Offshore Real Estate Investors: Here's Your Due Diligence in 6 Steps
Estimated reading time: 3 minutes
Scams run amok in the investment world. Everyone with an email account has received an email from a Nigerian prince “who needs help” to transfer the funds of his estate out of the country and is willing to reward them with riches for only a small investment that will help him in doing so. Avoiding such schemes requires doing your homework, or what we call due diligence.
Due diligence is critical. It’s the difference between savvy investors and those who become victims of fraud. Due diligence is the process by which you gather information and evaluate the cost, benefit, and risk of your potential investment.
With more and more Americans interested in purchasing offshore real estate, whether for investment purposes or living abroad after retirement—due diligence only becomes more essential. Given the Self-Directed IRA rules that allow you to use your IRA funds to purchase your retirement home, exploring offshore real estate investments with your IRA is somewhat pragmatic. Even if you never plan to live in it, offshore real estate is a great way to diversify your portfolio and can yield high returns (depending on the investment).
Here’s a sensible process for conducting due diligence on your offshore real estate investment:
Step One: As Always, Remain Compliant
Observe all IRS guidelines concerning prohibited transactions and disqualified persons. Research the IRS reporting requirements for offshore accounts.
Step Two: Learn the Local Offshore Real Estate Investment Laws
You’re probably not the first foreigner wanting to purchase real estate there, so it’s likely that the country you intend to buy in has policies regarding real estate purchases made from abroad. Consulting a local attorney is advisable. You’ll need to know whether the property title can be held in the IRA’s name.
Step Three: Choose the Country You Buy In Wisely
Before deciding to purchase a property in a particular country, you need to have a good sense of what it’s like there. How stable is it from a socioeconomic standpoint? What are the cultural norms? Note the climate and any ecological concerns such as hurricanes, monsoons, etc.
Step Four: Get All the Financials In Order
Typically, when investing in properties outside the USA, you’ll need to establish a bank account in the country you’re buying real estate in to pay expenses and collect income (if you plan to rent the property). Verify that the country you’re buying in will allow you to open a bank account, as laws regarding this do vary from country to country.
Step Five: Find a Trustworthy Real Estate Professional
You’ll need to hire a real estate professional who can communicate in a language you understand, and whom you trust to find properties you’ll be interested in and go look at them. Be sure to check their professional record for credentials and any complaints.
Step Six: Know the Process and Plan Accordingly
You need to know which party is responsible for fees throughout the real estate process, and exactly how those fees are structured. Countries vary as to whether it is the seller or buyer that is responsible.
Offshore real estate transactions take time. Every country requires different types of documentation. Ensure that you understand the amount of time that it should take to close the transaction.
Things to be wary of:
- Demands to wire money outside of the U.S. as a precondition for negotiating or starting a deal
- Agents that are not registered to do business in the country you're buying in
- Any indication that an offer is dependent on insider information
- Lack of documentation, such as building plans, inspection reports, construction permits, or financial statements
- Be on the lookout for pyramid or Ponzi schemes
Offshore real estate investment can lead to some great opportunities, but avoiding fraud and conducting proper due diligence is key. Want even more information on this topic? Check out the following resources: