Two Problems With Renting Overseas
Our motto for anyone moving to a new country is always: Rent before you buy. Renting rather than buying has important practical advantages. It allows you to remain mobile and flexible and saves you the carrying costs associated with home ownership. Most important, it gives you a chance to get to know your new home before you commit in full, so you can be sure a place suits you before investing in the purchase of property there.
There is a potential downside, however, to renting rather than buying as soon as you appear on the scene in your chosen retirement haven. Real estate prices could go up, maybe significantly, during your getting-acquainted period. This risk scares some people, as they don’t want to get priced out of the market if it turns out to be the place where they want to settle long term.
This isn’t nearly as big a concern today as it could have been a few years ago. Through the first half of last decade, for example, some property markets were appreciating noticeably month-on-month. This is almost unheard of today. Most markets today are stable…flat.
Still, if you have concerns along these lines, here’s what I suggest: Rent a place to live…and purchase something for investment.
I’ve seen this play out in different ways over the years. Nearly three decades ago, I knew a French family living in Paris with three kids. They needed a place large enough for their brood but didn’t have the cash (or the interest) to buy an apartment big enough for a family of five.
Instead, they rented one in a neighborhood where they wanted the three girls to go to school. Meantime, they bought a smaller two-bedroom apartment in a neighborhood where they thought they’d like to retire. They rented out the two-bedroom apartment for enough to cover the mortgage (and a bit more). I’ve lost touch with them, but I imagine that, by now, their daughters grown, they’ve likely made the transition, converting their rental investment to their retirement home.
More recently, a friend moved to Uruguay, where he bought a small apartment to use as a base while exploring that country. He knew he wanted to get money out of the United States as soon as possible, but he wasn’t sure where in Uruguay he might eventually want to live. He found an apartment he was sure he could rent. Meantime, he stayed there himself as he came and went. Once he identified his final landing spot, he bought another apartment in the area, keeping the rental as well (which continues to throw off a nice yield).
Again, the danger of getting priced out of a market isn’t great anywhere in the world right now…but here’s another consideration: currency risk.
While most country’s real estate markets are flat these days, their currencies may not be. I’m currently investing in Medellin, Colombia, and Fortaleza, Brazil, two places where the local currencies are fluctuating every day against the U.S. dollar (my base currency).
This risk is much harder to manage. If you’re sure about a market, trying to time the short-term direction of its currency against your base currency may gain you a few percentage points. As it is doing for me right now as I prepare to move more money into Colombia to cover the costs of the renovation of the apartment we’ve just purchased in Medellin. I’ve been watching the Colombian peso lose value against the U.S. dollar, biding my time, and am just about ready to hit Send on the wire transfer.
However, I’d suggest that you can’t worry about how long-term currency movements will affect the cost of a piece of real estate you’re interested in buying. It’s just not possible.
You should be aware of any long-term currency risks…and then you should set them aside. Certainly if you’re shopping for a place to live, base your decision on that–that it’s a place you’d like to live. You’re buying (in theory) for the long term, and there’s no way you can predict or allow for currency movements up or down over many years.
Get distracted trying to do that and the greater risk is that you’ll lose out on the property you want. Instead, I recommend that you move the money you intend to use for the purchase before you begin shopping. This way, it’ll be there when you find what you want and need it.