Breaking the Comfort Zone: Investing Internationally

[John Flanagan]

With real estate markets throughout the US continuing on the tear they've been on for quite a while I wanted to create a post about a topic I don't think is covered enough on Bigger Pockets, investing internationally.  Personally, I have been looking at investing internationally for the past 5+ years but didn't pull the trigger until recently.  While I had done extensive research on investing in countries from Central and South America to Europe and spoke with people to help facilitate investments in certain countries, there was always an excuse or domestic opportunity that stopped me from doing it.

This year I partnered with two brothers on a mixed-use 100 unit development in Peru, Aire Simbal.  While still early in the project, to say the numbers are staggering when compared to what I would be able to do in the States on the same level is an understatement.  Building and labor costs are a fraction of what I have found in the states (not to mention quality laborers are easier to find and more efficient in my opinion). In regards to rentals, we are using the short term rental model since the market is almost non existent in the area and have had to limit stays to 3 nights on the 2 units currently rentable since they are booked solid.  

Would love to hear from other members about their successes (or failures) investing outside of the United States.  What countries and what strategies were used?  Personally it feels like half the people we compete with for properties here in the US couldn't spell Real Estate if you gave them the letters and they have only contributed driving property values higher and higher.  Would love to hear your thoughts! 

[Mike Lambert]

@John Flanagan

Congratulations on taking action and great idea to bring the subject! I hope the project goes well. I'm almost investing exclusively internationally because I have a competitive advantage there and I'm not suggesting everybody should do the same. However, I think that anybody who has the means should consider investing internationally for diversification purposes.

As usual, investors have short memories. They forgot the last property crash and global financial crisis. Many think it was caused by subprime mortgages and therefore won't happen again. This is short sighted. The last crisis was actually caused by rock-bottom interest rates, money printing by the central banks and real estate prices totally disconnect from reality (rents). Subprime mortgages were just the trigger and the result of this causes. Guess what? These factors are present again in many places in North America and Europe. Is a crash or correction coming at some point? No one has a crystal bowl but the current situation could go on for years given some offsetting positives like interest rates and the lack of inventory. However, it might not be a bad idea to diversify. After all, when real estate was crashing in the US and some European countries in 2008, it was booming in other places like Brazil for example.

Each country is different though. Given that I have been a big proponent of international investing here, it might sound unusual to some here that I adopt a cautionary tone here because people leverage all their US properties to buy in Peru. The cautionary tone isn't for you since you've done 5+ years of research; it's for those who haven't. What you've done sounds great but you might have glossed over the huge risks involved. Even though it's great that we are positive about what we're doing, I think we should never hesitate to mention the risks and negatives of what we do. As you implicitly seemed to acknowkledge, it would be very difficult/risky for anybody who doesn't have your connections to do anything similar or any development overseas for that matter. Even in your situation though, the risks are still very big, given the country in which you decided to invest.

Investing is different in every country. My first criteria is that I won't invest in countries in which I'm treated second class as an investor because I'm a foreigner. As much as I think that Latin America can be a great place to invest, Peru is regrettably not one of those countries. Moreover, the politics in Peru have rarely been conducive to foreign investment and it could get much worse with the election of a new president that some label a communist. If you ever have to go to a Peruvian court against a Peruvian citizen or entity, you might still lose even if you think you have the law on your side.

In my not so old previous career as an international banker, I was lending hundreds of millions of dollars to Latin American (and European) banks (hence my competitive advantage in terms of knowledge and contacts when it comes to international investing). While the bank was more than happy for me to splurge tens of millions of dollars in countries like Mexico, Colombia, Brazil or Uruguay, my bosses didn't even allow me to utter the name "Peru" during the sessions of our credit committee, as they were afraid it'd undermine our credibility. As a Canadian, we knew all too well that some of the biggest foreigner investors in Peru are Canadian mining companies and that it's not unusual for the Peruvian government to try to change the terms of mutually agreed contracts. So, unsurprisingly, there are plenty of US and other foreign real estate investors buying properties in countries like Mexico, Colombia, Brazil or Uruguay but not many in Peru. So you might be a bit of a trailblazer :-)

I'm not in any way suggesting that you should stop your activities in Peru. After all, there are many businesses that are and will be successful there irrespective of the politics and legalities there. Never forget that you're a foreigner dealing with Peruvians within their own country so they have the upper hand, regardless of how many years of research you have done. Hopefully this will work well for you but I'm not sure the it's the ideal destination for the newbie real estate investor though.

Since you asked us to share our successes, I'll take the example of Mexico, who has had a very different attitude towards foreign investors. In contrast to what I wrote above, Mexico has been rolling the red carpet for us for decades and made massive investments in infrastructure to attract foreign investment. Like many other Americans and Canadians, I'm buying short-term rentals in Mexico's most popular beach towns.

That's something pretty much anyone can do, at least as a first investment overseas and they can enjoy their property as well. The main issue for many is financing. It's not necessarily that easy to get and it's expensive, although nowhere like in Peru. What many people don't realize is that, oftentimes, your ROI is higher on property in Mexico paid for 100% in cash than on a like US property financed with a mortgage! And, sometimes, the price of the property in Mexico is less than the downpayment of the like property in the US. When you have a high ROI, you can actually still use leverage since you can afford the high local interest rate. Still, many would-be buyers/investors don't have the needed cash so I'm doing my small bit to try to improve the local lending conditions :-).