Buying Real Estate In Another
Country:
The Last Great Non-Reportable
Investment Idea?
By John Schroder
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| John Schroder has written numerous
articles for EscapeArtist.com - He has devised a unique residency / passport
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Also note, that to open a $US bank account in the Dominican Republic only
requires a residency card. If your residency card is from the D.R.,
then you are home free. No Gestapo-type government can access a bank
account belonging to a Dominican Republic resident, even if that resident
gained their residency a week before they opened their bank account. Best
to contact John for lifesaving residency techniques. See John's Contact
information below - |
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| As we progress into
the 21st Century, one theme that seems to a common one among the so-called
modern industrialized welfare states is a new aggressiveness towards worldwide
taxation of citizens. In the case of the US, it has been the situation
for some time now that the US tax authorities claim the right to tax US
Citizens on worldwide income regardless of where they are living and working.
They even go so far to claim the right to continue taxing a citizen after
that citizen may have even renounced US citizenship (and procured another
in the process presumably). Death does not give you an escape, as
the US claims the right to tax the estate of US citizens as well.
Europeans on the other hand have it a bit easier in that they can declare
themselves legally non-resident in their former country (while retaining
citizenship) and opt out of the tax system accordingly. This stems
from the idea or concept that if you NOT living there, then why should
you continue to pay taxes for government services you are not using?
This at least is a fair and reasonable point of view. However, with
that said, we know that the European Union certainly has a Savings Tax
Directive designed to collect interest from bank accounts across borders,
that are owned by EU citizens. So, even the EU is somewhat in this
line of thinking, although certainly not as much so as the US.
In any event, many of these tax collection
issues center around investment or banking accounts owned by citizens in
another country. However, it is very interesting to note that REAL
ESTATE ownership is not reported, is not required to be reported and is
a non taxable asset for Americans or Europeans in terms of any worldwide
taxation reporting initiatives (unless you happen to have rental income
and are a US citizen, in which case Uncle Sam claims the right to pick
your pocket, which is another matter for another day). So, for those
people that very concerned about following the tax reporting regulations
to the word, owning an asset such as real estate in another country may
be the answer. In fact, apart from the idea of moving funds offshore
to buy real estate (which is perfectly legal to do and does not invoke
any sort of tax liability to do so), there are also a number of social,
economic and other benefits to consider as well. |
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When you discuss the idea of owning
real estate in another country with Americans, many will claim that this
is a risky idea, that legal protections for titles do not exist, that living
in foreign lands may be dangerous, along with a whole slew of other comments
- which are not entirely accurate or true. In fact, in many countries,
such as the Dominican Republic, title insurance is certainly available
(from well known firms such as Stewart Title) and legal guarantees under
the law for foreign investors as well. In many countries also, you
need not be a resident or citizen at the time you make a real estate purchase
either.
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Owning
real estate overseas protects intelligent people from the growing abuse
of a government gone mad -
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| Throughout America, police are
now seizing cars, houses and bank accounts — without trial . . . and killing
innocent Americans. |
| The police now have the legal power
to confiscate anything and everything that you own. Without trial, conviction,
or even indictment, police are seizing cars, bank accounts, homes, and
businesses from at least 5,000 innocent Americans every week. If you resist
a police confiscation, they can even cripple or kill you with impunity. |
| Source: The
Future of Freedom Foundation - |
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Europeans of course
have no problem investing in real estate overseas and generally make the
leap to ownership abroad much quicker and easier. Regardless, both
Europeans and Americans do have a current problem at home they need to
consider in the decision making process - namely a housing boom or bubble
in their respective countries (which means that NOW may be the best time
to cash out and move your profits).
Calculations by The Economist suggest
that house prices have hit record levels in relation to incomes in America,
Australia, Britain, France, Ireland, the Netherlands, New Zealand and Spain.
In other words, ratios of prices to incomes are now above levels that have
proved unsustainable in the past. Taking the average ratio of house prices
to incomes in 1975-2000 as a baseline, American house prices are now almost
30% overvalued.
http://www.economist.com/finance/displayStory.cfm?story_id=3477796
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Where as housing prices have gone
up roughly 65 percent in the United Stated from the period 1997-2004 according
to the Economist Financial Magazine, the figures are far more dramatic
in the following countries for the same period: South Africa - 227
percent, Spain - 149 percent, Ireland - 187 percent, Britain - 139 percent,
Australia - 112 percent (see the online article from the Economist for
the full list).
What does this all mean? Well,
for starters it has been noted that artificially cheap interest rates have
been partly to blame. Even more so in the US, where housing prices
have not gone up as dramatically as the other countries on the chart, YET
the debt incurred to purchase the properties could lead to a serious problem
going forward. In fact, in some areas of the US, it is estimated
that over 50 percent of new home financing is interest only and or hybrid
adjustable rate mortgages, whereby buyers are not even paying off the debt
principal as part of the payment plan (in the case of interest only and
so-called 1 percent ARM option loans). In addition, some newer statistics
would indicate that about 70 percent of all residential real estate is
mortgaged, in one form or another. In other words, about 30 percent
or so of US homeowners actually own their own home outright with no debt
or mortgage against the property, while 70 percent of US residential property
has a debt liability. But aside from that, home prices as a percentage
of average income is at one of its highest levels or ratios historically,
making housing even more expensive or less affordable for many middle class
people. European housing prices are even worse or have gone up even
more shockingly over the past five years, yet there may be a major difference
in terms of the consumer debt supporting it (in comparison to the US market).
However outrageous home prices are still outrageous regardless, and a boom
is also a bust waiting to happen. One possible indicator that a boom
is becoming overblown is speculation. Roughly 20 percent (or more)
of property purchases in the US right now (2005) are done for speculative
reasons rather than personal shelter (personal shelter meaning you are
buying a home you intend to live in yourself). |
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Your initial reaction to this might
be - so what? But what if the boom started to subside? What
if US interest rates started going up? What if many US consumers
are in over their heads now (just about making the payments) AND things
turn negative? This may all sound like a dooms day scenario, but
keeping your fingers crossed does not mean deflation or a turn down economically
is impossible. Germany already is starting to see a slight pull back
in terms of housing prices and the domestic housing market. Is it
that Europe follows the US in terms of economic cycles, is it the other
way around - or not at all? It can be difficult to predict, but one
thing is certain - real estate in many other countries is still less expensive
and not over leveraged with debt. Why is this so?
Financing is available in most other
countries, but it often doesn't make any sense, said Elizabeth Makatura,
vice president for international service and operations for Coldwell Banker.
Interest rates can be as high as 30 to 50 percent in some parts of Latin
America or the Caribbean. Down payment requirements are also more
stringent. While it's not uncommon to put down as little as 0 percent to
5 percent in the United States, in many other countries buyers need a hefty
amount of cash to qualify for a loan. According to Fannie Mae, buyers
in Italy may need to put down 50 percent of the cost of the house. In Germany,
a 40 percent down payment may be needed, and in Mexico a 30 percent down
payment is the standard.
http://money.cnn.com/2004/11/11/real_estate/investment_prop/pf_worldhousing/
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Sounds terrible, does it not?
But it is true in many countries that local banks require a 50 percent
down payment or will only offer a mortgage for 15 or 10 years only.
But is this really such a bad idea? We know that according to some
US statistics, roughly 70 percent do NOT own their own home. Which
is to say, people that have purchased homes think that they own it, but
they really do not. The bank does, and in effect these people are
tenants making monthly payments to the bank. Where as in the past,
this was a fairly sound idea - many people today are making interest only
payments. In effect, remaining on the hook for the full debt amount
while making monthly payments to the bank for interest only. In any
event, from a socio-economic point of view, certainly a case of citizens
living on credit (in terms of their own home) and certainly very much so
exposed financially should things become difficult economically going forward.
Contrast this now to a country where most of the citizens own homes outright
(paid in full with no mortgage) or whereby the requirements are steep in
that a loan applicant must be very solvent in order to qualify. What
are possible differences in financial outcomes for people living in the
easy credit environment (no money down, etc.) versus the later more difficult
one? One thing that comes to my mind, in terms of the easy credit
environment, is that many people are going to loose their homes and face
severe problems (which often enough translate into social problems).
In the country where most people pay cash for their homes, they may loose
their job, the economy may turn negative - but they still have their own
home (free and clear). Ergo, even with a poor economy, certainly
the probability of LESS social strife and not more, in the country with
the high down payment or cash only real estate purchase environment.
Where have we seen real case studies of this? Where have we seen
a country where the people actual do own their own property, and often
have more real personal wealth that have allowed them to weather economic
torments? Argentina is one and the Dominican Republic yet another.
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| This is in contrast
to accepted wisdom in North America, whereby everyone can borrow money
and buy a home - but without the savings to do it with. No money
at risk often means no personal responsibility, or at least the probability
of walking away if things go wrong (and certainly not a pretty site for
the banks that have loaned the money either).
In any event, let us put our long-term
rational thinking caps on for a moment. If the US and Europe has
experienced explosive double-digit gains in the housing markets (a boom,
if you will), is it perhaps time for some profit taking? If you do
believe that there is a debt and leverage problem affiliated with the housing
market in these places as well, then where will this lead socially and
economically? The final question is, depending of course how you
answered the first two questions - Where do you go? |
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| How long until Americans start swimming
the Rio Grande going south? We all know that such a event is absolutely
totally impossible, right? |
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The surprising answer for some might
be - those very countries where credit is strict and housing equity in
the hands of the owners and not the bankers. For many people, the
equity in their current home is the bulk of their wealth or savings.
So, it stands to reason, the opportunity exists to tap into that wealth
and buy a home, apartment or small farm in Argentina, Brazil, Dominican
Republic, Ecuador and a host of other places where the climate is good
year round, real estate prices are not overblown AND whereby perhaps the
opportunity exists to draw a tax-free income from the left over funds.
So, we started our discussion with the idea that buying real estate abroad
may be one of the few legal non-reportable wealth transfer opportunities
left (for Americans especially). However, the benefits extend far
beyond just that.
SOME ADDITIONAL INFORMATION:
Comments from Mr. Graham Hacche,
Deputy Director of the External Relations Department at the IMF, September
29, 2004
The United States, which led the
way out of the recession, recently hit a soft patch. With failing fiscal
stimulus and higher oil prices weighing on consumption, much will depend
on continued employment growth. Nevertheless, this is a soft patch, not
a sinkhole. The measured pace of withdrawal of monetary accommodation should
continue. On the fiscal side, however, despite recent revenue buoyancy,
we see red ink stretching into the future.
Latin America is doing a lot that
is right, and it has a period of growth, and it should use the period of
growth to strengthen some of those reforms.
http://www.imf.org/external/np/tr/2004/tr040929.htm
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OTHER RELATED REAL ESTATE ARTICLES:
http://bigpicture.typepad.com/comments/2005/05/interest_only_l.html
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http://bigpicture.typepad.com/comments/2005/05/as_prices_rise_.html
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U.S. NATIONAL DEBT CLOCK (Read
it and weep)
http://www.brillig.com/debt_clock
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| For
additional information on John Schroder including how you can benefit from
Dominican Republic residency or a second passport, tax-free banking or
the formation of an offshore company, please contact Mr. John Schroder
at (809) 334-5387 or (809) 293-9427. You may also send an email to
John at: info@ascotadvisory.com
- or visit John's website:
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| The Author John Schroder
- When it comes to living and investing in the Dominican Republic John
Schroder is the undisputed Guru - He assists with banking, residency and
relocation - Contact John, or visit his website for further details and
for a wide range of resources on the D.R. |
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