favourably priced – compared with equivalent real estate in Australia. Some states in the US have fewer restrictions on property ownership which also makes buying in the US ideal. However, as of writing (August 2020) the exchange rate between the Australian Dollar and the US Dollar is $0.74.
That means for every US Dollar included in the price of your chosen property, you may have to add another 36c to your calculations. A $200,000 property may cost $272,000 or more, depending on the market rates.
You may pay even more than this figure based on commissions and fees.
Saving as much as possible on your foreign exchange is not only sound financial sense, but also gives you a buffer for making improvements, hiring property managers, or funding a trip to inspect your property before you buy.
Can you wait for better rates?
The last time the Australian dollar was above parity ($1AUD to $1USD) was the first quarter of 2011. In the third quarter of 2001, the Australian dollar was below 50c US. Can you time the market and lock in good foreign exchange rates?
Since 2015, the Aussie dollar has struggled to maintain its purchasing power above 75c. Using foreign exchange services with a Rate Improver Guarantee like our partner TorFX offers account holders can not only give you more favourable rates than the banks or other exchange houses, but also the ability to fix an exchange rate for up to two years, which is known as a forward contract.
A forward contract is a type of agreement to buy a foreign currency at an agreed price before you actually need the currency. This gives you more security than hoping for “better rates” – by the time they arrive, you may lose your opportunity to purchase the property. Other economic factors such as a rise in the Reserve Bank cash rate may mean any potential foreign exchange savings are wiped out by higher interest repayments.
Taxes, government duty, and other considerations
When you pay for real estate overseas, you’ll have to research the different statutory taxes, government duty, and any foreign ownership levies your country of origin requires before you take ownership of property. This could add thousands to the final amount – ensure that your budget can cover all these externalities before committing to a sale.
Limit and Stop Loss Orders
You can further mitigate risk by asking for a Limit Order on your foreign exchange. A limit order is like a pre-order that is dependent on the exchange rate. If you are waiting for an exchange rate of $0.75 AUD for example, as that’s what you’ve budgeted for, your order is executed.
Also used together with Limit Orders are Stop Loss Orders. These orders allow you to hedge your order if the exchange rate weakens beyond a certain level. Again, if you needed an exchange rate of $0.75 AUD but the market is continuing to move against you, you can execute the order at a certain level, say $0.73 AUD before the rate gets too unfavourable for your budget.
With our partner TorFX, we can use both these orders in combination with our Rate Improver Guarantee for account holders to help maximise your return on investment. We also give you up-to-the-minute advice on market movement. You can always cancel or adjust your order at any time.
Talk to one of our friendly and qualified TorFX brokers to fulfil your next foreign property purchase. TorFX are fully licenced, proactive, and make over $10 billion in foreign exchange transactions each year.