Wiping Your Face

In this Saturday Edition from the vaults, originally published June 10, 2006, Lief Simon considers the circumstances that might cause you to walk away from international real estate investing altogether…

Saturday, Dec. 29, 2007

Learn more about investing in foreign real estate in International Living Postcards--Saturday Edition

"I know that Lief Simon is still advertising that he has never lost money in a deal,” says a reader, “ 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, and 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 online. 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 U.K., 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
For International Living

Editor’s Note: Let us save you time and effort and give you the collective knowledge you need to discover property, invest, or buy a home abroad. IL’s Your Own Second Home in the Sun is the single best resource for anyone considering the purchase of a rental home or investment property in the land of sunshine.

Read related articles:

- Beware: Guaranteed Rental Returns Exist in Only One Place

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

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