The strength of the Singapore dollar together with lower barriers to entry make investing in foreign properties a tempting prospect. Here are some things to look out for before handing over that cheque.
By Chang Hui Chew
Singaporeans have a huge appetite for investing in foreign markets, given sky-high property prices here, and a strong currency which stretches our purchasing power overseas. Investing overseas seems incredibly tempting, with ads promising no money down, guaranteed yields and returns, and a quality of life that would be much too expensive to enjoy in Singapore. Here are some factors those considering foreign investment should look out for:
1. Laws of the land
Most countries have restrictions on the properties foreigners can purchase. Up north in Malaysia, foreigners can only buy properties above RM1million, and it goes up to RM2 million in the state of Selangor. In the Philippines and Thailand, foreigners are restricted from buying land or landed properties, but can snap up the many luxury condos springing up in Manila and Bangkok. Be wary of schemes that promise to get around these restrictions by using other ownership structures such as incorporating a company and so forth.
2. Taxes and duties
Often, governments will impose a form of taxation or duties on foreigners buying properties, either when the purchase is made, or when the investor chooses to cash out. In Malaysia, foreigners must pay a State Consent Fee, which differs for each state. Foreigners are also liable for higher capital gains taxes from sales of their investment properties. Also, in most countries, rental income is taxable under personal income taxes, and you are required to pay it if your rental income meets the state’s taxation threshold.
Investors need to understand the financing options available. For instance, banks in the Philippines offer shorter mortgage tenures of five to 10 years for foreign investors. You’ll have to decide whether to take a loan with a Singaporean or foreign bank and understand the restrictions. Local banks, for example, will finance property purchases in Tokyo, but only in certain wards of the city. A local bank loan also increases your Total Debt Servicing Ratio, which reduces how much you can borrow to finance local property purchases.
4. Political situation
The political and social stability of the country you are considering is paramount to the safety and security of your investment. In the very worst cases, if the situation devolves into political unrest, the investment property might be damaged with little recourse available to the investor-owner. Another thing to be aware of is sentiment towards foreign investors in the country, as it could lead to states bowing to populist pressure and imposing barriers on foreign purchase and ownership, which could lead to issues when trying to cash out.
Understanding how currencies move and fluctuate is key to investing in foreign properties. For instance, when the Singapore dollar is performing strongly against the destination currency, it lowers the cost of investment. However, if the currency were to further depreciate, returns would be reduced. It is for this reason that most investors in Malaysia right now are leaving their Ringgit across the Causeway, as converting it to Singapore dollars would incur a substantial loss, given current conditions. As with most investments, the principle here is to buy low and sell high.
6. What’s the plan
It is important to go in to foreign properties with a plan. For instance, how will you lease the unit for rental income? Or should you invest in a serviced apartment instead so this is not a concern? Many individual investors are also using services like Airbnb, a short term leasing solution, to earn rental income, while leaving themselves leeway to use the unit as a vacation home. Also think about the timeframe for exit. Or would you prefer not to cash out and hold onto this property to be used in future as a retirement home? Many developers provide differing solutions to this, and investors should do their due diligence.
Above all else, remember the old saying: If it’s too good to be true, it likely is. While financial and market know-how is definitely key to making sound investments, the most important factor is always your own common sense.
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