Structuring Your Property Investment Portfolio
Buying wholesale, path of progress, crisis investing, real productive assets…why bother with all these different real estate investment strategies? Why not just focus on one? Wouldn’t that be simpler?
Yes, sure. It’s be more simple, but, over time, it’d also be far less effective.
One of the fundamental advantages global real estate investing offers is diversification. You want to capitalize on that advantage every way you can.
All those bubble investors in the United States who “controlled” millions of dollars worth of pre-construction condos found out the hard way what putting all your eggs in one basket can mean for your wealth when something goes wrong. Your net worth can disappear, and maybe you’ll have to, too, for a while, until the smoke clears.
The first opportunity international real estate gives you for diversification, to state the obvious, is the chance to own property in more than one country. It can automatically give you currency diversification, as well, if you buy in a country where real estate changes hands in a currency other than the one you use at home (a rental apartment in Paris, for example, if you’re shopping with U.S. dollars). However, the opportunity here for diversification is much greater and has to do with holding in your portfolio different types of real estate with different investment windows and different exit strategies.
Buying wholesale might lead you to hold raw land in an emerging market early on in its growth cycle…or in a more developed market at the bottom of a cycle.
You could expand and diversify your portfolio then by buying land in the path of progress…or by picking up a pre-construction condo-hotel unit (that also qualifies as a real productive asset that should throw off cash long term). The possible combinations are many.
And the diversification is critical. Over the years I’ve been at this, I’ve been approached all too many times by attendees at my real estate investment conferences with stories to tell. They go something like this:
“I owned several dozen properties in X. They were renting well and cash flowing nicely. Then the local economy turned, and tenants became thin on the ground. All of a sudden, my cash flow was negative, and, before I knew what was happening, I’d lost all (or nearly all) my properties!”
This is what can happen when you’re not diversified and highly leveraged, as most people tend to be with rental properties.
Here’s what I recommend you do to mitigate the risk of this happening to you:
Start with wholesale opportunities, which tend to be longer term. This portion of your portfolio should represent money that you won’t need for at least five years or more. It’s also the portion of your portfolio from which you should expect your highest annualized returns.
Path of progress is generally a shorter-term play and can be highly profitable if your timing is right. Rarely will your timing be exact, but buying in the path of progress even a year after a target area has been identified can translate into excellent ROIs.
Timing is also critical for crisis investing. True crises don’t last long, and, generally, economies recover quickly…if they are going to recover. This means that, to act on crisis investing opportunities, you need cash on hand, set aside for this strategy. Real estate values in Argentina began to recover within 12 months of that country’s financial crisis at the end of 2001. Prices didn’t return to pre-crises levels for about three years and then continued beyond where they’d been prior to the economic meltdown. So if you had bought even 15 months after the crisis (as I did), you would have doubled your money in fewer than 5 years (as I did).
Generally speaking, five years is the longest length of time you should plan to hold a crisis buy, unless you have reason to believe property prices will continue to increase at an extraordinary pace.
Productive assets you buy for the yield and, as well, some capital appreciation. If you are a conservative investor, real productive assets should constitute the greatest percentage of your real estate holdings. Most investors moved away from yields during the real estate boom, turning their noses up at the levels of yield they typically bring. A net rental yield of 8% per year plus perhaps 5% capital appreciation a year wasn’t nearly as sexy as the 30% to 40% (or more) annual returns promised (and, in fact, still promised today) by some pre-construction marketers.
Yes, you can achieve those 30%- or 40%-per-year returns. I’ve done it and better. But speculative pre-construction plays shouldn’t serve as the foundation of your portfolio. Certainly, they shouldn’t constitute the whole of your holdings. Real productive assets, on the other hand, are your anchor. Further, they can generate cash that you can put aside for future investments…a crisis opportunity buy, for example.
A well-rounded international real estate portfolio might have 30% in wholesale opportunities, 20% in path of progress deals, 15% in crisis investments, and 35% in properties giving you a yield. Of course, the percentages will change over time. Some investments require more money to get into than others, and this can skew things temporarily. And a wholesale pre-construction deal can turn into a real asset rental property once you take possession.
Meanwhile, if one of the markets you’re invested in stalls, or, worse, collapses, you have your wealth distributed among other markets and many different holdings.
All is not lost.
Lief Simon
MAILBAG:
“I’ve just stumbled across your site, and I’m wondering if it is aimed at Americans, or would the information you publish apply to Canadians, as well? Specifically, for example, do you speak in Canadian or American dollars?”
— Robert A., Canada
Generally, we speak in U.S. dollars, though, sometimes, as appropriate, we quote prices in the local currency (euro, say, or Thai baht). We indicate the unit of currency (US$, for example) on every reference.
Currency references aside, the material we publish and the recommendations we make are as appropriate for the Canadian reader as they are for the American, British, Australian, German, etc., reader, with some important exceptions to do with taxes and residency options and requirements. These things can vary depending on your nationality. In other words, dear new Canadian reader, you should find much of value and interest in these dispatches, and I hope you’ll keep reading!
