Investing in Real Estate Overseas: The Really Big Leap
A couple of years ago, I was talking to a customer for my property management software who was based in Ulan Bator, Mongolia. “Mongolia!” I said. “Holy cow! Why are you investing out there?”
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My customer wasn’t from Mongolia, and he wasn’t particularly concerned with the fascinating and exotic nature of the country, although he appreciated it. (Mongolia once controlled almost all of Asia, and was ruled by colorful figures such as Genghis Kahn.) No, he was in Mongolia to make a profit.
I thought of my Mongolia friend the other day when I saw another real estate pundit talking up the virtues of Cyprus and Spain. Does it really make sense to invest overseas? Does it make more sense now than a few years back?
Finding a pocket of prosperity
The best reason to invest overseas is to find a pocket of prosperity that is richer than any we have here. Some countries have much more dynamic economies than in the United States. Mongolia, just for example, has been a free-market democracy since 1990 and is a staunch US ally. In 2008, the unemployment rate was just 3 percent. No doubt it’s higher now, but that’s a pretty low baseline.
Other countries may also emerge from the recession faster than the US. Many Eastern European and Asian countries have more open markets and lower overall labor costs than here, and are rapidly industrializing. These moves are likely to lead to improvements in the standard of living, most likely accompanies by a rise in the value of real estate. Things are also looking up in China, Japan, Singapore, France, and Germany among others.
The worst reason to invest overseas is that these locations are exotic. I have seen many marketing packages for flashy developments in beautiful parts of the world, or even on cruise ships. Typically these developments are selling “lifestyle” – beautiful views and luxury. But typical investors in these deals aren’t going to get the lifestyle – their tenants are. They are making an emotional decision in a situation that calls for hard-nosed financial analysis. Will the property make a profit? That’s the only question that needs answering.
Why I won’t invest overseas (yet)
Unfortunately, that’s also a very hard question for the typical investor to answer with an overseas property. Sure, you can predict the overall direction of a country’s economy to a certain degree. However, there are several factors that make it harder to predict how an individual property will do.
- It’s much harder to research specific areas in a foreign country. Not only will there be less information available, much of it will be in a foreign language. You might think you’re buying in the Korean equivalent of Cupertino, California, while you’re really buying in that country’s Camden, New Jersey.
- It’s much harder to know and trust the legal system. I’m not implying that the foreign country’s system will be corrupt. It’s just that, well, you really won’t understand it. How does the eviction process work in Thailand? Who knows?
- It’s much harder to get to know the property itself. This is really the deal-breaker for me.
My rentals are in a town that is just 20 miles from here, so I can get there pretty easily. Even with a property manager, I still want to check on the place myself from time to time to be sure it’s well-maintained.
If I buy property in a remote location in the continental US, the travel costs in time and money are still low enough that I can justify going there every few months.
On the other hand, let’s say I do buy in Ulan Bator and want to go inspect the property. The round trip will require about 40 hours on airplanes at a cost of more than $2000. It is physically impossible for me to get there and back in less than three calendar days.
All of these factors mean that if I buy over there, I have to trust the local property manager big-time. I’ll have very little clue if he’s making bad decisions or cheating me.
Who should invest overseas?
Just because I won’t invest overseas doesn’t mean you shouldn’t. If you are more willing to take a risk for what could be a substantial profit, overseas investing might be for you.
If you really know a foreign area, of course, you substantially cut down on the risk of owning property there. Imagine an investor who grew up in Poland and still has friends and family there. He is far more likely to do well with a property there than someone who doesn’t know the first thing about Poland (like me).
Finally, as we’re weighing risks, we also have to weigh rewards. I can imagine some overseas opportunities becoming so compelling, with such terrific potential, that even risk-averse investors will take an interest. We’ll have to see what the next few years bring.
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