IT’S not hard to understand why property investment is so popular. Investing in good old fashioned bricks and mortar is seen as a reliable — and more tangible — investment compared to the stock market.
But with rental yields tightening around Australia and house price growth cooling, should Aussie investors look beyond our borders?
An Australian Taxation Office (ATO) analysis of 13 million tax returns from 2014 revealed around five per cent of Australian tax payers are earning money from investments in other countries.
Ben Kingsley, chair of the Property Investment Professionals of Australia (PIPA) said there are three main reasons why it might be beneficial to start looking offshore. The first one is yield potential.
“[Investors] may get a better yield offshore at the moment. Rental yields in Australia have contracted as property values have gone higher, so potentially there may be a more attractive rental yield that is coming from offshore property,” Mr Kinglsey told news.com.au.
Rental yields hit a new record low in November across Australia’s capital cities, according to CoreLogic data, due to dwelling values continuing to rise at a faster pace than weekly rental rates.
The average gross rental yield has now dipped to 3.2 per cent, down from 3.5 per cent a year ago and 4.1 per cent five years ago. And CoreLogic head of research Tim Lawless said rental yields will continue to decline.
“With rental markets remaining soft, it is likely there will be further yield compression across those markets where residential property values are rising,” he said.
In addition to achieving higher rental yields, buying property offshore can give Aussie investors a lifestyle benefit.
“There are investors taking advantage of holiday access,” Mr Kingsley told news.com.au.
“So they might be on holiday in South East Asia and see some type of development going on — a condo complex near the beach — and they can invest in one and rent out the room and get some income from that as part of a holiday accommodation. But they can also be attracted by the incentive of a couple of weeks holiday each year, where they can holiday in that location.”
Investors may also be able to take advantage of a possible currency upside.
“If there is an improvement in the currency of the country they are going to invest in and the Australian dollar falls against that, like the US dollar at the moment, that would mean they can get some uplift in terms of currency exchange,” Mr Kinglsey said.
“Definitely post-GFC when the US market was in serious decline, there was absolutely a strong level of interest from Australians looking to take opportunity of our very high Australian dollar and the house prices in the US. We saw a lot of American companies come out and promoting buying property in the US to Australian residents.”
Todd Hunter, founder of buyers’ agency and broking group,Wheregroup, is a prolific investor and has considerable experience investing offshore, namely in the US. He told news.com.au he chooses to look outside of the Australian real estate market because there are less barriers to entry.
“There are lots of countries that don’t have stamp duty so the entry costs to get in are significantly less.”
NOT FOR THE FAINT-HEARTED
But while owning a place by the beach in Bali might seem like a dream, investing in property overseas is a lot riskier than keeping your portfolio locally. As such, Mr Kinglsey said it probably isn’t a wise idea unless you are a seasoned, committed investor. It takes a whole lot more research and effort to invest in and manage properties from another country.
“Someone with a little bit more of a higher-risk profile than the average mum-and-dad investor would be better for this. For every positive story there are probably a couple of horror stories around investing offshore,” he said.
Trying to manage your investment property from afar can he hugely risky, he warned.
“You could potentially have tenant issues. Or how do you manage the maintenance?
“A lot of these international countries don’t have property managers with property rules — in some cases you have to manage your own asset.
“Who is going to collect the rent? What if squatters access the property? There are some real high-risk, time-consuming and potentially expensive considerations, especially if you have to travel to that country and sort out these issues. It is certainly for those who are a little bit more experienced.”
There is also an important ownership risk investors need to consider before purchasing property offshore.
“You want to make sure you are dealing with a legal agency overseas that will ensure that the transfer of the title is done correctly. I would be engaging the services of an international law firm who can help you with that process.”
And while you can certainly reap benefits from the currency market, it can just as easily rip any benefits away.
“If that country’s currency was to falter then bringing the money back into Australia when the Australian dollar is rising on that exchange rate ultimately means you will get less return for that period the Australian dollar is improving,” Mr Kingsley said.
And unlike property investment in Australia, where investors bank on strong capital growth, Mr Hunter said that isn’t necessarily the case overseas. He told news.com.au that investing offshore shouldn’t be focused on chasing capital gains but chasing “a really good passive income” with the higher yields. So it can take a bit of a mindset shift if you are a local investor.
But when it comes to picking a good market, Mr Hunter said it is similar to picking a good market at home. Investors should look for areas with strong employment, a commitment to infrastructure development, low crime statistics, and reputable local schools.
BE AWARE OF TAX ARRANGEMENTS
There are some tax arrangements investors eyeing the global markets should familiarise themselves with. All worldwide income must be declared as extra income to the ATO. This includes rental income from your overseas property and any capital gains you make if you were to sell your investment property.
You may also be required to pay tax on your rental income to the tax department of the country you have invested in.
You can claim a foreign income tax offset in your Australian tax return, however, special rules apply and it can be quite complex so you will need to seek professional tax advice when investing overseas.