What Rising Global Debt Means for Real Estate Investors

We're just seven years past the onset of a worldwide financial crisis, and global debt is still growing at an astronomical rate. What does that mean for real estate investors? A lot, actually. For starters, it means you're on the right track. Real estate is a smart investment in today's economic times. It's a good idea in the U.S. market. But, for those willing to consider other options, there may be even more profitable options available just a little further south.

Here's How Bad It's Gotten

The Guardian reported earlier this year that global debt has grown by $57 trillion, now totaling $199 trillion, in the seven years since the crisis. That's a 40.1% increase. All the major economic powers are reporting higher ratios of debt to gross domestic product (GDP) than they did in 2007, including the U.S., Australia, Germany, and Canada. China has even surpassed the U.S. with a national debt that's 282% of its GDP (vs. the U.S.'s 269%).

And Here's Why You Should Care

The mounting global debt is more than just a number to be thrown around during campaign time. Although it's usually cited by media outlets as an indication of poorly performing governmental policies or parties, it actually has some implications on individuals, their savings, and their investment portfolios. We've seen things like what happened in Cyprus when the debt ratio became such that banks couldn't raise enough liquidity from the markets to remain solvent and banking customers (from 100,000 euros on up) were forced to take a 47.5% "haircut" on their deposits. In simple terms, someone with 100,000 euros in a Cypriot bank saw that total reduced overnight to just 52,500 euros. Instead of a bailout, they experienced what's known as a "bail in," where depositors, rather than taxpayers, finance the bank's loss. What's more, the government froze all bank accounts and prevented customers from withdrawing any of their own money. The country's debt to GDP ratio when all this took place? A mere 134%. Let that sink in. It's naive to think this couldn't happen in the U.S.

Debt Spells Even More Bad News for Investment Products

If bank accounts are at risk of losing almost half of their value when a country's economy goes south, other investment products--like stocks--are even more vulnerable. By owning stock, you've basically paid a certain price to own a chunk of a company in hopes the company will grow and so, as a result, will your little piece of the pie. If their debt becomes too high, or their own investments fail, your stock could lose value or--at the very worst--become worthless.

Why Real Estate is Your Safest Option

In today's climate of mounting global debt, real estate is among the best, if not the single best, option for where to park your money. (You could argue that a coffee can under your bed is safer, but even then you can't rule out risks like fire or theft.) For one thing, real estate is...well, "real." It's a tangible asset, not just a piece of paper or some numbers in a ledger. It is its own security. For another, it's finite. As it's often said, they aren't making any more of it. As a result, it carries a permanent value.

Why Tropical Real Estate is Even Better

Given the aforementioned U.S. debt ratio--as well as other important factors like price, property taxes, and a lack of investor incentives--more people than ever are thinking outside the border when it comes to real estate investments. There are a number of reasons for this. For starters, many developing countries offer significant bargains on desirable properties, compared to what a similar home or piece of land would cost in the States. Take for example, the Latin tropics. In most Central American countries, foreign property owners have the same rights as the country's own citizens. Many offer favorable incentives, like property tax exemptions. Where taxes are levied, they're often at a substantially lower rate than in the U.S. These factors make investing in tropical real estate an ideal option for many investors. And that's even before you take into consideration that some of those bargain properties out there come with jaw-dropping views and incredible access to nature and culture.

But It Takes a Special Breed

International real estate investing isn't for everyone. But it's an amazing opportunity for those who are adventurous enough to entertain the option. For many it starts as an investment and ends up as a new lifestyle in a foreign setting. If the idea interests you, start by taking a trip down to see what it's like. I think you'll find it more appealing than your bank lobby.