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Are You an Investor or a Vacationer?

International Living Postcards--Saturday Edition

Saturday, March 10, 2007

You've got a specific amount of capital you want to invest in international real estate…a budget you've determined based on your overall investment portfolio. Further, you've got your eye on a part of the world where you'd like to spend more time.

Back up.

Where you invest in real estate overseas and where you want to spend your personal time overseas needn't necessarily be the same place. In fact, I'd suggest that, most of the time, they shouldn't be in the same place--let your head run the numbers and your heart figure out where you spend summer vacation.

I own several properties I have never seen (that I may never see). One of these is currently on the market. I may trade this property without ever laying eyes on it. It is land, a pure investment play; no point in making time for a special trip to see it. I knew the market when I bought, and I knew the region well enough to conclude it wasn't a spot I was particularly keen on visiting.

This position made sense to me, but I realized the inherent dangers. While there are benefits to investing in a place where you like to spend time (writing off part or all of your travel expenses for every trip is one…another is that you have a way to rationalize frequent trips), don't go overboard. Remember that one reason to invest in real estate outside your home country is diversification. I know people who found a place they loved and then put all their money into real estate in that country. That is as risky as not investing outside your home country at all.

You should be invested always not only in different countries, but also in different currencies and in different types of real estate (raw land, short-term rentals, resort rentals, off-plan buys, developments, etc.) If one of these markets doesn't go the way you expect when you expect, the impact on your overall portfolio will be manageable.

The level of diversification you aspire to is partly a function of your risk tolerance.

Spreading yourself between different countries, for example, means that you must manage investments in more than one country. This works for me as I do it for a living. But you may want to forgo country diversification for simpler management issues.

The level of due diligence and diversification you should make when investing in real estate depends on the investment amount and your net worth. If it costs you $3,000 to visit a country where you will be investing $30,000 in a real estate opportunity, when all the other relevant due diligence could be completed from home, then the 10% cost of the visit doesn't make sense…unless you want to go to the place anyway for a vacation. And if you only have a $100,000 net worth, then buying a piece of land for $90,000 in a foreign country for pure investment is foolish.

My personal rule is to put no more than 5% of my net worth into any single real estate investment. I break this rule regularly, but when I do it, I do it knowingly. That is to say that the thought process for investing when breaking the rule is more vigorous.

Everything is a balancing act. You never want too much at risk; you can mitigate the risk by diversification and due diligence.

Lief Simon
For International Living

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