The Hardest Sell: Why Overseas Real Estate Costs You More
A three-bedroom house in rural Mexico costs $150,000. The equivalent house in suburban America costs $450,000. That’s a 70 percent discount. It looks like an opportunity. You’re thinking: I could buy two houses here for the price of one in the US. I could rent one out. I could house-hack. I could build equity instead of throwing money away on rent.
This thinking makes intuitive sense and destroys wealth for most people who execute it. This article explains why, when it occasionally works, and how to tell the difference.
The core truth: the price discount exists for a reason. It’s not an opportunity to arbitrage. It’s market pricing reflecting reality. The property will appreciate slower. The rental income will be lower. The transaction costs will be higher. The liquidity will be worse. The currency will fluctuate. You’re not finding a deal. You’re taking on risks the market has already priced.
The Currency Trap: Depreciation That Wipes Out Returns
You buy a $200,000 property in Mexico at an exchange rate of 17 pesos per dollar. You’re spending 3.4 million pesos. You hold it for five years. The property appreciates 3 percent annually in peso terms, so it’s now worth 3.75 million pesos. That’s a 10 percent gain in pesos, or $220,000 at the original exchange rate.
But the peso has weakened. It’s now 22 pesos per dollar. Your 3.75 million pesos is worth $170,000, not $220,000. You made a 10 percent gain in local currency and lost 22 percent to currency depreciation. Your net loss is $30,000 on $200,000 invested. That’s minus 15 percent per year.
This scenario is not hypothetical. Currency depreciation has wiped out returns on emerging market real estate investments repeatedly. The Thai baht, Indian rupee, Brazilian real, and Mexican peso have all experienced severe depreciations that exceeded local property appreciation.
Even if the property appreciates 5 percent annually in local currency (a solid rate), and the currency depreciates 3 percent annually (a moderate rate), your dollar-denominated return is 2 percent annually. That’s worse than a high-yield savings account and includes vastly more illiquidity, effort, and tax complexity.
Some people don’t care about dollar-denominated returns because they plan to live in the country forever and spend in the local currency. For them, currency depreciation is irrelevant. Their income is in the local currency or in dollars converted to local. Their liabilities are in local currency. The house appreciates in local terms. The currency becomes a non-issue if you’re permanently committed to the location and the currency.
For most expats, this isn’t the case. You might return to the US. You might move to another country. You have optionality. That optionality means currency exposure matters. You’re taking currency risk that you might not want or need.
Many countries require you to report foreign real estate holdings annually. Some tax unrealized gains (you owe tax every year even if you don’t sell). Some require you to declare the market value. Some tax the “imputed income” (the rent you could charge if you rented it). The complexity varies. This complexity requires hiring accountants in both your destination country and the US. Annual accounting costs might be $1,500-3,000 per year depending on complexity. Over 20 years, that’s $30,000-60,000 in accounting costs on top of property management, taxes, and insurance.
The Tenant Problem: Eviction and Rights Vary Wildly
Some countries have strong tenant protections that effectively prevent eviction. A tenant in certain European countries can stay indefinitely with limited rent increases. You cannot force them out. That’s dramatically different from the US, where tenant laws vary by state but generally favor owners.
Thailand’s tenant laws favor tenants. You cannot raise rent more than 5 percent per year. Eviction takes months. This creates a situation where you might own a property generating low rental income with a tenant you cannot remove and cannot charge more to.
Mexico’s laws vary by state, but generally require 90-day notice for eviction and allow tenants to claim hardship. You might initiate eviction and end up unable to execute it.
If you’re considering rental property, research the specific tenant laws for your specific location. They matter more than property appreciation. An excellent property in a location with strong tenant protections is a bad investment. A mediocre property in a location with owner-friendly laws is better.
