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Another country? They do things differently there.

If you have a toehold in Australia’s residential investment property market, you may be considering diversifying your portfolio by buying property overseas. While diversification is a desirable part of any property investment strategy, you need to understand that buying overseas carries a relatively high degree of risk. It is important to look at several key issues before jumping into the fray.

Local market knowledge.

First, it is vital to research the market in the country in which you are considering investing. The property market there may operate quite differently from the market in Australia.

You must understand the long-term economic, demographic and (in some cases) political factors that drive property values in that country.

In some cities in the United States, for example, economic hardship and oversupply of property may mean property prices stay flat for many years to come.

In fact, in some areas banks that have foreclosed on properties have opted to knock houses down rather than let them go derelict because there is no demand from buyers.

The laws of the land.

Next, it is important to know the legal and regulatory requirements that govern buying residential property in your desired country and locality.

In Dubai in the United Arab Emirates foreign owners are limited to new and established property in high-rise towers, along with a few designated enclaves where they are able to buy established property.

Remember, too, that the type of property title varies between countries. Most residential property in Australia is bought on a freehold title (that is, the buyer owns the land) but it may be a different story overseas.

In some countries such as Britain you do not always buy a freehold title; you merely buy a leasehold entitling you to long term use of the land. This may influence your ability to borrow against the property for future investment.

The process of applying for a property loan, and the conditions of the loan once taken out, maybe different from the way it is done in Australia, so be sure to investigate this thoroughly.

Also find out about the buying and negotiating process, along with any upfront costs such as stamp duty or the local equivalent.

Overseas and Australian tax liability.

It is vital to find out about the tax treatment of residential investment property in the relevant country. What level of tax will apply to the rental income, and will you have to pay capital gains tax or the local equivalent when you sell?

Remember, too, that if there is no tax treaty between that country and Australia, you may also be liable to pay tax to the Australian government.

Buying direct property in overseas markets requires a substantial amount of time and due diligence. If this sounds like too hard a task, it may be better to consider a managed overseas property fund instead or an investment closer to home.

Source: The Age Domain