One of the perks of being transferred overseas is that sometimes your housing is partially or fully subsidized. This allows you to save a huge part of your disposable income. For one reason or another, many of us in this situation will start asking ourselves this question:
‘Should I buy a house (or keep my house) back home?’
Since I see this question a lot on various expat forums, I would like to provide a thought process for those who are going through this decision from a financial planner’s point of view. My first response to your question would be:
‘Why do you need the house (or condo, property, chalet, whatever)?’
If your answer is,
‘I need a place where my children can go back every summer.’ Or
‘I visit my family often and don’t want to impose all the time.’ Or
‘I am close to retirement and will move back home soon.’
In other words, you have a legitimate, ongoing need in the near future for a dwelling go ahead and do the calculations on how much you are willing spend to fulfill this need and compare that to other alternatives. That is to say, I generally believe that the only reason that you should devote a significant amount of your wealth to a single object, especially for those of us without many assets, is because you really need it, and the need continues in the long run, like people who stay in one place and need housing for an extended period of time.
(On the other hand, if your answer is, ‘I have extra money now and investing in a house back home sounds like a good idea’, then read Part II.)
So ask yourself again, ‘do I really need this house?’ If the answer is still yes, follow the steps below to decide on the property that works with your personal finances.
Step #1: Define the need in monetary terms using the next best alternative.
For example, if you need this house for a one month vacation every year, how much would it cost you to just rent a house at the location? Also determine the need’s duration. I would say only seriously consider this need if the duration is in the 5-10 year range.
Step #2: Work with a real estate or financial planning professional in your desired location to calculate the cost of buying and maintaining the house.
The cost usually includes and is not limited to: mortgage payment, repair/upkeep, property taxes, condo/locality fees, utilities, mortgage insurance, property / liability insurance, and potential risk that the property value will go down. This would be the cost if you do not lease the house while you are away, and represents the maximum cost of this purchase. If you are able to accept the additional cost as compared to the best alternative in #1, and you are confident enough your income can sustain the annual payment, then consider the purchase.
Step #3: Estimate the potential income with the help of a professional if you are willing to lease the property while you are away.
Most people will jump to this part when making the decision, thinking that they can rent it out easily without first going through the cost calculation in #2. You will need to realistically budget for the months in between tenants where you don’t get income, and take into account the associated cost of professional management fees, income tax, advertising, commission, and depreciation (which is recaptured if you sell it as an investment property.) This income may not cover all of your costs as many might expect, depending on where you intend on buying. However, the reduced cost associated with renting the property may still be justifiable if you need the house for one month a year, however finding tenants who are willing to vacate the property when you need it or sign a lease with a duration that fits your needs can be a tricky proposition. This is why your ‘need’ is important- if you buy something because you need it and you can afford it, you decide that the benefit is worth the cost up front and you don’t regret losing money after the purchase, (which is what will happen if you are not clear whether you treat buying this house as a purchase or investment.)