Why Buying Property In These International Vacation Destinations Could Be A Terrible Investment
White sand beaches, rich cultural histories and exotic dishes. When you are considering buying an international vacation property to rent out to other tourists, it all makes for an easy investment. But a few destinations can be total disasters for investors, with very saturated rental markets, specific legal regulations for doing business as a foreigner and severe taxes.
Jay Zigmont, PhD, CFP® and Founder of Childfree Wealth, said it’s imperative to understand what you’re getting into as an investor in a vacation property. “Each country has its own rules, restrictions and advantages,” said Jay Zigmont. “When you buy overseas, you also take on currency risk. You buy in dollars, but get paid in their currency. As currencies fluctuate, your returns go up and down. Which can be a good buy now can turn into a loss simply due to exchange rates.”
If you are considering buying a property for vacation rentals, Check out these international destinations where buying a vacation property could be a bad investment.
Tulum has seen a drastic increase in Airbnb rentals during the pandemic, with an already popular city for tourists also becoming a landing spot for remote workers. During the pandemic years, revenues for Airbnb owners in Tulum grew by more than 167%.
The nearby city of Cancun attracts more tourists each year, so Tulum might seem like a natural place to invest in a vacation property. However, the influx of vacation rental listings is saturating the market, which could leave your rental vacant.
The city has also become concerned about the rise in party tourism which has earned it a reputation for violent crime, which is damaging the overall image of tourism.
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There are already a plethora of Airbnb rentals in Bangkok, but many of them are operating illegally. The Hotel Law, BE 2547, states that you must have an appropriate license to operate a hotel in Thailand, defined as “accommodation established for commercial purposes to provide a temporary accommodation service to travelers or any other person in exchange of compensation”. Yes, this includes Airbnbs.
The process of legally operating an Airbnb in Thailand requires applying for and paying for the license to operate it. There are gaps depending on the size of the property and the number of guests it can accommodate. There are also several legal processes for hosting foreign guests and operating as a non-local host.
Jumping through all those legal hoops – and fees – makes this bustling city a complex one to invest in.
Historic buildings, museums and markets make this city a cultural hub for many tourists to Spain. But buying a vacation rental here could backfire due to the city’s strict regulations.
Apartments in Madrid can only be rented to tourists 90 days a year, and those in the central area are subject to building regulations. Even if you find a suitable property, you might not see a return on your investment for a while with the 90-day rental limit.
Madrid’s municipal government wants to preserve the amount of properties available for residential use, which means it has cracked down on the number of rental properties it allows. You will need to find a property in the city approved by the Madrid City Council to operate as a rental and pay a fixed income tax rate of 24% on the money you earn.
“You need to be aware of the tax complications,” Dr. Zigmont said. “Depending on what you are buying and your situation, you may have to pay US and international taxes, so be sure to check with your tax preparer.”
The culinary capital of the Caribbean, the Cayman Islands are popular with tourists and honeymooners. But the islands are also home to a nightmare for investors: frequent tropical storms.
The Caymans are the worst-affected area of the Caribbean Sea, with the effects of a tropical storm on average every 1.69 years. While that may not seem like much right now, forecasters at NOAA’s Climate Prediction Center say they’re preparing for a more active hurricane season this year. There is a 65% chance of having an above normal hurricane season in 2022.
Not raining on your parade, but worse weather conditions could hijack your travelers’ plans, leading to more cancellations and less money in your pocket.
When buying a vacation property for yourself or for rental, it is important to remember that there are risks inherent in any investment and to be prepared to assume those risks.
“We often have different expectations for our own second home than for an investment,” Dr. Zigmont said. “Decide if it is primarily an investment or a vacation property. Be careful not to assume that you can afford a bigger or better vacation home just because you might be able to rent it out .”
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This article originally appeared on GOBankingRates.com: Why Buying Property In These International Vacation Destinations Could Be A Terrible Investment