"I
know that Lief Simon is still advertising that he has never lost money
in a deal, but I'll tell you that I have lost a lot of money following
his advice. This is a very risky business if you are not where the
investment is and an expert in that local real estate. And it's especially
dangerous if it's one of the pre-construction deals that this operation
loves to hype. One never knows what the situation will be a year or two
in the future. I would avoid these enticements like the plague!"
I couldn't
have said it better myself. In fact, I did say it myself. Back in April,
2005, I wrote:
"Off-plan (that
is, pre-construction) buying offers the potential for very good returns,
but you can't forget the risks involved with investing in foreign real
estate. And, as in any kind of investing, the greater the potential for
profit…the greater the risk. My approach is to look at the likely worst-case
scenario for any potential property investment. In this case [that is,
in the case of a pre-construction buy], the worst case is that the property
doesn't sell before completion and closing and that the buyer (you) is
forced to complete the sale…which requires coming up with the cash or obtaining
a mortgage. Taking out a mortgage likely means putting down more money."
If
the total value of your global investment portfolio is less than $100,000,
you shouldn't be investing in foreign real estate. I make this point as
often as possible, in my reporting and in person when speaking with readers
at conferences and other events: This international real estate game is
tricky. Cumbersome. Risky. Most of my total investment portfolio is in
international real estate, but, typically, I'd advise that you probably
shouldn't put more than 10% to 25% of your overall investment portfolio
into foreign property…and don't buy real estate overseas at all if:
a.)
you have a weak stomach… and b.) you don't have
time to focus on it.
This isn't
calling a stock broker or placing a stock buy order on-line. In this case,
the buy is complicated, and, once it's made, you don't walk away from it
until the time comes to sell. This kind of investing carries with it a
lot of ongoing administrative baggage. Plus (to state the obvious), real
estate, especially foreign real estate, is not a liquid asset. Maybe, when
you decide you want to sell…or, worse, when you realize you need to sell…you're
not able to find a buyer…
That's the
first step: Realize this is risky business. Proceed only with money you
can afford to lose.
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Prepare
yourself not only for the buy (by understanding the process, the local
restrictions on foreign ownership, the costs, etc.)…but also for the hold
(taxes and other expenses you'll incur while you own the property…plus,
for example, the necessity for an on-site caretaker, a property manager,
a rental manager, etc.). Become comfortable with the idea of buying property
overseas in general.
Then, as another
reader, this one from the UK, put it recently: Make sure any particular
investment you consider can "wipe its face."
In other words,
think through all possible outcomes and exit strategies for the purchase…especially,
as I suggested above, the likely worst-case scenarios. If you're financing,
with an adjustable-rate mortgage (as is common in much of the world), what
would the consequences be for you if the interest rate doubled from its
current position? If you're buying for rental, what if, instead of the
70% occupancy you think you ought to get…you get only 35% instead? What
if you're covering a gap between the income from rental and the ongoing
monthly expenses (not an ideal situation but sometimes necessary, at least
for brief periods) with money from home…and the exchange rate between your
home currency and the currency in the country where you're incurring expenses
moves way out of your favor?
What if
the political or economic situation in the market changes dramatically…for
the worse? What if, as a result, the capital appreciation you bought for
doesn't materialize?
If your answer
to any of these questions makes you uncomfortable…walk away. Maybe from
international real estate investing altogether. But, certainly, from the
particular opportunity you're considering. Look for another, less risky
one.
This article
previously appeared in International
Living. Subscribe to International Living’s free
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