The gloomy picture of the current US real estate market has many investors and potential investors feeling jittery. While falling prices and long foreclosure lists make it relatively easy to buy low, it’s not clear when, if ever, the opportunity to “sell high” will arrive. But because economies in other parts of the world may not be facing the same crises, international investments in real estate can open lucrative new opportunities – but, as Jason Hartman reminds us, not without risk.
International Investing Encourages Diversification
The international real estate market encompasses countries at all levels of development, from the sophisticated, robust economies of Europe and South America, to impoverished Pacific Island nations. For investors large and small, veteran and newcomer, the variety of investment possibilities in global real estate means increased opportunities for diversification, which can create a hedge against losses if one market collapses.
A downturn in the American housing market can coincide with an upturn in another one halfway around the globe, or vice versa. Keeping assets spread among real estate in the home country and others of varying economic conditions ensures that some will survive a financial disaster. Likewise, the variability of markets makes it possible to hold properties of varying types and uses, which can offer new ways to earn income on the investment. A beachside cottage in Mexico that’s rented out seasonally offers a different kind of return, for example, than a single family suburban home in the US.
Instability: Risk or Return?
International investing involves not only the real property transaction itself, but also the exchange of foreign currency, which has a profound effect on the return on the investment. The strength or weakness of your home currency, such as the US dollar, against the currency of the country you’re investing in, will affect not only the initial cost of the property but also is appreciation over time, and any additional costs of maintaining or upgrading it.
The general stability of a country’s infrastructure and government is also a factor in determining the potential risk in foreign real estate investments. Unstable governments and the potential for civil unrest contribute to investment risk, especially if the property you’re investing in is intended for the use of foreign nationals, such as vacation rentals, or houses leased to expatriates such as foreign workers or American retirees fleeing high taxes and medical costs.
Likewise, the vulnerability of a country’s infrastructure to natural disasters such as tsunamis and earthquakes can be a factor in evaluating property for investment potential. Legal considerations related to property also vary from country to country, so options may be limited in recovering the loss of a property destroyed by a quake or other natural event. (Top image: Flickr | jbachman01)
Legal and Cultural Issues
Although many countries welcome American investors, offering full privileges in terms of ownership and legal recourse, not all do. Some countries place strict limits on the amount of currency that can leave the country. Others limit the amount of property a foreign investor can own, or prohibit it entirely. Still others limit foreign investors to a minority partnership role, with a citizen holding at least 51% of the assets. Familiarity with the laws of the country involved, or working with an international real estate specialist, is essential.
Protecting the investment abroad can be tricky, too. Even if you’ve negotiated legal issues of ownership and other factors affecting your purchase of the property, you may have the legal protection of title insurance or landlord’s insurance. This kind of coverage simply may not exist in certain countries, or providers may not be screened or licensed.
Managing the property involves day-to-day maintenance and upkeep, so finding a property management company or individual to handle the project in the local market is essential. New investors must work with international property brokers with connections in the target country in order to be sure that the property is maintained, and emergencies are taken of. A property manager familiar with local culture can be helpful for maintaining both the property and relationships with local residents.
Investing in international real estate can be a smart strategy for diversifying and growing a portfolio. But it’s essential to do your research, work with international real estate investment professionals, and keep an eye on global and local news headlines.
Action points: learn as much as possible about the target market, consult a professional specializing in international real estate, and be aware of fluctuations in the market, currency and overall stability of the country you want to invest in.
The Jason Hartman Team
