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Why foreign property investment could be a ‘perilous exercise’

Property investment, investing, house market, property market

Half of Aussies would consider foreign property investment if it had an appealing price point, but this could be a bad idea, a property research house has warned.

RiskWise Property Research chief executive Doron Peleg has told property investors to be aware of the significant hazards that accompany overseas property investment.

His warning coincides with research from money transfer group WorldFirst, finding half of Australians would consider investing in international property if it was cheaper than Australian property.

“While it may seem like a good idea at the time, investing overseas is quite a perilous exercise mainly because, unless you know the place or have family living in the country, you don’t know the local market, especially from a demand perspective,” Mr Peleg said.

“It’s only the local people who know if an area is really popular and has high demand or vice versa.”

Continuing, Mr Peleg said the Australian property market is generally highly regulated when it comes to valuations. These buyer protections may not exist in other countries and buyers’ understanding of fair market value is also compromised in international markets.

“Even here there are blacklisted areas where lenders require more deposit and they will also tell you if it is high risk,” he said.

“But overseas you won’t know any of this, not the supply and demand factors, not the demographics of the area and not whether good tenants are available.”

I still want to invest overseas, help me out?

Mr Peleg’s advice for those committed to foreign property investment is to become familiarised with the market, laws and regulations of the country and region in question.

Investors should also be aware of how they would recoup losses in the event of a tenant’s failure to pay rent.

Additionally, he noted that developers in some instances hold the property management company, and as such are not fully independent.

With this in mind, Mr Peleg said, “Often they offer a rental guarantee for a certain period, so you will be convinced the property generates good rental return and therefore its market value is higher. However, the person who pays for the rental guarantee is the investor.

“In addition, in Australia you know with an existing property the commission the agent receives is about 2 per cent and for off-the-plan maybe between 4-6 per cent.

“However, overseas in an unknown market you don’t know what the commission is and the person who ultimately pays is you and, in some cases, it could be 10 per cent or even more commission to the seller.”

He said the only exception is if an investor is purchasing with good advice from close friends or family who live in the area.

However, even this safety net may not be good enough, he added.

“RiskWise’s advice to investors is if they must purchase overseas, to at least try to stick with existing properties as opposed to off-the-plan, which carry a lot higher risk especially if there is a danger of oversupply in the area,” Mr Peleg said.

Why foreign property investment could be a ‘perilous exercise’
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