Checklist for investing in overseas real estate

Indians love investing in real estate. Before millions of Indian investors opened new demat accounts and began investing in the stock markets, real estate was the only major investment avenue that most people, especially belonging to the middle class, understood.

But it is not just middle-class investors that we are talking about here. Real estate is often the first investment choice even for wealthy investors who qualify to be classified as high net worth individuals (HNIs) or ultra-high net worth individuals (UHNIs).

In fact, it will not be an overstatement to say that when it comes to Indian investors, real estate is often either the first choice that is considered or comes in a close second, after equity. Other investment avenues like gold, fixed income and commodities often come on their radar only after they have had sufficient exposure to real estate, at least in the form of their primary accommodation. Simply put, only once they have a home that they can call their own, do most savvy investors look at other asset classes to invest into.

Investing in real estate overseas

While India remains the first choice for local investors, in the last few years, the wealthier among those looking to buy real estate, have been looking outside India, in order to take advantage of the global real estate market and park a portion of their investible surplus abroad. Not only does it help diversify their portfolios, it also helps shield them from the trials and tribulations that the Indian real estate market has been facing over the past decade and a half, since the financial crisis of 2008.

But why exactly are people looking to invest in real estate markets outside India?

First, investors looking to bet on the real estate market abroad are looking primarily for yields higher than what they can typically hope to get in India. 

Second, international markets allow investors to invest in fractional real estate. So, if they do not have the capital to buy an expensive piece of land or that ultra luxurious condominium in say Dubai or somewhere in Europe, they can keep investing in the same in bite sized pieces over time.
Third, a lot of wealthy Indians are looking to invest in second or third homes abroad. These properties can be rented out for additional income or they can go live in them as remote work allows them the flexibility to seamlessly manage their business or high paying jobs from overseas.

Here are some of the most important aspects to consider when investing in a foreign real estate market.

Destination

Indian investors have been attracted to countries like the UAE, the Netherlands, the US, Germany, Australia and the UK.

These have become attractive real estate investment destinations as they typically have mature and well developed markets and allow investors to manage their properties remotely via robust management systems. On top of these reasons they become good investment choices owing to the fact that they allow for clear ownership laws. Moreover, the dispute resolution processes in these countries are well laid out and the markets are well regulated, minimising the threat of frauds and scams.

While deciding on which country to invest in, investors should also look at factors such as ease of purchase and sale transactions, any entry or exit loads or levies imposed by the local authorities, rental yields, likely capital appreciation, maintenance costs, agent fees, stamp duties etc. Investors should also see if their investment can help them obtain a short or a long term stay or work visa in lieu of such an investment.

A choice of location would also be determined by the purpose the property being purchased is likely to be served. For instance, is the property commercial or residential? If commercial, will it be used for an office space or as a warehouse or for any other purpose. Likewise, if residential, will it be used as a retirement home, as a normal home for city dwelling, as a bed and breakfast hotel or a serviced apartment, or even a vacation home in a quiet part of the country.  

Taxation

After the location itself, the next most important aspect that a real estate investor needs to look at is the tax implications of such an investment. 
Each time one rents or leases or purchases a commercial or residential property anywhere in the world, he or she has to incur some tax implications. Not only are laws of taxation local to a place but the scale of taxation is also determined by the residency status of the person concerned.

Indian citizens investing abroad need to be aware of that if they buy real estate abroad, the rental income being generated from it will be taxable back home in India. If they have however paid taxes in the local jurisdiction, they may be able to claim a tax credit, depending on the country in which they have made the purchase.

Apart from taxes on rental income, buyers should also be aware of how capital gains on sale of property will be taxed. In most cases such capital gains will also be taxable in India, although an exemption can be claimed if the person chooses to reinvest the proceeds in real estate back home in India.

Indian investors should therefore consider buying real estate only in those countries that have a favourable tax treatment for foreign investors. This can potentially help them bring their overall tax outgo down significantly.

Money matters

When it comes to buying property outside India, it is advisable to have the entire amount available upfront and not depend on loans or mortgages. This is because most Indian banks are typically not inclined to lend for property purchases abroad, unlike in India where they go to great lengths to disburse home loans. Lenders are reluctant owing to the fact that in case of a default, it will be extremely difficult for them to take possession of the property outside India. Most resident Indians also cannot hope to avail of home mortgages from a foreign bank, making leveraged purchases even tougher.

Overseas account

When purchasing a property abroad, the buyer is most likely to be asked to open a bank account with a local bank in the country where they want to buy the property. Statements of such an account will be used as proof of funds and to move money for buying the property, paying local duties and levies, handover charges, broker fees as well as recurring maintenance charges. You may also need to collect the rent in the local bank account. Moreover, when the property is sold in future, the sale proceeds will also be deposited in the same account and all expenses for the sale will also be required to be paid from it.

LRS

Indian citizens need to use the Reserve Bank of India’s Liberalised Remittance Scheme (LRS) to buy real estate abroad. The LRS allows an Indian citizen to remit up to $250,000 per year. So, if the cost of the property exceeds this amount, it may need to be bought jointly along with other family members each one of whom can individually remit the same amount of money. 

If the property is being bought using such a pooled arrangement, it will need to be bought jointly in the names of all the individuals who have remitted the money. Family members can also include minor children.

Conclusion

Buying property abroad can be a cumbersome process and can take longer than doing the same in India. Having said that, if an investor buys a property in the right jurisdiction, and at the right price, he or she can expect a much higher return both in terms of rental yields and as well as resale premiums in the years to come.

Such overseas properties are often also used by HNI investors to park some of their money abroad and diversify their portfolios while at the same time take advantage of visa by investment schemes being offered by several countries. Getting such short- and long-term visas can allow them to settle down in those countries for long periods of time or even for good, and can also help them travel to and transit via other countries, for which obtaining visas on an Indian passport can often be tough.