IL Postcard

Three Questions You Must Ask Before Buying a Piece of Real Estate Overseas

Date: 12/07/2007

Saturday, Dec. 8, 2007

Read more about international real estate in International Living Postcards--Saturday Edition

You’ve decided it’s time to invest in foreign real estate…or maybe you’re ready to expand your existing portfolio. You’ve identified the amount of capital you’d like to place…and now you’re wondering:

Where is the best place to buy right now?

I can’t answer that question. The truth is, no one can…except you. You’ve got to answer it for yourself, within the context of your overall investment portfolio, your current investment agenda (growth, value, etc.), and your tolerance for risk.

Consider these three things:

First, how long do you want to hold on to the investment? And, perhaps more important, how long could you afford to hold on to it, worst case? This is critical thinking. Real estate is never a very liquid asset. Real estate in a foreign country can be much less so. You can have a plan for selling…an exit strategy that connects with your overall investment strategy…but you can’t count on finding a buyer when you want one.

I’m a shareholder in a piece of property in Thailand. The plan when I bought in was to develop the land, but then values shot up quicker than any of us expected. Another developer appeared on the scene offering to buy the land at a price that translated into an excellent return in a short period. Happy days.

Then came the coup. Thaksin was ousted by the military.

The coup itself didn’t deter the buyer. He was experienced and farsighted enough to keep things in perspective and to look beyond immediate events. The military, though, now running the show, began to make silly changes that affected how money could flow in and out of the country. These things the would-be buyer couldn’t ignore, and he eventually backed out of the purchase.

That potential buyer, though, had given us the idea for a new exit strategy. Why not flip the land, rather than holding for development? This, the would-be buyer had shown us, could allow for a higher annualized return on investment sooner than expected. So, rather than pushing ahead with development as originally had been planned, we listed the property for sale. It has been a little more than a year since that first buyer showed interest, and this month a contract was signed for the sale of a portion of the land. The remainder of the parcel still seeks a buyer.

My point is this: When you ask yourself how long you want to tie up your capital in a particular investment…and, more importantly, how long, worst case, you can afford to tie up your capital in a particular investment…understand that, in fact, you may have little control over when you’re able to realize your return. You may reconsider or reinvent your original exit strategy in response to market events. And I guarantee you that you’ll encounter twists and turns along the way you could never predict. You’ve got to be prepared, mentally and financially, to ride them out.

In other words, don’t bet the kids’ college money…or money you need to cover your mortgage back home…on an international property play.

The second question to consider before investing in overseas real estate is, What percentage of your net worth should you place this way? I recommend that you put no more than 5% of your total net worth into any single deal. I break this rule regularly, but only knowingly and only when I have some level of control over how the investment will play out.

The point is to keep things in perspective. If you’ve got a total investment portfolio of $100,000, you should think long and hard before putting $50,000 into a piece of foreign real estate…unless you intend the property for personal use.

The 5% rule does two things for you. First, it helps to keep you diversified, so that when things go bad in one market, as they are right now in the U.S., your portfolio is strong enough to ride out the downturn. Second, this rule forces you to do a higher level of due diligence than you might otherwise before you break it.

The third important question you should consider before making a property investment abroad has to do with risk tolerance: How strong is your stomach?

I’ll leave you to think about that a little, and we’ll return to the question next week.

Lief Simon
For International Living

Editor’s note: Lief Simon’s crash course shows you everything you need to know about global real estate investing…from how to find the right deals to how to get financing.

Related articles:

Yes, You Can Use Your IRA Dollars to Own International Real Estate

Remember, Americans Don't Drive All World Property Markets