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Over the years as I’ve written about moving abroad, readers have often told me they worry about buying into global real estate markets. Some see it as more risky than buying property where they live now.
There are some valid fears behind that, which I’ll go over in a minute, but if done right you have high upside and not much downside, mitigating your risk. To do it right, you take your time, keep your eyes and ears open, and make sure you’re not investing all your life savings in one investment. At worst you keep your expenses down and break even. On the upside, you make a nice profit.
I have strong opinions about domestic and global real estate that I’ve backed up with decades of my own actions. I bought my first house in the USA at age 25 and did it twice more as I got older. I was also a renter plenty of times as well, including in all the places my family lived in while in Tampa Bay. (In between I was a nomad with a backpack roaming the world.)
For the past decade and a half, I’ve felt it’s safer to own abroad than to buy real estate in the United States. I own a house in Guanajuato free and clear, which has been handy during this virus-induced global recession. My property taxes are less than $200 per year. I purposely own nothing in the country of my birth though except what’s in my retirement accounts. No real estate anymore.
The Importance of Timing in any Real Estate Market
Back in late 2005 I wrote a freelance article for a (now defunct) living abroad publication called “The Riskiest Real Estate Investment?” I pointed to all the canaries in the U.S. real estate coal mine and made the point that putting your money into global real estate—especially in Latin America or Eastern Europe—had far more upside potential that buying a vacation home in the U.S. I wasn’t sure when the U.S. real estate market would crash, but I knew it was looking more and more like a house of cards.
It didn’t take a crystal ball to see that, but it took a little while before everything played out as expected. (Watch the movie The Big Short for some of the reasons why.) Three years later, home foreclosures in the U.S. reached a record level. Surprise surprise, all those interest-only loans and teaser adjustable rate mortgages turned out to be big trouble when prices flatlined and investors couldn’t flip their new purchase to a greater fool.
Naturally, the places where prices appreciated the fastest saw the most trouble. The foreclosure rates were the highest the in Mortgage Bankers Association’s history and the spike “was much steeper in California, Florida, Arizona, and Nevada.”
The fallout from the financial crisis was swift and brutal. In some markets, real estate values tumbled by half. Whole chains of banks and mortgage companies went under. The stock market crashed. Many homeowners either walked away or were forced from their homes. Look at that chart and imagine how you would feel if you spent a fortune on a California home in 2006. You were then underwater for a good decade: if you had sold, you would have lost a significant sum.
If you bought a condo in the New York City area in the early ’90s and sold it in 2003, as I did, you looked pretty darn smart. If you had to sell a house in Nashville in 2010 though, as I also did, you did not look very smart at all. People forget how important good (or lucky) timing can be when you hear stories about people making a big profit on their home sales. More often, they would have been better off renting and putting the difference between that and the true cost of owning a home into bond funds or a business. “Buy low, sell high” is dead easy to remember, but not so easy to implement when the market forces are beyond your control. The higher the prices, the higher the stakes.
Now the world is in recession and 1 out of 5 Americans are now unemployed. For now real estate prices are holding up fairly well because inventory is still limited. But what happens if millions of people can’t make their monthly mortgage payments anymore and landlords have to start selling out of desperation because their tenants can’t pay the rent? That snowball will turn into an avalanche. Right now, Zillow says “Arizona home values have gone up 7.5% over the past year and Zillow predicts they will fall -0.5% within the next year.” After that…?
Developing Markets Are Less Dependent on Debt
If you buy a house or condo in a developing country, from Panama to Bulgaria to Thailand, you will probably need to wire the whole sale amount plus closing costs to some kind of attorney before you get the keys. No 30-year mortgage, no variable rate + balloon payment, probably no seller financing either. If there is any kind of financing option, the terms will usually be onerous, with double or triple the interest rate you would pay where you live now. So you walk away owning 100% because you have to pay 100%.
As a result, when’s the last time you heard anything about a housing bubble in Mexico, Romania, or Cambodia? Prices may be high on the Pacific Coast of Mexico and Costa Rica because so many foreigners live there, but prices only took a temporary dip because demand waned when the U.S. market tanked. It only took a few years for values to recover, even in expat enclaves such as San Miguel de Allende, Boquete, and Panama City. They barely budged in Antigua, Guatemala. Global real estate markets that serve more Europeans and Asians saw an even shorter recovery time.
Meanwhile, it would be quite difficult to double or triple your money in a decade on a real estate investment in the USA now. If you have to finance it and pay more interest than principle, it’s even tougher. You’d have to time it right (back to that again) and buy at the coming bottom, sell at the eventual high.
In some foreign markets though, that’s an easier scenario to picture. I’ve personally seen it happen over and over in Mexico and I’ve interviewed people who have seen it happen in other markets outside the U.S., in countries on the rise economically. Then when you look to the downside, the chance of losing half your investment is close to nil. It would take a natural disaster or a political upheaval to destroy a market the way the financial crisis in the late ’00s did in the USA. The latter can happen of course—look at Venezuela—but usually the warning signs come years before the actual meltdown.
How to Protect Your Downside With Global Real Estate
Almost no real estate investment is a sure thing if it’s a legal and transparent one free of corruption. This is true in any country. Unless you have insider knowledge, you are subject to the whims of the market. Speaking as a person who has bought and sold one Mexican house and lives in another I own though, here’s my advice on protecting your downside and making sure you invest well.
Don’t Put All Your Chips Down
Investing your whole life savings into one single vehicle is always a terrible idea. If you put all your available money into a house, that may seem sensible because you can live in it, but you need diversification to protect your downside. What if you had done that in Venezuela 15 years ago, Nicaragua 5 years ago, or a property on the side of a volcano in Guatemala a year before it erupted?
Real estate should only be one part of your portfolio. If it would take everything you have to buy a place, you’re definitely better off renting. That makes you more mobile if something goes wrong and you’ve still got the rest of your investments or savings.
Don’t Buy at the Top of the Market
This is good advice anywhere, but is especially true in developing markets where you don’t have Zillow, MLS systems, and public records of sale prices. If a pitch from a local agent is something like, “This market is on fire right now!” then you probably want to run from that fire, not jump into it.
If you buy in Bansko, Bulgaria on the other hand, it’s hard to go wrong. If you lost your entire investment in this market, you would be out less than what most UK workers earn in a year:
Look at Where Most of the Sales Prices Are
In most real estate markets anywhere, there’s a sweet spot range of sale prices where most of the action is. Generally that’s a percentage deviation up and down from the median sales price. If you get too far beyond that, you might have a tough time finding a buyer when you need one—and it may be harder to rent out. So if most of the houses are selling in the range of $125K to $200K, you don’t want to buy a house that’s $2 million unless you’re going to leave it to your children. Or you don’t mind leaving it on the market for three years when you have to sell it.
This will vary greatly by market of course. A million-dollar house in Nicaragua would be an opulent mansion. A million-dollar budget in Los Cabos might get you a condo with a water view.
Take Your Time
If you’ve ever watched House Hunters International, you may get the impression that it’s perfectly normal to swoop into a place you’ve never visited, go look at a few houses, and buy one. But you do know that show is completely fake, right? The prices are accurate, but everything else is a fictional TV story. The people have always already rented or bought something before the camera crew arrives. The big dramatic decision was made months ago. One episode’s star had looked at 42 condos over the course of 6 months before they picked the one (of a supposed 3) they ended up agreeing on in the show.
The ideal way to buy foreign real estate is to back up a year or more before you even start that process and rent. It’s routine practice in developing countries to wildly inflate a listing price hoping some dumb sucker will pay it. You’ll see a lot of listings like that if you look online and in English. Sometimes the seller tells the agent, “I need to walk away with $100,000. You can keep what you get beyond that.” So the agent lists it at $175,000 and hopes for dumb luck when the seller would have sold it directly to you for $105,000. If you take your time, look around, and talk to people without being in a hurry, you’re much more likely to get the real price instead of the gringo/farang price.
If you take your time when looking at foreign real estate, you’ll also have a better sense of neighborhoods, of how the sun hits, of what locals say about the neighbors. If you buy near where you’re already renting, you know it even better. Plus you’ll have a better idea of what local costs are like if you need to add a room, renovate the kitchen, or upgrade appliances.
Gaze into the Future
There’s a business exercise called a SWOT Analysis that looks at strengths, weaknesses, opportunities, and threats. It’s important to use some form of analysis like this for a place too, especially if you’re about to plunk down a sizable percentage of your net worth there.
Strengths and weaknesses are pretty easy, but gazing into the future can give you a good sense of what can go wrong and what can improve the situation enough to make property values rise. Is a certain neighborhood getting more gentrified each year? Are more people with money moving in? Is a new highway/light rail/park coming that will make the city or neighborhood more attractive? Are more tourists coming who are renting houses and apartments? Is this place in a location that has been popular for centuries and will continue to be?
On the weaknesses side, is there potential for increasing crime or corruption? Is the country’s political system shaky or is a dictator on the rise? Are property rights on shaky ground? Is the tax burden getting too onerous for the population to bear? Can a loud bar or auto body shop open up right next to you, bringing the value of your home down? Some of these issues are probably threats where you live now too, but they’re “the devil you know” instead of the one you don’t, which can create a problem of feeling blindsided if you don’t know all the possible threats.
If I had to bet money right now, I would feel confident investing about almost anywhere in Europe except Hungary, Poland, and the UK. (Right-wing governments on the first two, Brexit on the third.) Georgia and Morocco look promising. The only Southeast Asian country that consistently seems to want foreigners to hang around is Malaysia and there’s a supply and demand imbalance there, so I’d only invest in a condo that seems like a bargain somewhere else in the region…and only if I already had permanent residency. I’d feel confident in Uruguay, Ecuador, Colombia, or Panama in Latin America. On the other hand, I would only rent if heading to Honduras, Nicaragua, or anywhere outside Antigua in Guatemala.
Overall, everyone has a different tolerance for risk, but recognize when you are amplifying that fear just because a market is foreign and you don’t know it as well as the one you’re in now. As I’ve seen several times in my life now, real estate values don’t automatically go up forever and sometimes they need a correction. Buy in a smart way though and you can minimize the risks.