6 Rules for Protecting Yourself When Buying Outside of Canada

Often, during the winter, the weather seems to freeze the logic portion of some people’s brains as they head south to thaw their bodies. (Sorry, if that is a little harsh, but sadly it’s true). Given that winter weather comes to this country at different times, I thought this was a great time to start thinking about it. We land in these little warm retreats and begin to fantasize about “owning a piece of paradise.” That is when the justifications begin and as we all know humans can find a way to justify anything they really want in their life.

Canadians Have Targets on Their Backs

Sales teams know Canadians begin to make desperate decisions as winter closes in and feels like it may never end. Sure, a piece of tropical or recreational paradise may make sense for some, but before you take the plunge please ensure you are following the 6 Rules For Canadians Buying Outside of Canada.  Not only will these rules protect you from “holiday brain”, but they will also protect you from the often ignored tax, legal and currency issues.

Buying, owning and operating property outside of Canada is completely different to what we all have come to know here. For instance, titles are not the same, the closing process is not the same, and the financing process is not the same. Plus, the immigration and tax laws can come back to haunt you, and that is just the beginning. That’s why there are very specific investing rules that we all need to follow BEFORE we sign on the dotted line for a foreign property. 

Rule 1: Fly (Twice) Before You Buy!

Sadly, some people never even make it onto an airplane before their brain seizes up and they get sold a “dream” property through pictures and a sales pitch. Never buy property at a distance, especially in another country, without seeing it for yourself. Do your own homework and protect your interests. It does not matter what the other party says; you need to verify the reality of the situation. The key with visiting a region is that you must visit at least twice: once in the high season and once in the low season.  In many countries there is a VAST difference in accessibility (flights, bus travel, etc.), demand (tropical storm season or too hot), and open amenities (often times half the businesses are shut down during low season). Only invest if you can start creating return visitors including yourself, even if you are not renting it out for income. 

What to Do During the Visits

When you visit, there are certain steps you should take to complete your due diligence.

1. Feel free to tell the promoter/developer that you are coming but only tell them this the first time (you might get a free hotel stay out of it). The next time you go, do not pre-warn them. Book somewhere else and just show up at the site to see what’s really going on behind the scenes. 
2. Check out the location and closeness to local amenities - airport, restaurants, stores, water, etc. Pay very close attention to how easy it is and how long it takes to get from your house to the potential property. Check out what the water is like: is it good for tourists? Are there a lot of attractions nearby? How about a medical clinic?
3. Visit a local realtor to see if a property you are considering was being sold to you in “local” or “foreign” pricing. Sure it may look inexpensive, based on our North American perception, but only by visiting will you know if it truly is a deal or not. The difference between local pricing and foreigner pricing is often substantial. 

Rule 2: Just The Facts Please – Not The Emotions!

The most common ‘justification’ we hear from those who bought without doing their diligence is, “It sounded perfect and is one of a kind and WAY cheaper than it used to be!” Well, sorry to tell you, in most cases it may feel like one of a kind, but in reality it probably isn’t.

Check Out Your Future Competition

Make sure you’re buying not because it is cheap, but because it has potential. Part of any due diligence is investigating what else is out there. Discover what your competition may be and what other opportunities you can uncover that may be cheaper or provide better return. Speak to the local experts (economic development offices, city hall, etc.).

There are two types of competition you will want to check out:

1. Other projects or properties in the region
2. Other projects vying for your potential renters or vacationers

When looking at the proformas for comparable properties, take a look for ‘Resort Fees’ that are often charged over and above other operating expenses.  Watch for this as a hidden profit centre for promoters or developers not discussed in presentations.  How will this affect your bottom line?

Rule 3: Make Sure the Laws Are On Your Side

It still amazes me how many times I receive notes and emails from investors who purchased outside the country only to find that the laws, the closing process, the tax structures and the clarity of property title didn’t match what they expected.

You are NOT covered by Canadian Law.  Knowing the local property, tenant and tax laws is absolutely critical. If you don’t, you’re playing with fire.

The first step in this rule is to find out what restrictions are put on a foreign property holder. Don’t assume that what occurs here in Canada will look anything like what occurs in another country. As a very basic beginning, you need to have answers to the following questions, many of which you wouldn’t have to ask when buying in Canada:

• How must the ownership of the property be held by a foreigner? A trust, fee simple, etc.?
• What is the maximum length you can stay in the country? Do you need a work or business permit to do business (i.e. buying real estate) in the country? If yes, what type?
• What are the squatters’ rights laws? Often these are very strong in tropical countries.
• What appropriation rights do the many levels of government hold in the region?
• Do locals appreciate or disapprove of foreigners buying up their properties? What types of problems can that lead to?
• What are the property tax implications of a foreigner buying?
• What licenses or fees must be paid by foreign owners? Are they annual or one time?

The one question I highly recommend you use when investigating the local laws is, “What question am I not asking that I should be asking?” You’ll be amazed at what you find out with this simple question.

Rule #4: Look Out For Yourself. Who’s Advice Are You Taking?

Never use a legal representative that also represents the other side of a deal. EVER! This is true when you buy in Canada and is doubly important when buying outside of the country. The best way to deal with Rule 3 is by following Rule 4. Every contract you sign must be reviewed by an unattached, outside expert familiar with local laws.

Arm’s Length Is Critical

The key is, this legal expert must not have anything to do with the current property owners, developers, or promoters, and must be very proficient in property transactions with foreigners. Find out, from this independent legal advisor, what rights you have if the developer or promoter does not perform. For instance, what is the dispute resolution process in the country? What would the costs be and would you have to be present in the local court to bring an action? How do you get your deposit back and how long does it take? What are the “trust” laws and how do they protect you, the buyer?

Land Title Considerations

The land titles registry, in many of these countries (including some states in the US), is not as sophisticated, or as accurate as we have come to expect here in Canada.  You want to ask key questions to ensure that you are well protected in the transaction such as:

• How is Title usually held in that country? 
• What is the historic accuracy of their process?
• Do you get the equivalent of a site survey or Real Property Report?  Is the information on this document confirmed by a government agency? 
• What is the title dispute resolution process?
• What are the restrictions for use on the property’s title?
• What are the zoning rules?
• Are there historic or Indigenous rights issues?
• Can you hold the title as a Canadian or does a local have to ‘hold’ the title in trust?
• If in trust, who do you know that you TRULY trust with your money and investment in the country?
• Who holds the deposits and in which country are they held during the purchase process?
• How do you get your deposits back if you need to?

Knowledgeable and independent legal advice is going to be important in all of your transactions, whether in Canada or in a tropical country.  DO NOT take this transaction lightly, make sure you have a strong team around you who has nothing to do with the promoter or vendor and has extensive knowledge of the local laws and how they can affect you.  The extra few hundred dollars you spend to do this right is peanuts compared to the money you could have to spend (or lose) in the future if you are caught by a legal surprise.

Rule 5: It’s Not How Much You Make, It’s How Much You Keep That Matters

“Hey, the rent is $1,000, why did you only send me $625?” – The Cry of the Uninformed Investor

You’d be surprised at how many times investors are shocked by withholding taxes, resort fees or any of the other painful economic realities that are foisted on them by both local governments and property managers in these beautiful tropical countries.

“Tax What Don’t Move or Vote”

Inevitably, tax issues follow you wherever you go. An important component of any successful investment is in the tax planning. We all seem to understand that it is not how much you make that matters, it is how much you keep (just look at the deductions on your last pay cheque), yet not many people consider the importance of understanding the tax implications of their investments.

The rules vary from country to country/region to region/state-to-state.  Each rule will affect your deal and may even inadvertently affect your investments and taxes due in Canada. Some investors have even been caught with double taxation (because they bought in a country that lacks of a tax treaty with Canada or they bought it using the wrong structure). Consider for example that additional fees are charged to non-Canadians with Metro Vancouver’s recent decision to tax foreign investors for purchasing property over and above what residents pay for transfer tax.  The key is to keep as much as you legally can of what you make – and only by asking lots of questions can this happen.

Plan For Reality – Don’t Hide In Perception

Before you sign an offer to purchase, make sure you have investigated the tax implications.  Ask questions such as:

• Is there a tax treaty between Canada and the country?
• How will profits (income and capital gains) be taxed in both places?
• What effect does the time you spend in each country have? 
• Do you get all of your money, or is there an ongoing holdback?

Property taxes are also an issue that is often overlooked.  Find out if you are going to be paying substantially more property taxes because you are from out of the country. In many cases, the local’s property taxes are substantially less than that paid by foreigners, as are the utility rates.  Ensure that you are analyzing the cash flow based on the foreigner taxes, not the local. Clearly ask the seller/promoter, in writing, whether the numbers they are presenting you are locals’ numbers or foreign buyer numbers.

Property Management Cash Flow & Performance

In addition to the tax issues, if you are renting out the property for all or part of the year, you must know how the property management company will conduct the finances and how money will be transferred to you.

• Will it be sent by wire, cheque, or do you have to open a foreign bank account?
• Can this cash flow be expected monthly, quarterly, annually?
• How much do they hold back for future expenses/their fees?
• Do they pay the property taxes on your behalf?
• What rights do you have, as a foreigner, to get your money out if the property or the management company doesn’t perform? 
• What occurs when there is a deficit in the cash flow?
• How will you be transferring the funds to the management company if required?

When buying any property at a distance you are in essence putting all of your cash in the hands of a second party. What is your trust level with them? What experience do they have with foreign investors? Do you believe that they will be treating your money as if it was their own?

Rule #6: “What Do You Mean I Can Only Use MY Property When YOU Say I Can?”

Do you TRULY know what you are buying? Is it a real estate investment, or a security with a real estate foundation? Many unsophisticated investors buy into projects believing that they are buying a real estate investment, when in fact they are simply pooling their money in a security (partnership, LP or share) that uses real estate as the base for the profits. There is a massive difference between buying a security and a true real estate investment. With a true real estate investment, you have some control. With a security, your control is very limited and your ability to get out when you need to sell can be very restricted.

The key identifier between the two is that with a true property investment you own the actual title, not a percentage. You can move in, rent it, or sell when you want. This is the true definition of a real estate investment. Whenever there are restrictions that limit your ability, it adds to your future risk. Not all restrictions are bad; you just have to factor that in when you are investing. What is your exit strategy?

Bottom Line: Do You Control It, or Does It Control You?

If you do not have control you may get stuck with a dead investment. If you have control, in worst case scenarios, you can sell it on the open market to try and get some of your money back.

The true test of the quality of the investment is by looking at the secondary market opportunities to sell it into. Try searching the internet for ‘time shares for sale’ to see the deep discounts owners are willing to sell at. That should give you an indication of profitability and liquidity.

CONCLUSION

By following these six rules for investing outside of the country, you can succeed. You’ll have asked questions that most do not, you’ll have mitigated the risks you can, and you’ll have eliminated, or at least diminished, the influence of “Holiday Brain.”

Yes, our winters can feel long and cold, but that should not be the only reason you buy a tropical retreat. If you choose to do so, please ensure that you have done the proper due diligence you would buying here in Canada, and more.

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