Buying Real Estate Overseas

An Emerging Risk In This World Of Property Bargains

July 8, 2011, Liberia, Costa Rica: The risk in this current climate of seriously discounted real estate is thinking that you can make money on any purchase in an under-valued market.

Dear Live and Invest Overseas Reader,

As the adage goes, you don't make money when you sell real estate, but when you buy it.

If you don't buy right, the likelihood of your making a profit when you sell is greatly diminished. A big part of buying right is understanding who you'll sell to when the time comes to exit. Where will your eventual buyer come from?

From 2000 to 2006, everyone seemed to believe that property prices could only go up and that there was an endless supply of ready global buyers. By the end of that run, it was amateur hour.

I was in Montenegro looking at the property market in that country in 2005. One real estate agent who toured me around told a story of a buyer she had worked with the previous week.

The client was a young Irish girl. She was a hair-dresser from Dublin who had decided she should get in on the worldwide real estate boom. She couldn't afford anything back home, as Ireland was already well overpriced (especially for a young girl earning a hair-dresser's salary). So she'd targeted Montenegro, a recognized up-and-coming market at the time.

The real estate agent showed the girl several properties. When she walked through the door of one apartment, the Irish girl exclaimed, "It's perfect. I'll take it. How much is it?"...

That's how nutty the global property scene was back then. Everyone was afraid of missing out. The thinking was, buy now...understand what you're doing later...a crazy strategy that naive investors (like our young Irish lass) didn't find crazy because it never occurred to them that real estate prices could do anything but continue up.

Or that they'd ever have trouble finding another buyer when the time came to sell.

It's a very different world today...and I see a similar reverse risk emerging.

In the current climate of bargains and distress sales, you need to avoid thinking, "With prices this low, how can I go wrong?"

While that may be true in some markets right now, I wonder today about super-cheap houses in Detroit, Phoenix, Florida, the Costa del Sol, Bulgaria, Ecuador...

If you're looking for a place to live, that's one thing. But if you're buying for investment, cheap doesn't necessarily mean a good buy and it certainly doesn't automatically translate to a profitable investment. Especially if the market is driven more by foreign than local buyers.

This is not to say you can't make money buying cheap in the markets I mentioned above and others that are currently seriously under-valued. To do so, though, you must understand the forces at work. Why are prices so deflated? Is there some reason to believe they will appreciate in some identifiable period? Who is buying? Who might be buying in the future?

The most appealing property investments right now are those that are undervalued on a global scale (that is, that are cheap relative to comparable real estate other places) but that reside in markets with strong underlying fundamentals and positive economic upsides.

Medellin, Colombia, is one such market right now. You can buy here today for less than US$1,000 a meter. To put that in perspective, that's what it cost to buy into Buenos Aires following the 2001 economic crisis in Argentina.

There's been no economic crisis in Medellin. In fact, prices in this city have increased steadily over the last year or so, and I believe they will continue up for some extended time to come. I don't see a spike in this city's future...but a steady up-tick over time.

The point is that the current prices are a very good deal on a global scale.

Further, you can earn a decent net rental yield (depending on the property, I'd say 5% to 12%). This market isn't driven by foreign buyers, but they are arriving on the scene...a new force that is going to help fuel further appreciation in values.

Tourism is expanding, along with the demand for both short- and long-term rentals. The city itself is prosperous and growing...on the right track.

In a market like Medellin, where prices are absolutely low and the underlying fundamentals are positive, here, yes, maybe you could make money on almost anything you'd buy.

That's why I've bought...and am shopping for more.

Lief Simon

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