The Challenge of Money Transfers When of Investing in Overseas Real Estate
Any real estate investment is a big commitment of one’s funds. Even if the investor takes a mortgage instead of buying a property outright, they will have to make a big money transfer. Moreover, the new owner will need to make regular transfers to ensure good property maintenance and management of any legal matters.
The problem is that making international money transfers is rather expensive by default. This is why even despite how lucrative investing in US property can be, many prospective buyers from abroad do not take this chance. The US real estate market is not in a bad position even as it stands right now. However, no one can deny that it could do much better with a higher rate of foreign investment. And a stronger property market means a stronger economy overall.
One of the reasons why foreign investors are hesitant about buying a property in the US is an outdated banking system. Buying and managing a property requires regular transfers, which can cost 3-7% of the transfer volume. The exact cost will depend on where the transfer is coming from. A big part of it is due to unfavorable foreign currency exchange rates (FX) offered by banks. You might not even know it because the transfer fee itself doesn’t seem so big. But if you compare the rate to the one offered by specialized FX brokers, the total cost will be much lower.
Unfortunately, FX broker regulations in the US are very stringent. Therefore, the majority of them don’t enter the US market at all. But there are some online FX companies that dare to take this step.
How Money Transfer Companies Make Real Estate Investment More Affordable
Online money transfer companies, which are also FX brokers, solve the problem of expensive transfers. Using these services you can make international money transfers from Australia, or many other countries, that cost less than 1%. This means that an investor making a down payment on a mortgage can save thousands of dollars right away. A simple thing like using a different transfer service can immediately boost investment ROI.
The leaders among online money transfer companies available in the US are Moneycorp, OFX, and Currencies Direct. They are all among the industry leaders and have solid reputations for trustworthiness and transparency.
Note that every money transfer company has unique pricing policies as well as offers different FX rates. This means that you should compare the offers from every available provider to make the best choice. Moreover, some companies, like Moneycorp, offer discounts for bigger transfers. This can be most beneficial for real estate investors.
However, the best thing about online FX companies is that they offer not only cheap transfers but also additional services. Those include hedging, which is absolutely invaluable for foreign real estate investors. It’s particularly important now, when FX markets are extremely volatile due to the global economic recession.
The Importance of Hedging
FX hedging is used to reduce the risks of foreign currency exchange caused by the changes in FX rates. Currency exchange rates fluctuate all the time because they are affected by many macro and microeconomic factors. These changes can be big, especially during periods of economic instability. And if a change like this happens not in your favor, it might turn a profitable investment into a sinkhole overnight.
Hedging tools can fix exchange rates at some specific level to reduce this risk. The most popular among them are forward contracts. They allow you to exchange currency in the future at a rate set now. This means that even if a drastic change in FX rates happens, you will be protected from it.
Forward contracts are particularly useful for real estate investors because property deals are never fast. However, the FX rate can change quite a bit between you making the first bid and finalizing the deal. With a forward contract you can be sure that no matter the changes in the currency market, you will pay the exact amount you expect to.
Please note that the FX rate used in the forward contract isn’t affected by any currency forecasts. It’s calculated using a specific formula and will be unchanged.
Also, you should know that forward contracts, as well as other hedging tools, aren’t offered freely by banks. Traditional financial institutions usually offer hedging only to their biggest corporate clients. Therefore, a private real estate investor might not be able to get access to them at all.
FX companies, on the other hand, allow any clients to use different hedging tools. They also offer not only forward contracts. But you’ll need to study each company’s terms as they are all unique.
Bottom Line: Buying US Real Estate Can Be Cheaper
No matter the situation with the global economy, investing in US real estate remains a very lucrative possibility. It’s even better now when cutting the cost of international money transfers is easy.
A foreign investor merely needs to do some research into the leading FX companies licensed in the US. These are all market leaders because small companies have no chance to go through the rigorous US certification process. This is a good thing because in this industry biggest companies usually offer the best rates. They trade currencies wholesale. Therefore, higher trading volumes mean they can keep FX exchange rates close to the mid-market rate.
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