Wednesday, November 16, 2011
If you had unlimited funds, what would your dream home overseas look like?
A luxury ocean-view condo in a thriving metropolis….a serene beach house sitting alongside the sand…a spacious villa with panoramic lake and mountain views?
In reality, most of us have a budget for our overseas home. It’s one of the most basic decisions we make before we even start looking for a property. But you can make your budget stretc hfurther…giving you the best bang for your buck. And you could consider financing.
Cash is king when it comes to buying a property overseas. You’ll get the best price…either sizeable discounts or freebies or a combination of both. In some locations your real estate dollar will go a long way. Ecuador, for example, offers some of the best values for beachfront and ocean-view property. You can buy a new home in a beachfront development for $120,000…or a lot for $52,880. Build costs are low, too, averaging $55 a square foot. You can buy lake view lots in Costa Rica for $19,000…and fixer-upper homes from $45,000.
Personally, I would only use cash for a home that is complete, that I can see and touch, and move right into. I’m not a fan of paying cash upfront on pre-construction property. There’s always a risk associated with pre-construction. I’m more comfortable with paying in stages during construction.
If you’re looking for a property in Latin America, bank financing is difficult to find for non-residents. If you come across a bank offering it, it’s often at a rate that’s much higher than back home. Typical interest rates run from 6%-13% in the region, and usually they’re not fixed.
You’ll have more paperwork to fill out, and a much longer wait for approval. You’ll likely need life insurance (which rules out anyone with a pre-existing condition, even a treatable one such as diabetes). Plus, you have age limits. If the bank’s age limit is 75, and you’re asking for a mortgage at 64, you’ll only get a loan for 11 years tops.
Then you have to deal with lending caps. Take Panama. Banks here offer loans up to 70% LTV (loan to value) to non-residents. But if you find a condo priced at $2500 a square meter, don’t expect to get 70% of $2500 a square meter. The bank may have a lending cap of $1500 a square meter in that neighborhood. So they’ll lend you a maximum of 70% of $1500 a square meter. You’ll have to fund the shortfall yourself.
Another option worth considering is using the funds in your IRA or 401K. You face restrictions, on personal use of the property before retirement, or using rental income that the property generates. You can buy and flip property, rent it out, and collect a reasonable fee for managing the rental yourself, so long as your IRA or 401K is self-directed…and your custodian doesn’t have rules that won’t allow you to this. You should check with your custodian and see if this is an option open to you.
Developer financing is much easier. This applies to lots, home sites or pre-construction property. It’s usually simple: little paperwork, few questions, no age limits, no life insurance. And it’s often interest-free. It comes in two main forms. In the first, you make payments either on fixed dates (10% on signing the purchase agreement, 10% six months later, 10% twelve months after signing, and the remainder on completion) or at construction stages (10% down, 20% on completion of foundations, 20% on reaching the first floor, etc.).
In the second form, you make regular monthly payments. So, on a $44,000 lot in Belize, you’ll pay $687.50 a month over four years…or $950 a month on a condo in a five-star Caribbean resort.
Brazil has perfected this type of developer financing. Interest rates in Brazil are high (the key interest rate is 11.5% right now), and personal loans carry exorbitant interest rates, often more than 20%. Developers offer deals with low down payments and low monthly payments, as little as 1% a month. The payments are pegged to the current official inflation rate and adjusted monthly. It’s possible to buy a condo in Brazil, that's move-in ready with ocean views, from $1158 a month.
Note that with both bank and developer financing you have exposure to currency fluctuations if your loan is not in dollars. This can mean more profit; buyers in Brazil who bought a few years back have seen the value of their assets rise dramatically, both in terms of appreciation of the property and currency gains. But it can swing the other way, and also mean higher monthly payments.
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