It's Not Too Late to Diversify Your Property Portfolio--Here's How
Date: 10/05/2007Read more about real estate overseas in International Living Postcards--Saturday Edition
Saturday, Oct. 6, 2007
Many real estate "investors" in the United States are retreating right now, tails between their legs, trying to figure out what's happened to their portfolios. The answer, of course, is obvious…and twofold: excessive leverage, which is risky enough when it comes to real estate investing…but, in many cases, the leverage has been coupled with little or no diversification, creating hyper risk. With all your eggs in a single basket and only a portion of your eggs paid for, any stumble along the path to wealth accumulation can result in a mess of scrambled yolks.
Many speculators in the U.S. are losing big because they bought into pre-construction deals. These are highly leveraged by their nature. You put down a small deposit of 5% to 10% and sometimes make no further payments until completion of the property. If property prices drop 5% between the time you buy and the time you take possession, you've lost your entire investment.
If you haven't already begun diversifying your real estate holdings beyond U.S. borders, don't worry that it's too late. There is still plenty of opportunity to do so. You need to know where to look…and you need to be prepared to work at it. No question, building a diversified global property portfolio is not as easy as building…well, any other kind of investment portfolio. And it's only getting harder, as more and more investors worldwide look for opportunity internationally. The Chinese, the Russians, the Brits, the Aussies…they all like to dabble in international real estate markets, just like the Americans.
Nevertheless, here's my point: Look hard enough, and you'll find good investment opportunities today in markets from Panama to Romania, from Thailand to South Africa.
Don't wander blithely into a new country and buy the first thing the guy in the hotel bar tells you about. You need to start by considering your options and doing your homework, both in terms of location and type of investment. Your portfolio should include, ultimately, property in more than one country and of more than one kind.
One of the easiest ways to buy into a foreign market is pre-construction (typically called "off-plan" outside the States). In this case, the key is to understand the market well enough to ensure you're buying at the right time. You also want to make sure that you either have the cash available to close or that you'll be able to obtain a local mortgage if you're not able to sell on your contract before you're required to take possession of the property.
At the other end of the spectrum is land. Land is simple to manage and to maintain but typically must be purchased with cash, as you aren't going to be able to obtain local financing for this kind of buy. I compare buying land to holding gold. It doesn't pay dividends, it doesn't cost much to hold (property taxes versus storage costs), and it tends to increase with inflation. The big difference is liquidity.
You should also consider rentals, which can make great sense in the right markets. Both residential and commercial rentals require little direct management once they are set up; you leave that to your local property manager. Which means you need to find a good one.
Rental yields around the world are similar and easy to compare. However, there are anomalies, windows when they can be above the norm for isolated areas, creating opportunity. For example, Punta del Este, Uruguay, offered atypically high yields a few years ago, when purchase prices fell but short-term rental rates didn't.
Building a diversified portfolio isn't easy. It takes time and effort. Administering multiple pieces of real estate in different countries can be a headache. In the end, though, it is worth it. You won't have to worry about waking up one morning to learn that the bank is repossessing all your real estate because the local market has turned against you.
This happened to a colleague years ago in Boston. His entire real estate investment portfolio consisted of long-term residential rentals in the Boston area. The economics changed quickly one year. Rental rates dropped dramatically, and he found himself unable to meet the mortgage payments.
My colleague wasn't an amateur real estate investor, but he wasn't properly diversified, either. Had he owned even a few properties somewhere else, he might not have lost everything.
Lief Simon
For International Living
P.S. We'll talk in more detail about how and where to diversify your real estate holdings at International Living's Ultimate Event in Panama later this month. In fact, we'll consider 26 specific opportunities that make sense right now. More information here.
Related articles:
- "IL's Flip Answers Disgust Me!"
Lief Simon will speak at:
- Lief Simon's International Real Estate Opportunity Conference, Oct. 8 (Monaco)
- The Ultimate Event, Oct. 24 (Panama)
- Global Wealth and Wisdom Summit, Dec. 1 (Ireland)
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