Should Indian investors buy US homes

RBI has relaxed provisions relating to investments abroad by resident individuals under the liberalized remittance scheme. The scheme provides for investments abroad in capital assets like stocks and real estate by Indians upto a limit of $2,00,000 per annum.

There has been a growing demand among Indian HNI’s (High Net Worth individuals) to make investments in overseas markets like US and the UK to take advantage of the low property prices prevailing there consequent to the subprime credit crisis. With prices getting depressed to the levels of $1500 –2000 for properties in certain areas of US, on the face of it, it does sound like an attractive bargain hunting investment opportunity for our fellow investors. But we need to consider the following aspects carefully before making use of the relaxed RBI provisions to buy properties abroad:
Ø Whether the investor is buying the property abroad with the intention to emigrate to a foreign country in future or just purely as a profitable investment opportunity to benefit from price appreciation in the short to medium term. If price appreciation/capital gains is the sole objective of the investor, it makes better sense to invest in our domestic real estate sector as prices have corrected significantly over the last one-year. There is more pain left in the US post the credit crisis and real estate prices can remain depressed for a long periods as the US economy goes through periods of recession. Relatively, India has been fairly insulated from the global crisis and the domestic real estate sector may offer better scope for return in the medium term.

Ø The costs of maintenance of properties abroad, the distance barrier that reduces the scope for frequent surveillance/monitoring of the property by the investor, the local laws and regulations governing property acquisitions by non residents are factors to be considered by the investor before embarking on a decision to buy a property abroad.

Ø Currency risk and tax incidence are important decision making drivers. It would be a good decision to invest abroad when the rupee is appreciating against the dollar. However given the bleak future outlook for dollar as a currency, realizations in rupee from sale of the property abroad might be significantly lower due to continuous dollar depreciation. India has a double taxation avoidance agreement with the US and any taxes paid on foreign property can be claimed as a deduction under Indian tax laws.
Considering all the above factors, it makes better sense to wait for domestic real estate prices to bottom out and make fresh investments in property, as the entire exercise of investing in a foreign property might not be worth the trouble. Those families who want to emigrate or those who have children working or studying in the US (which indeed is a sizeable community) may consider buying these properties abroad as prices have become more affordable now