To buy or not to buy property in Bermuda: what to consider
Most Bermudian residents have always had a culturally induced compulsion to acquire real estate, with many of us devoting our entire lives to the purchase, renovation, upgrading and financing of this most cherished asset.
There is nothing quite like owning something of substance, a piece of property that, for the most part in most locations: holds value and will appreciate (or at least that formula was true until the recent housing crisis); is generally readily available and saleable; is particularly versatile as a liquidity leverage; and may be a hedge against inflation.
This real property inflation hedge quality is unlike the perception of owning intangible capital market investments, touted as long-term appreciable assets while subject to the uncertainty of investment risk and global economic influences.
Of course, as is statistically evidenced in recent business cycles, investing totally in real estate is not always the best idea, nor is holding capital market assets ever the worst idea. They both have their place, ultimately, in diversification of an individual's (family) assets.
The two defining factors for most people in wanting to buy real estate is that property is, well, real, immovable as is stated in many a tax treaty. It is there, it has always been there (at least the land), it is marked on a map (Google GPS Earth), it is tangible-touchable, and it is understandable.
And secondly, it is your home, within your control, beholden to no one else, representing to some a castle, to others a retreat from the world around them.
A home is a deeply personal space, inviolate and protected. It is the place you go to when your daily involvement with the outside world has been relieved. It is the place to hide away one's vulnerabilities. A home is your own world within and why home invasions are so absolutely abhorrent to every family's sensibilities.
Real estate is also finite: The more of us there are, the more of us that want our own space. Any waterfront, just about anywhere, is rapidly disappearing from public domain as it is scooped up by individuals or companies for 'exclusive atmosphere' control. What was once thought of as a residential birthright that of access to the sea, the lakes, the rivers and streams, is no more.
This highly sought connection with nature by offered with a limited group of domestic housing sought after by a significantly larger buying group creates a physical, economic, and moral dilemma. How do you satisfy market forces, competitors, and the general buying public so that everyone who can, owns a home?
Domestic or Foreign Property?
Over the years of providing financial observations and individual financial advisory services here in Bermuda, I estimate that one in four local Bermudian residents have very strong ties to another country, among them the United States, Canada, UK, Italy, Canada, France, Australia, and the West Indies.
Yet, this, the most serious purchase that most people will ever make, is greatly dependent upon their individual goals, their current employment, their assessment of future growth of the family, their place in the life status, their ability to save and their current financial condition.
There are many types of considered property shoppers, both buyers and sellers.
This is, after all what makes a viable market.
nYoung local residents who are finding that they still cannot afford the domestic real estate prices, may purchase in overseas competitive markets along with seeking new jobs, new careers and new lives, if they possess the immigration lineage to do so. Regrettably, these professionals (and their young families) are a real loss to our current economy and our future.
nMature local residents, close to retirement, are also seriously scrutinising the quality of life plus the cost of living here.
They may be opting through sheer necessity to be financially comfortable in the second phase of their lives by downsizing property in Bermuda, or seeking retirement environments elsewhere.
nFirst time home buyers who have rigidly focused on owning a piece of the Rock, and are close to that realisation.
nFamily groups who have pooled their resources to buy a family home or want a second property investment here (or possibly elsewhere with seasons that complement Bermuda)
nMid-career professional families who will take advantage of competitive home prices to move upward to a larger home.
These are only a few of the composite groups that are focused on property purchases. For every market, good or bad, there are always those who will take advantage of opportunities presented.
This time is no different.
Real estate in Bermuda is finite, and was always considered a great investment.
Choice of site or physical structure was not as much of a factor as the astronomical rise in real estate values in the last ten years in Bermuda demonstrated clearly that local residents interested in purchasing property in Bermuda bid frantically (in order not to be outbid) just to have a piece of the rock.
Then, the buyer was happy to purchase just about any home of a small inventory at just about any price.
Now, sales prices have levelled off to far more realistic valuations.
Whether they will move further downward is not clear. Real estate, as with any asset, is subject to the old expression of “beauty is in the eye of the beholder.”
It is only beautiful if both buyer and seller think the price is fairly valued.
Market forces will ultimately set the price, the appreciable quality of the property, while implicitly assessing the long-term economic conditions of that particular property market in Bermuda.
Whether your goal is for that modern condominium, or a larger home, or retirement cottage in Bermuda (or elsewhere), serious planning is required to research the following criteria before you sign those acquisition documents.
1. Location, location, location always the mantra of professional real estate salespersons.
2. Your economic job future and potential changes in employment environment.
This personal assessment is critical. If you are made redundant and can't pay for the property down the road, what is your contingency plan?
3. Financing & the Cost of Carry.
Do you fully understand how fixed rate and adjustable rate mortgages work? Are you aware of fall positions listed under the financing contract?
4. Rental property. It is getting a bad rap, or should I say empty rap these days. Is it still a good idea?
5. Liquidity & Infrastructure. Will this property be easy to sell, if your future plans change, or your career accelerates?
6. Residency & Tax Structure. Can you own the property outright, or are you restricted to placing it into a trust or a corporation (Costa Rica). US citizens (and green card holders) owning shares in a foreign company face complex reporting and filing issues due to the controlled foreign corporation (and foreign accounts) with US Tax regulations that foreign financial institutions must comply. Could you be considered a resident for US tax purposes, or in another country's tax structure?
7. Legal & Estate Planning who will own this property, who does not want to feel like a temporary resident with few rights, even though you've become a guarantor on the mortgage?
How will the legacy stream be handled?
8. Risk of Ownership for Physical and Intangible property. What is your real risk of ownership?
How should your assets be allocated to mitigate for currency exposure, soft real estate markets, and personal / property liability.
These and other issues will be explored in future articles on real estate ownership.
The biggest (and most often the best) financial decision of life for many, many people.
Martha Myron, JP CPA CFP (US) TEP is a Bermudian and an international Certified Financial Planner™ practitioner in private wealth management.
She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with United States and multinational connections, and US citizens living and working abroad.
She is a Masters in Law candidate in International Tax and Financial Planning and the Bermuda country contact at the American Citizens Abroad Tax Advisory Council.