5 Rules For Overseas Property Investing
I grew up in a household that put great value on owning real estate. Before I was 10, my family had purchased property overseas, and would go on to do so many times over before I graduated high school.
My stepfather, real estate investing guru Lief Simon, now maintains a portfolio of 20-plus properties in various countries at any one time. The list changes as markets change… he buys, he sells, he renovates, he rents out, and he holds. Depending on what makes sense at any given time in any given place, he responds.
Suffice it to say, he has vast personal experience in just about every aspect of owning and selling property outside (and inside) the United States.
So when it comes to seeking advice on the topic, there are few better qualified out there to give some tips… and we managed to have him write down his top five rules for foreign property investment…
5 Rules For Overseas Property Investing
By Lief Simon
Over the years, I’ve come up with various rules for investing in real estate, but I’ve not actually written them all down in one place… until now. (And, frankly, I may have forgotten a few.)
Also, by way of full disclosure, I’ve broken all of these rules at one time or another… and the investments made while breaking my own rules have had varying degrees of success. The key is knowing you’re breaking the rules and being willing to accept the additional risk for not following them.
I’ll number the rules, but they aren’t necessarily in any hierarchical order…
Rule #1
Don’t invest more than 5% of your net worth in any single real estate deal.
For me, 98% of my investment portfolio has always been held in real estate, so I’ve used this 5% rule focused on real estate from the beginning. However, I’ve used it for non-real estate investments as well, including pre-IPO companies, among other investments.
You can make a minimum of 20 investments at 5% or less of your wealth. Therefore, if you’re working with US$1 million, that’s 20 properties at US$50,000.
Property investments for US$50k aren’t easy to come by today unless you use leverage, i.e. get a mortgage. When I was getting started with real estate 25 years ago, I was able to find some US$15k investments, which at the time was still more than 5% of my net worth… so I broke this rule fairly often early on.
However, I broke it knowing that I was putting more of my net worth at risk and therefore, I put more time in on my due diligence and assessed other risk factors more carefully. With a larger percentage of my portfolio at risk, the market, country, and property risk had to be lower.
While a maximum investment amount is prudent and using a percentage of your net worth helps you keep things in perspective when you’re getting started, a minimum investment amount also needs to be part of your criteria at some point of your investing career… leading eventually to Rule #2.
Rule #2
Don’t invest in too many small investments.
This rule came to mind when I found myself with too much administration with my portfolio, and I was considering a great opportunity that would have required more administration than made sense… for me. The investment was well under my 5% rule… too far under, really.
While the property and the projected returns were exciting, at the end of the day, the hassle factor wasn’t worth the effort. It would have been around a US$50k investment that required me setting up a new entity to hold title. It was pre-construction, so the time frame before cash started flowing was a few years. And, finally, the property wasn’t in my then annual travel itinerary, which meant added costs of travel to go check on it if I ever needed to or wanted to.
Having a couple dozen small investments may make sense on paper, but the administration could become a nuisance if nothing else. Annual property taxes, maintaining any holding companies, paying HOA fees… If a property is being rented, these can be handled by the property manager. If not, you’ll have to deal with them. Make sure you’re prepared for what administration may be required once you invest. The expected returns should be worth the time to deal with whatever you need to do.
To help streamline administration, I came up with Rule #3.
Rule #3
Invest in properties and places you’re interested in.
I’ve passed on great investment opportunities over the years that don’t fall into my annual travel circuit. Such an investment were pre-construction condos in Mongolia that targeted international companies that extract minerals to rent to their managers and employees. The prices were great for the properties and the projected net yields were 15% or more per year.
But getting to Mongolia wasn’t in the cards before or after any purchase, so I moved on.
The bigger underlying point of this rule, however, has to do with leaving yourself with options. If you invest in a property in a place you’d like to visit, then even if it doesn’t work out great in generating a rental yield, you can use it for your own vacations and get some value out of the property.
Plus, I’ve found over the years, if I buy something I like somewhere I like, there’s a group of people out there who will like it as well—making reselling a better possibility as well as keeping it rented.
This rule doesn’t always play out. I’ve invested in several things that I liked a lot, but in the end, the project went under. The investment losses in these cases came from direct investments with developers. One was in Thailand where the project was great, but the market at the time just wasn’t ready for it. The developer ended up selling the land, and I got some of my investment back. Fortunately, in that case, I did follow the 5% rule and the investment actually made up less than 5% of my portfolio at the time, meaning the loss didn’t hurt that much.
Rule #3 ties into Rule #4.
Rule #4
See it before you buy.
Basically, you should visit the country, city, and the property before you buy. Right now, with the pandemic, that’s not easy in person, but you can do virtual tours which is a viable option in some cases… especially cases where you’ve already been to the country (see Rule #3).
The overused term “boots on the ground” is overused because it connotes the overriding premise… go see for yourself.
When I bought a pre-construction condo on the beach of Estepona in Spain in 2000, I had driven the entire Mediterranean coast on that trip. I’d seen a lot of properties (which I’ll expand on for Rule #5) and towns. I’d met with many real estate agents and developers. The developer I met with in Estepona had just released phase I of a beach project.
They took me to the site which was literally a beach. They hadn’t even put up their sales office yet. There was nothing… and there was everything. The project hadn’t put a shovel in the ground, but I was able to see what was in the neighborhood. First of all, the property was actually right on the beach. It wasn’t beach-adjacent or ocean view across the road from the beach.
Second, it was close to town which had restaurants, shops, and grocery stores. It was in a location that other people would be interested in living or renting.
Had I simply seen a website advertisement for the project, I wouldn’t have been able to get a feel for the place and get a gut instinct for whether it made sense or not to invest.
This particular rule I’ve broken many times. The investments have ranged from complete losses to unbelievable returns… with a couple investments I own that I still haven’t seen.
Breaking this rule is one to do with your eyes wide-open. Many times, I broke it based on a recommendation from a real estate colleague. They have to know what they are doing… and even if they do, it doesn’t mean they are right all the time. These investments I’ve probably had 50% losses and 50% successes.
One investment I made sight unseen, other than some photos sent by the real estate agent (this was well before Zoom… or even Skype), turned out very well. However, in that case I was buying in Buenos Aires and the apartment was in the same building I had just bought another apartment. The floorplan was the same, but the apartment needed renovation. I didn’t actually see the apartment until more than a year after it was renovated, as it rented right when the renovation was completed.
That apartment in Buenos Aires worked out because I was following Rule #5.
Rule #5
Be in the market.
Many investors chase the latest marketing piece for a project or chase yields no matter where they are finding them. Being in the market simply means getting to know a market and paying attention to it so you know a good deal when it presents itself.
Chasing yields… like those 15% yields in Mongolia many years ago, can work out or not. However, if you know a market well, then you are better positioned to make a solid investment. This rule ties to rule #3.
While I advocate diversification (that’s really the Golden Rule for me), you don’t need 20 properties in 20 countries to have diversification. Besides investing in different countries, you can invest in different types of properties—rentals, land, pre-construction, as well as in different areas of any country.
Being in the market in one country, you’re more likely to hit upon a great opportunity like I did with that renovation property in Buenos Aires.
Of course, you don’t have to “be in the market” forever in the same country. Right now, I’m out of touch with the Buenos Aires market and would have to get up to speed for me to consider myself “in that market.”
You can be in the market fairly quickly with some experience. For example, when I bought my apartment in Lagos, Portugal, six years ago, it was my first trip to Portugal. I did my research beforehand on prices and locations… plus I had a long-time Portuguese friend who arranged for us to view 10 or so properties before making an offer on one. He was able to download his knowledge of the current market situation in a few hours while we were driving from one property to the next.
Fortunately, one of the apartments we saw fit my criteria and was an excellent deal… so I bought.
Breaking rule #5 probably means you’re breaking a few other rules as well, but not necessarily. People who buy a condo in Cozumel while on a cruise have their boots on the ground and are probably investing in a place they enjoy spending time. However, they most likely aren’t “in the market.” They don’t know what prices are and whether they are getting a good price or a good investment simply because they haven’t done any research.
Rule #5 would be the rule I’ve broken the least, but again, it’s OK to break one of these rules. Just do so knowing what you are doing… and mitigate your risk other ways if you can.
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These are the kinds of insights that Lief and his wide circle of trusted colleagues and friends share with attendees of our annual Global Property Summit, this year held virtually.
The Global Property Virtual Summit will provide you with up-to-the-minute intel, lessons, and actionable opportunities in real estate via live and high-definition video…
This is the 8th year we’ve held this event (check out this video to hear from past attendees), but the pandemic has forced us to go online this year…
The result is the biggest and most actionable property event in our history.
With no schedule or travel conflicts in place, nearly every developer in my rolodex has signed on to join us, and they’ve committed to offering the deepest discounts and best deals.
Likewise, every single Live and Invest Overseas expert has agreed to sign on for the many educational sessions.
Let us all show you, step by step, how to buy the property you want, in a location where you always wanted to be, and make money off the purchase… all while avoiding potential pitfalls and mitigating the risks.
And, remember, as a LIOS Confidential reader, you’re eligible for US$50 off the cost of entry.
Kat Kalashian
Editor, Live and Invest Overseas Confidential
