InternationalLiving.com

Wiping Your Face

International Living Postcards-- Saturday Edition

Saturday, June 10, 2006
Paris, France

Dear International Living Reader,

"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. 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.

Lief Simon
Real Estate Editor, International Living

P.S. I've still not ever lost money on an international real estate investment…but, right now, I'm struggling with a deal in the UK, where I made two pre-construction buys, the contracts for which I had intended to sell on before closing. But I wasn't able to. So I had to close…which meant getting local financing and coming up with additional cash for the down payments. Today, both units are rented, and the monthly rental income is coming close to covering all my expenses (mortgage, etc.). I have to make up a shortfall each month, though, by converting euro into sterling. Not ideal from any point of view…but not a disaster either. In fact, the deal may work out in the end, depending on the value of the units when I eventually sell.

My point is this: When you make a foreign real estate buy, you've got to be quick on your feet…willing to make adjustments…and ready always with a Plan B…sometimes even a Plan C…

Editor's note: We love it when you share your opinions with us. As debate rages in the IL editorial headquarters about the pros of this destination, and the cons of that country…you, dear reader, are engaged in frank appraisal of our daily efforts. This is welcomed and encouraged…but please, be gentle! The hot topic on our open forum right now: Is IL a scam? "Stop supporting these jerks…" "I joined this site just 10 minutes ago…such overstatements!" "IL is a ripoff…" Oh my…are we really that bad? Not according to some kind souls: "Thank you for everything that you do! Keep up the good work!" Join in the fun here.