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Owning real estate overseas is often a lifelong dream. It can look different for everyone. For example, maybe your goal is to retire in Tuscany, or perhaps you want to buy a second home but keep your primary residence in the U.S. You might want to purchase property now where you’ll live later, or you could want to move overseas full-time.
Regardless of your situation, many specifics vary depending on where you want to buy, but the following are some general considerations to keep in mind.
No matter where you want to buy or when, you should go into it with an understanding that it’s complex. There are legal and financial issues, as well as travel-related logistics. If you think you’re going to have a completely smooth process, you’re probably wrong.
To help streamline it, you should work with local professionals. First, a local lawyer can be extremely helpful when you’re buying property as a foreigner. You should also use a buyer’s agent who specializes in international transactions.
There are very specific rules dictating who can buy what in most countries. For example, there’s a rule in Mexico that if you’re a foreigner, you can’t own property on the coast, but there are ways to go around this by using a Mexican bank trust.
Some places won’t let foreigners buy property altogether. For example, Switzerland has very strict restrictions on foreigners buying property. You can only buy property if you’re an EU or EFTA national who has a Swiss residence permit and lives in Switzerland, or have a Swiss C permit.
In many cases, mortgages overseas aren’t available to U.S. buyers, and U.S. banks typically won’t lend you money to buy something internationally. Even if you can find a location where you might be eligible for mortgage lending, you’re probably going to have to make a down payment of anywhere from 30% to 50% and your terms aren’t going to be very favorable.
You may also have to get a life insurance policy that totals your mortgage, and the bank lending you money will have to be named the beneficiary. At the same time, depending on your age you may not be eligible for life insurance in some countries.
What this means is that you should have cash if you plan to buy overseas. You might be able to get developer financing, or you can use the proceeds of a self-directed IRA if you plan to use the property as a rental or investment only.
If you buy property in a foreign country, you may be taxed both when you buy it and sell it. You may also have to make payments throughout the year, similar to property taxes in the U.S.
Finally, before you buy anything overseas you need to have an exit strategy you can turn to if necessary. You may think you’ll never sell, but unexpected life and financial situations can arise. What taxes would you owe if you did sell? Would you even be able to sell? What is the market like where you’re buying and what is it likely to look like in the future?
When you have equity in your home, you can tap into that and, if you’re strategic, use it as a way to build long-term wealth.
There are a lot of ways you can capture equity to build wealth. For example, you can pay off higher-interest debt or make home improvements that ultimately increase the value of your house. You can start a business or you can even invest in the stock market where returns might be significantly more than the interest you pay on your loan.
Another question people commonly have is whether or not they can use their home’s equity to purchase another property, which we discuss below.
In short, yes. You can use a home equity loan to buy a house, but that doesn’t mean it’s always the right decision in every situation. Using home equity can be a way to buy a second home or an investment property with caveats.
A home equity loan is a second mortgage, giving you a way to access the equity you’ve built in your home. Home equity refers to the difference between what you owe and what your home is worth.
If you’re thinking about using your home’s equity to buy another house, there’s a distinction you need to first make. Are you buying a second home or an investment?
If you’re planning to buy an investment property, using a home equity loan can give you more liquidity and make it less expensive. Benefits of using equity to buy an investment property include:
• You can put more toward your down payment. A home equity loan is something you receive as a lump sum payment so that cash can go directly toward a down payment. You’ll be a more competitive buyer, which is essential in the current market, and you’ll get lower interest rates and monthly payments.
• It can be harder to finance a second property because there are more stringent down payment requirements, so a home equity loan can be a more affordable solution and also one that’s more convenient.
• A home equity loan is secured with collateral, which is your current home. As a result, you get the benefit of lower interest rates.
If you’re buying an investment property, using your home equity can be a good wealth-building strategy. If you’re buying a second home, you have to consider that it’s not going to bring in income like an investment. That means that you’re going to be tying your home up in a loan and then taking on another loan, so you need to be in a solid financial position to make this work.
The downsides of using equity to buy an investment property do exist. These include:
• You’re swapping an asset for a debt. You’re taking the part of your home that you own, and then you’re putting it into a loan. Ultimately, no matter the specifics, you will have higher debt, so is that what you want?
• You’re vulnerable to housing market shifts, even more so when you own two properties instead of one. You’re doubling your risk if something happens in the housing market. For example, if the value of either of your properties goes down, you might owe more on your home equity loan and your mortgage, overextending you.
• If you were to default on your loan, you could lose both properties.
• You might end up having three mortgages but only two homes. Most home equity loans are second mortgages, so you have to combine this with the loan you’ll need for your second home, meaning three mortgages.
• Another downside you’ll have to weigh is the fact that interest payments on your home equity loan will probably not be tax-deductible because of 2018 changes in tax codes.
The big takeaway here is that, yes, using home equity to buy a second home is an option and sometimes a very good one. At the same time, there are risks and it’s not always the right decision, so you need to go over the details in your specific situation carefully.
The idea of wellness architecture or wellness-centric home design isn’t entirely new, although it largely seemed to pick up steam last year. Now, with the coronavirus still impacting our daily lives and our homes being where we spend a larger portion of our time, it may be an even more popular trend in architecture and interior design.
Wellness architecture is an approach to home design centered on improving health—this can include mental and physical health. Millennials tend to be health-conscious and, in some cases, even obsessed, and Baby Boomers are also driving the trend.
Baby Boomers are considering their own goals to age-in-place, and they want to ensure their homes are going to facilitate this.
With wellness architecture, you design your home with the idea in mind that it influences your health on a holistic level.
You might include things in your home that help you stay physically healthier—for example, adding a home gym.
You might set aside a bathroom that’s geared toward relaxation and rejuvenation, or a bedroom designed to get quality sleep.
It sounds like an expensive trend, but that doesn’t necessarily have to be the case.
There are simple things you can do to ensure your home promotes your wellness and the wellness of your family.
If you want a home centered on wellness, think about how you’re most going to use spaces. In the past, the goal was to have as many bedrooms as possible in a home, and that’s often what buyers were most looking for.
Now, families are having fewer children and spending more time at home, so they want spaces that reflect that.
If you’re buying a new home or you’re redesigning your current one, think about what you’ll realistically use.
For example, will you use a home gym or a yoga studio?
Maybe you’re most likely to use a spa-like bathroom, or perhaps a large kitchen where you can prepare healthy foods.
If you’re like most Americans you may be working from home right now, educating your children there, and doing most of your leisure activities at home. What you surround yourself with during these times can have a significant effect on your mood, so keep that in mind.
Things that you can improve your mood in your home include live plants and natural light.
Integrate décor that you find aesthetically pleasing, whether that’s art, or rich, textured fabrics as examples.
Give yourself time to reflect on what makes you feel your best when you’re designing your home. There’s no one right answer as to what will work for everyone.
Another way to design your home for wellness involves reducing your exposure to toxins.
Some of the ways to do this include:
• Use an air-purifying system to remove pollens and dust particles.• If you’re renovating your home, try to use low-VOC products.• Remove carpet and replace it with hard flooring.• Consider using color temperature light bulbs as part of your smart home system. You can program them to match your body’s natural circadian rhythm, which can help your mood and productivity, and also help you wind down each night and sleep better.
Finally, if you have outdoor space, maximize it. Getting outside, even if just for a few minutes a day can have positive effects on your mental health as well as your physical health. For example, we’re increasingly finding out about the importance of vitamin D to prevent chronic illnesses.
Create an outdoor space that’s going to be usable for you and meets the needs of your family. Maybe you focus your outdoor area on dining or entertaining, or perhaps it’s a place where your children can play while you soak up the sunlight.
Furnish your outdoor area as you would the indoors of your home in terms of comfort and functionality, to encourage you to get outside as much as possible.
We’ve talked a lot lately about appraisals but what we haven’t mentioned is an observation the appraiser makes when performing an on-site property inspection. This observation is explicitly deemed, “Deferred Maintenance” and if it’s so noted on your appraisal report, it can stop your loan application dead in its tracks. What is it and why is it so important?
Technically it means there are things wrong with the house and in need of repair, but the owners have yet to fix them. To a lender, it can stop the entire loan approval process until the issues are addressed and resolved. What are some of these items?
Cracked or broken windows. Lawns that have not been taken care of and full of weeds. Carpets severely stained. Sidewalks with multiple cracks and sagging porch decks. The appraiser will note all these things on the report. The sellers of such a property knows these things and can adjust the sales price to reflect the needed repairs. While this can certainly be a strategy by reducing the sales price of the home by an approximate amount the repairs would cost, a lender won’t issue funds until those items are fixed.
Many times the sellers will refuse to make the needed repairs and hold out for someone that will acknowledge the needed repairs and pay cash for the home in lieu of financing. But this strategy can severely reduce the pool of potential buyers.
This is why so-called ‘preventative maintenance’ is so important for homeowners. Addressing an issue that pops up very early and fixed can save time and money. When maintenance issues are ignored, they can fester and get worse over time. Even to the point the issue is officially a deferred maintenance item. Even if the buyers accept the notion they’ll need make needed repairs after they buy and own the home, the lender will indeed step in.
Another option to address deferred maintenance issues is to establish an ‘escrow holdback.’ A holdback is an amount set aside that will go toward fixing the needed repairs during the approval process. An inspection is made of the problems and an estimate is made about how much those repairs will cost. In this fashion, the appraised value will be based upon those issues being repaired. It’s an ‘as repaired’ notation made on the appraisal.
The repairs will then be made and when completed, an inspector will be sent back to the home to verify the needed repairs were made. Once the inspection report has been completed and sent to the lender, the loan approval process will then proceed.
Bargain hunters and real estate investors alike look for these types of properties with eyes wide open knowing repairs will be needed. Minor repairs won’t hold anything back other than perhaps some additional negotiations between the buyers and sellers. Maybe a light fixture doesn’t work or a light switch doesn’t work. These are minor issues. But if there are indeed bona fide deferred maintenance issues, know in advance there will be some bumps in the road to loan approval.
Question: Our homeowner association has 30 single family detached homes. Our governing documents were basically written for townhomes. One of the bothersome issues is that the governing documents state that the HOA is responsible for replacing roofs, painting, gutters and other things that are commonly done with condominiums. Many owners object to building up a reserve fund to pay for repairs that may be as much as 20 years or more down the road.
The covenants also state that the board cannot special assess for anything other than common area improvements. So that leaves us with pretty much the options of building up the reserve fund or changing the governing documents. Can you provide us some sample wording for a single family home HOA that would allow homeowners to pay for major repairs themselves but would allow the board architectural control of those repairs?
Answer: While it's unusual for a single family HOAs to do exterior maintenance, repairs and replacements, it's not unheard of. I doubt that the developer made a mistake on this since it's a huge issue. And it's doubtful that you can muster the votes to change this which may take 100% of the owners to approve it including their mortgagees. You need to consult with a knowledgeable attorney to determine the requirements. If it is possible, the attorney can assist the board with the proper wording of the amendment.
So barring you pulling off a major governing documents amendment, yes, you need a reserve plan that includes a funding plan to collect money systematically from each owner every year. The 20-years-down-the-road thinking is flawed. While a reserve event like a roof may take place 20 years down the road, the reserve plan will only charge each owner a share of the future cost directly proportional to the benefit received. For example, if a particular owner owns for five years and sells, he would only pay 5/20ths of the future roof cost. He only pays for the benefit received and not a penny more. This is the fairest way to fund future costs.
Question: Our board is being badgered by a delinquent owner because his account was turned over to collection. In hard economic times, should the board back off of collections?
Answer: As long as the board is enforcing collections uniformly, consistently and fairly, it is the board's responsibility to enforce the Collection Policy regardless of circumstance or economic climate. There is no government bail-out for HOAs.
Question: Is there an average that HOA management companies charge for managing a homeowner association? How do they base their fees...by size, number of units, expectations, etc.? Do they usually charge a flat fee or percentage? How do they charge for maintenance...as a flat fee, by the job?
Answer: Percentages are not used to determine HOA management fees. Commonly, the management fee is expressed as the cost "per door". But behind the per door concept is an analysis of how much time it takes the management company to execute the routine duties described in the Management Agreement. This can vary a lot from HOA to HOA. And within the fee structure, there is usually several levels and costs of service included in the routine duties like management, accounting and administrative (mailing, making copies, etc.).
Maintenance and repairs are charged over and above the basic duties on an hourly or bid basis. So, for a management company to make a profit, an annual estimate of all the levels of service multiplied by their hourly charges multiplied by the number of hours for each plus a profit margin equals the annual cost of management. Keep in mind, however, that most Management Agreements provide for extra charges for non-routine tasks like assisting in insurance claims, arranging contractor bids, overseeing larger renovation projects and performing special tasks requested by the board.