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What Argentina Can Teach Us About Real Estate

by Leon Yang on April 12, 2014 · 9 comments

  
REI in Argentina

Several weeks ago I made a trip over to Buenos Aires. Admittedly part of the goal of this trip was to taste the delicious grass fed beef that is so hard find here in America, but my main goal was to see whether it was worth investing in real estate there.

Now, Why Argentina?

My initial thesis was that if the currency of a country collapses, I may have an opportunity to buy up real estate on the cheap.

If you have followed the news lately, you must have heard about the rampant inflation rampaging about the country and the country’s currency was heading down the drains. Despite the government’s insistence that inflation was not that high (hmm, doesn’t that remind you how the Western governments are all claiming low inflation despite the fact that I have to pay $6 for a dozen organic eggs?), everyone knew inflation was running at least 30% a year.

This is not new. Back in 2001, the Argentinian government devalued their currency, the peso, which was originally supposed to be pegged to the dollar 1 to 1. The epic collapse of the peso, along with the government essentially seizing Argentinians’ dollars and forcibly converted them into, threw the economy into chaos for quite awhile. Everyone lost their savings. Everything became ridiculously expensive for locals but on the other hand remained cheap for people who still held real dollars beyond the grasp of the government. I’ve read a story of how someone was able to rent and renovate 3 hotels back in 2001 with only $40,000!

Related: The Perfect Storm Continues for Real Estate and the Economy

As a Result of all This Mess…

Argentinians have learned to not trust their currency as well as their banks (as if what happened in Cyprus hasn’t taught us that we shouldn’t keep all our money in banks already). Today, Argentinians mostly try to convert their earnings into American dollars because they think the dollars are much safer to hold. The government tried to control the currency by limiting anyone from trying to buy dollars. Thus, a black market for dollars was born and thriving. When I arrived there, the unofficial black market rate was 1 dollar for 10.50 pesos when the government rate was 1 dollar for 7.8 pesos (and this was after a recent official devaluation already). You can see the daily rate here. At certain point it went as high as 13 pesos, signaling a truly lack of confidence in the currency.

Well, if you think when 2011 the exchange rate was 1 dollar to 4 pesos, I must be heading for some great deal right now! However, what I learned was that the many apartments and houses were listed in US dollars! The Argentinians lost so much faith in their currency that when it came to a huge transaction, they wanted something that actually held its value (I know, I know some of us are losing faith in the American dollar, but I suppose that what the US dollar to Argentinians is like what gold is to Americans). Real estate in Argentina, in fact, has become a true storage of value for Argentinians.

Related: Don’t Cry for Me Argentina…Build and Buy Real Estate in Panama

Risky Business

I admire them quite a bit in this aspect. They have learned that putting money in their banks is risky. They have learned to live with massive 30% year to year inflation. They have learned how, despite all the government controls, they can protect their net worth. Some people are converting their earnings into US dollars at the end of every paycheck and put it in a safe in their house. Some people are accepting US dollars instead of pesos. And a lot of people have learned after 2001 that real estate is something that they can maintain true value. And it shows given that they aren’t willing to sell their houses for pesos, but instead, a safe storage of value, the dollars.

So, in the end, I didn’t really find a big bargain going down to Argentina. The real estate prices have fallen a bit but not much. Most people are holding on to them and not selling. Granted, you can have a great life down there without spending too much, but this market is certainly not like Vegas-Phoenix-Miami 2011. It is not worth the risk to go down there for me. The beef, however, is totally worth it.

The Truth of the Matter

While I can go on and on about Argentina, the truth of the matter is, owning real estate can truly store your wealth. Even if a country’s currency goes down the drain, owning real estate protects your life savings. The world has shown us that governments can take our savings, banks can take our savings, but what has been harder to take is your real estate (though some might argue the Communist regime in China back in the days took everything in the name of communism). So next time, if you’re banking your retirement on stocks, cash or pension, just remember what happened in Argentina can happen in America or in wherever you live. Don’t always trust the government and buy some real estate.

 

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{ 9 comments… read them below or add one }

Tom Phelan April 12, 2014 at 10:16 am

Leon makes many good points but having lived in Argentina for five years and still owning vineyards in San Rafael I do have a few observations.

Argentina does not have a mortgage industry ergo Argentines do not have crushing mortgage payments each month. Thus they can hold on longer than someone who has a high LTV mortgage on his or her home and has to default.

Many Argentines are buying real estate and luxury cars to stash their cash. Luxury car sales are up dramatically.

I hate to break Leon’s bubble about “Argentine” beef being grass fed but having worked for a meat purveyor while in college I learned enough to be dangerous. Unless Leon ordered an American cut steak from Argentine beef; T-Bone, Porter House, Rib-eye, Top Sirloin etc. in a very fancy BA restaurant, rather he took part in an Asado, he was probably getting inferior cuts of unaged beef.

Because keeping land to raise cattle has become prohibitive when compared to growing soy beans many Argentine cattle ranchers have converted much of their cattle to soy beans and send their cattle to … yep, “Feed lots” (estimated at 70%).

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Douglas Larson April 12, 2014 at 10:24 am

Interesting observations Leon. My sister was living in Argentina during the money devaluation of 2001 you described. She said that literally overnight it was VERY painful at the grocery stores and gas pumps for the locals but her money was still in dollars. Interesting that real estate (residential and farmland) can be a hedge against inflation. That may be very important for us to remember in the US.

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Gabe Sanders April 12, 2014 at 11:18 am

An excellent lesson here for those thinking of investing in the US real estate market as well.

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Sharon Tzib April 12, 2014 at 12:48 pm

Having lived in Belize for the last four years, I can add that while Belize has its own currency, it is pegged 2:1 to the USD, and USD is widely accepted here. Most all real estate is listed in USD prices (rental homes too). When the U.S. housing market tanked, so did Belize’s housing market.

The thing any one who invests abroad needs to be keenly aware of is the ease of selling your property should you need to liquidate, and how volatile the exchange rate is. In Belize, the exchange rate barely fluctuates, however, it can take 2-3 years to sell a property here. These are all things to keep in mind if investing internationally.

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Cameron Benz April 13, 2014 at 2:52 pm

I was curious how Argentinas stock market faired during this collapse. I tried looking into it but wasn’t having luck. My rationale was that it might offer some insight into what would happen when the US dollar collapses.

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Chad Carson April 14, 2014 at 10:11 pm

Yes, real estate is a good asset for Argentinians to invest in, but I would argue only free and clear real estate makes sense for them. For those who owe a debt on their real estate, inflation and devaluation of the currency can be big trouble.

One of the big benefits of leverage in the US is essentially a short on the dollar (borrow today’s dollars, pay back with cheaper dollars later), but Argentinians can’t short the peso because they usually borrow in dollars and pay back in pesos.

Here’s a story to illustrate:

We stayed with a friend in Buenos Aires who told us that during 2001, he owed 60,000 DOLLARS (at that time 1:1 with pesos) on his house. He earned 120,000 pesos per year, so all is well … right?

Almost overnight the peso went from 1:1 to 10:1 with dollar. This means his 120,000 pesos now are only worth 12,000 dollars. So he’s earning $12,000 per year to pay back a $60,000 mortgage!! It’s like he took a pay cut of 90%!

Bad news. It was a disaster for people like my friend, and the government had to bailout a lot of people during the crisis.

Despite a lot of moaning from Americans, we should feel fortunate with our country’s monetary situation. For all the problems with our federal government, we’ve got NOTHING on Argentina and others.

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javier Kogan April 21, 2014 at 9:25 pm

Chad, there are a few mistakes on the numbers you posted. There was no 90% drop on your salary,the exchange rate changed 3:1 to the dollar and they also changed any debt that was in dollars was converted to pesos… That scenario is no longer possible in Argentina. You will not assume a debt in dollars in Argentina, It will be a loan in Pesos, that will be adjusted every year by different inflation index depending on the institution that is lending you. Still you can have cases where you have a negative rate, (loan adjust at 25%, Inflation is 30% salaries go up 35%). People has been enjoying this for a couple years already. Still, it doesn’t matter what the case is, prices will not go down, they are set in dollars, but legally have to sell in pesos. Like you mention, it’s great to have Real Estate paid off, and that is how most people has it there and why prices don’t go down that much. Unless you really need to sell your property. But then again, it’s always crazy to invest in a place where rules can change in a heart bit.

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Lisa Phillips April 15, 2014 at 1:16 pm

I like this article Leon. Not only the fact that you got up and flew to Argentina to see for yourself, but also the broader economic discussion that is a huge part of real estate investing, outside of purchasing and renovating a home. Keep ‘em coming!

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Tom Phelan April 15, 2014 at 1:28 pm

Quality real estate in Argentina is not cheap anymore, nor is it in Uruguay or Brazil.

That is why money from these countries is pouring into Miami where a great Condo cost
less than highly touted Argentina, Uruguay or Brazil condos in glamor spots.

Probably the best way to buy real estate in Argentine is to offer to pay with US currency and wire the money to a USA account. Most Argentines would love this fact as they desperately want to get their excess money out of the country.

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