Buying an Investment Property in Australia: A step-by-step guide for Expats

Are you an expat considering buying an investment property in Australia?

Well… you’re not alone.

Since the pandemic lockdowns eased (remember those?) and our international and domestic borders reopened there has been a shift in demand across all our property markets.

Buyer interest has jumped from expats flocking to Australia to escape rising social and political unrest, crumbling financial markets, and out-of-control inflation and cost-of-living costs in overseas countries.

And, many of these expats are looking into buying an investment property.

Australia has always been an attractive destination for expats looking to invest in real estate, thanks to our stable economy, resilient property market, and stable banking system.

Of course, whether you’re an expat or not, when you’re preparing to buy an investment property it’s vital that you do your research and due diligence and come up with a plan of how much you can spend and how to get financing.

So here, I’ve put together a guide with the step-by-step process for expats with everything expats need to know about how to buy an investment property in Australia.

Then here are the steps expats should take….

Step 1: Find out if you’re eligible for a home loan with an Australian lender

The first step before looking to buy an investment property as an expat would be to ensure that you can finance the purchase with a loan from an Australian bank or lender.

Expats are currently having more difficulty securing finance and that’s why it’s critical to complete this step first.

The problem is lenders tend to assess your expat home loan application from a pessimistic, conservative angle to ensure you can still service the loan even in dire situations.

This means your foreign income will generally be converted back to AUD and shaded back.

Typically, lenders will consider only 80% of your gross income, instead of 100% as they would for Australian residents. This reduction is due to currency risk, which means that the lender perceives some currencies as more volatile than others.

The amount your income is discounted for loan servicing, will depend on the type of currency and also the lenders credit policy.

Most lenders will use Australian tax rates to assess your income, regardless of the country you live in.

This can be a disadvantage if you live in a low tax rate country such as Singapore, Hong Kong, or the UAE.

However, some lenders will allow you to use your local country’s tax rates, which can have a significant positive impact on your borrowing power.

Some key steps you’ll need to consider are :

• Assess your financial position: Determine your borrowing capacity based on your income, assets, and liabilities.
• Choose a lender: Research various banks and lending institutions, comparing interest rates, fees, and loan features. Many Australian banks offer home loans specifically for expats.
• Pre-approval: Secure pre-approval for your home loan, which provides a clear idea of your borrowing capacity and allows you to make offers with more confidence. But just to be clear… pre-approvals always have conditions attached to them such as a subject to valuation, or that it needs to be the right type of property or in the right suburbs.

Step 2: Look into the legal requirements

Just to make things clear…Australian expats can purchase a property and apply for a mortgage just like a citizen who is residing in Australia.

If you are a non-resident purchasing property in Australia from overseas, you are required to obtain approval to purchase from the Foreign Investment Review Board (FIRB) prior to purchasing a property. This is an Australian Government entity that regulates the sale of Australian property to overseas persons and corporations.

The problem is, many Australian expats have a spouse who is a non-citizen yet they wish to purchase a property together.

This means many expats looking to buy property for investment will need to look at the legal requirements with the Australian Taxation Office (ATO) and the Foreign Investment Review Board (FIRB).

You will need to confirm the definition of a foreign person with the FIRB (Foreign Investment Review Board) at a federal level as well as from a state based level, as every state has their own definition on additional foreigner surcharge and important to be across these rules.

The Australian Government has pulled the welcome mat out from under foreign Investors and they have introduces harsh tax legislation for Australian Expats who own property in Australia including:

1. The removal of the CGT 50% discount for non-residents
2. The ending of the 6 year CGT Main Residence Exemption for non-residents
3. The applied withholding taxes on property sales for non-residents
4. The increase in State Land Taxes for non-residents
5. The general reluctance by Australian banks to lend to non-residents

Step 3: Assemble your professional team

Seek professional guidance to ensure a smooth investment process.

Key professionals include:

• Finance broker: to help you find the most appropriate loan products and negotiate with lenders.
• Buyer’s agent: who will assist in identifying suitable properties and provides insights into the local market.
• Solicitor or conveyancer: to handle the legal aspects of the property transaction.
• Property manager: to helps many expats by looking after their investment properties, including finding tenants, collecting rents, overseeing maintenance, and ensuring all compliance requirements are completed.

Step 4: Find an investment-grade property

The key here is to find A-grade property in an investment-grade location.

Not all properties make a good investment – in fact, in my mind, less than 4% of the properties on the market currently are what I call “investment grade”.

Here it pays to do your thorough research and due diligence about what makes the best investment option for you.

Of course, you can’t really do this from overseas, and that’s why more and more expats are turning to Property manager to help them with their property research and acquisition.

Using your investment strategy as a guide, your buyer’s agent will search for properties that meet your criteria and consider factors such as:

• The local demographics
• Potential for capital growth that will outperform the averages.
• Proximity to amenities (e.g., public transport, schools, and shops).
• Rental demand and vacancy rates in the area.
• Property condition and required maintenance.

They will also conduct appropriate due diligence including:

• Inspections: Attend property inspections to assess the condition of the property.
• Organise a building and pest inspection to ensure the property you are buying is in sound condition.
• Legal checks: Your solicitor or conveyancer should conduct searches to uncover any legal issues, such as outstanding taxes or easements.

And then they will recommend a negotiating strategy based on:

• Your budget and pre-approval limit.
• The property’s market value, based on comparable sales in the area.
• The seller’s motivation and any terms or conditions they may have.
• Whether the property is selling at auction or private sale.

Step 5: Purchase the property

Your buyer’s agent will then negotiate the purchase of your property.

Whether you’ve won at auction or your buyer’s agent has negotiated and agreed on a purchase price with the seller’s agent, you’re now at the point of committing to buy your investment property by signing a contract of sale with the help of your buyer’s agent as well as your conveyancer or solicitor.

After your offer is accepted, exchange contracts with the seller. Your solicitor or conveyancer will manage this process, which includes:

• Reviewing the contract: Ensuring all terms and conditions are accurate and favourable.
• Paying the deposit: Typically, a 10% deposit is required to secure the property.
• Cooling-off period: Depending on the state, there may be a cooling-off period during which you can cancel the contract, though penalties may apply.
• Settlement: This is the final stage where the remaining balance is paid, and ownership is transferred to you. Settlement usually occurs between 30 and 90 days after exchanging contracts.

In this sale contract, you may need to state that the property sale will only go ahead after ATO and (if required) FIRB approval.

You should also organize property insurance – as the buyer, it’s your responsibility to arrange for property insurance effective from the date of settlement, but most brokers would recommend you insure the property as soon as the contract of sale is unconditional to ensure that the property is covered in case of any damage or loss.

Step 6: Time to apply for your ATO and FIRB and pay the required fee

Depending on the type of property you want to buy and your residency status you may need to get approval from the ATO and the FIRB in order to complete the property investment purchase.

Step 7: Finalise your property loan

Once you have your ATO and FIRB approvals you’ll need to send these to your mortgage broker who will then formally apply for your home loan approval, which you’ll then need to sign and return.

Step 8: Pre-settlement inspection

But as explained, the settlement period could be anywhere between 30 and 90 days, and that’s a long time.

So you shouldn’t assume that the property is in the same condition in the week leading up to settlement as when you exchanged contracts; so your buyer’s agent must conduct a pre-settlement inspection, sometimes also called a final inspection, which gives them the opportunity to check that everything listed in the sales contract is still there and that the property is in the same condition as when you signed the contract.

This can be as simple as checking that the owner, or tenant, hasn’t vacated the property and taken something like the oven or the carpets with them.

Or that the lawn hasn’t died or the pool turned green.

It’s also helpful when obligations arise from special conditions contained in the contract.

For example, the seller has agreed to fix a leak in the roof, in which case you’re entitled to check that it has been done before the settlement date.

If the property is not in the same state as when you signed the contract then you’re entitled to ask the vendor to make repairs before property settlement. 

Step 9. Final settlement and pay your stamp duty

Final settlement is when the buyer pays the agreed settlement sum to the seller and title documents are exchanged.

You must then pay stamp duty on the purchase of your investment property – the fee for which increases depending on the property’s value and differs in each state.

If you are an Australian citizen purchasing a property with a foreign national in joint names, be aware that Foreign buyers Stamp Duty surcharge will apply to half of the property’s value.

To avoid this surcharge, one alternative is to purchase the property solely in the name of the Australian spouse, resulting in only the standard Stamp Duty  being levied.

Australian citizens living overseas are not subject to any penalty or surcharge.

Step 10: Set Up Property Management

Once you’ve purchased the property, engage a property manager to oversee its management. Their responsibilities may include:

• Advertising the property for rent.
• Conducting tenant screenings and reference checks.
• Preparing lease agreements and handling bond payments.
• Managing rent collection and arrears.
• Coordinating property maintenance and repairs.
• Conducting regular property inspections.

Step 11: Understand the tax implications and your obligations

As an expat property investor in Australia, it’s essential to understand your tax obligations.

If you’re a non-resident, owning an investment property means that you will have to keep filing those Australian tax returns.

Any income, including income from rental returns or from the sale of a property, will need to be noted with the ATO during tax time.

You will also still be subject to capital gains tax if the asset qualifies as a ‘taxable Australian property’.

Some key aspects to consider are:

• Rental income: Australian-sourced rental income must be declared on an Australian tax return, regardless of your residency status.
• Negative gearing: If your property expenses exceed your rental income, you may be eligible to offset the loss against your other Australian income.
• Capital Gains Tax (CGT): When you sell your investment property, you may be liable for CGT on any profit made. However, the CGT discount may be unavailable for non-residents.
• Foreign Investment Review Board (FIRB) approval: Non-residents may require FIRB approval before purchasing an investment property in Australia.

You should also keep track of tax obligations our ongoing tax obligations and keeping good records for potential capital gains tax liabilities in the future.

Of course you’ll need to consult a tax advisor to ensure compliance with all Australian tax laws and regulations.

THE LEGAL REQUIREMENTS

Non-residents, temporary residents, and eligible visa holders are all classified as foreign persons, which means that if you fall in this category but want to invest in Australian residential real estate, you need to lodge an application with the ATO.

Residential real estate includes new dwellings, off-the-plan properties, vacant land, and existing properties.

The application includes a Residential real estate application form (the pre-approval you need to buy), a land and water registration form (after settlement), and a vacancy fee return to make a declaration each year on the occupancy of your residential property.

Expat owners are liable to pay an annual vacancy fee if their investment property is not residentially occupied or rented out for 183 or more days (6 months) in a year.

Depending on the type of property and your residency status, you may also be legally required to apply for permission from the FIRB.

Under the Foreign Acquisitions and Takeovers Regulation 2020, you’ll have to pay the correct fee amount at the time of lodging your application.

HOW TO GET FINANCING

Expats in Australia can apply for a home loan, and in most cases can borrow as much as an Australian citizen.

Tighter lending conditions mean a non-resident and expat will need to have a larger deposit or down payment for the investment property they want to buy, but it is still possible to secure financing.

Each of Australia’s big four banks – ANZ, Commonwealth Bank, Westpac, and National Australia Bank – offers options for expats looking to buy an investment property in Australia.

Specialist lenders can also offer more flexible policies to allow expats living in Australia to secure some financing.

Meanwhile, banks such as ANZ or even HSBC also allow Australians living overseas to buy and invest in the property market using their overseas income.

The good news is, even if you’re not an Australian (or New Zealand) citizen, temporary residents and visa holders are able to get onto the property ladder in Australia and invest.

The most important steps are to ensure you thoroughly research all the legal requirements and implications of making a property purchase as an expat… and that you can meet each of those requirements.

Then, of course, your next focus should be on locating investment-grade property in the best locations to make sure your property investment is best placed to succeed.

We are here to offer guidance to help you achieve your financial and life goals. Reach out to us by calling 08 8211 7180 or at info@centramoney.com.au.

Article courtesy of Michael Yardney’s Property Update.