Completely ignore the humdrum buzz of articles about how millennial / Generation Y is priced out of the housing market and completely locked out of ever owning a home.
Why? Because many of these are under the assumption that you’ll be living in your own home country.
If you are reading this blog, I am going to be assuming that you already live or seeking to live overseas and that you may have also previously rented overseas in another country before.
Actually, you don’t have to fit the above profile. There are others out there that can make do with just renting, like this entrepreneur.
People that live overseas – as digital nomads or expats or whatever – have unique considerations to be made. One of the most obvious is that as a non-resident, you must provide a down-payment of at least 35% of non-gifted funds to the bank. More on that later.
Before I start, here’s a few hypothetical rental situations
- You rent way above your budget, knowing that this is a temporary situation anyway, that you might not ever come back here after you move out of the country so you might as well go for gold.
- Completely cut the budget down on rental and any other associated living costs to possible breaking point but still somehow survive through it. This is a temporary situation anyway and you will end up moving elsewhere that is much better. In another country.
- Maintain your living arrangement in two places because you either want to keep the second place and/or you can’t be bothered to move (yet).
What do these situations have in common? Flexibility.
Flexibility is one of the main reasons why I continue to rent and will continue to rent within the foreseeable future.
Ever since I moved out of home, my rent is distributed across three countries – from houses to basement flats, to townhouses to apartments. Home owners may think to themselves – While this person is gallivanting around the world in her 20s, I am spending my 20s building up a rental portfolio and then I can use the disposable income as leverage!
This is great – but so long as this all held in your own home country and that your future is in your own home country. A majority of homeowners have local properties in their portfolio as well.
Thus lie another difference. As a non-resident, I am required to provide a down-payment of 35% in cash and that’s the minimum requirement. Also, if you are seeking mortgage financing from the bank, that down-payment cannot be gifted funds.
Here’s a breakdown of what that really means:
Cost |
down-payment |
$150,000 |
$52,500 |
$200,000 |
$70,000 |
$250,000 |
$87,500 |
$300,000 |
$105,000 |
$350,000 |
$122,500 |
$400,000 |
$140,000 |
$450,000 |
$157,500 |
$500,000 |
$175,000 |
$550,000 |
$192,500 |
$600,000 |
$210,000 |
$650,000 |
$227,500 |
$700,000 |
$245,000 |
$750,000 |
$262,500 |
$800,000 |
$280,000 |
Here’s a breakdown of how many months it will take to meet that down-payment:
Downpayment |
2k saved p/m |
2.3k saved p/m |
2.75k saved p/m |
3.1k saved p/m |
3.5k saved p/m |
4k saved p/m |
4.4k saved p/m |
$52,500 |
26 |
23 |
21 |
17 |
15 |
13 |
12 |
$70,000 |
35 |
30 |
25 |
22 |
20 |
18 |
16 |
$87,500 |
44 |
38 |
31 |
28 |
25 |
22 |
20 |
$105,000 |
53 |
45 |
38 |
33 |
30 |
26 |
24 |
$122,500 |
61 |
53 |
44 |
39 |
35 |
30 |
28 |
$140,000 |
70 |
60 |
50 |
45 |
40 |
35 |
32 |
$157,500 |
79 |
68 |
57 |
50 |
45 |
39 |
36 |
$175,000 |
88 |
76 |
63 |
56 |
50 |
44 |
40 |
$192,500 |
96 |
83 |
70 |
62 |
55 |
48 |
44 |
$210,000 |
105 |
91 |
76 |
67 |
60 |
52 |
48 |
$227,500 |
114 |
98 |
82 |
73 |
65 |
57 |
52 |
$245,000 |
123 |
106 |
89 |
79 |
70 |
61 |
56 |
$262,500 |
131 |
114 |
95 |
84 |
75 |
66 |
60 |
$280,000 |
140 |
121 |
101 |
90 |
80 |
70 |
63 |
That’s merely the down payment itself. I am not counting in any other associated costs. For example, you will also require a tax accountant to look into bilateral tax treaties. There are also other limitations and risks involved as a non-resident as well as other factors like the market conditions. And why invest in foreign property, when you can invest in your own home country?
The other issue here is that I am transferring a highly liquid asset (ie cash on hand) into something that is not only difficult to liquidate but screams residential property is not an asset class. Yes, your main residential property is not considered an asset class. And, if it’s not an asset, it “is an inefficient market with low price transparency, illiquidity and high transaction costs.” I see residential real estate as a depreciating, compostable good akin to having rare stamps or artwork.
And yet most people still retain an emotional connection to residential property to the point that becomes a central focal point in someone’s life choice. Great if you know what you’ll be doing in the next 20, 30 years.
Funds versus Residential Real Estate
Let’s say I have a $70,000 down payment that I save up for over 35 months at $2k per month goes towards a hypothetical $200,000 studio. To meet the rest of the payments I need to spend another 70 months (5.8 years) providing a contribution of $2000 per month or $24,000 per year. I intend to sell the studio after fully paying for it.
Let’s say the studio condo appreciates at 5% per year so that when I am ready to sell after paying it off fully (in 6 years’ time) it sells at $260,000.
However after taking away fees and any other expenses mentioned previously, I end up profiting $0 from the transaction. The reason why is that I took away taxes and other fees (i.e. condo upkeep fees, realtor fees) where I am spending $60,000 over the 5.8 years to cover these fees. I am not even counting any other fees related to the financier.
In a parallel universe I instead start at $24,000 – remember that as a non-resident I need to save 35% for a down-payment so in the previous example above, I already spent 35 months getting to $70,000. In this example, I am able to start my investment plan early with $24,000.
I use that to begin a Dow Jones Industrial Average Index fund with a return of 8.68%. I hold the investment over 9 years. I contribute $24,000 per year, the same amount that I would have ended up contributing for the studio. My return after fees would be $119,158. My final investment value would be $335,000 should I sell this fund including investment amount. This scenario does not take into account any further management fees, any rebalancing and so on.
But what about rental costs?
Since I have been keeping a spreadsheet of my rental costs, I anticipate spending $80,000 overall covering rent over the 9 years.
Overall, I would have profited $39,158 after 9 years compared to the risk of not profiting after putting all my liquid assets (ie cash on hand) on the studio condominium.
The biggest killjoy for those gunning for real estate investing is largely due to the time sink in coming up with the required 35% down payment for non-residents. In this case, if you are a non-resident intending to invest in real estate, you are better off seeking ways to leverage without relying on highly liquid assets to propel you forwards.