I regularly get good questions from seasoned real estate investors whose experience has been limited to their home country… in most cases, Americans with portfolios in a single market have done well in since the 2008 global real estate meltdown.
An interesting question to me came from a gentleman who wondered why he would buy a rental property in another country when he has all the infrastructure for rentals in place back home. Why put the effort into setting up new infrastructure for just one or even two properties?
Even if you’re new to my writing, you know the answer—diversification.
Unfortunately, most people who started investing in real estate in the United States in 2009 or later probably didn’t see the negative side of having all their properties in one market. They make good money. They’ve seen capital appreciation and built a portfolio.
However, it’s not a diversified portfolio.
A market downturn can cause serious damage to that portfolio. If it’s leveraged, a downturn can wipe it out.
I met a guy in Paris once who told me the story of his lost real estate empire in Boston. He built up a portfolio of more than a dozen properties with cash flowing in well. Then the rental market started to change… companies were leaving the city… renters became hard to find.
He was able to keep up with his mortgage payments for a short bit, but as his vacancy rate increased, his cash flow eventually dropped beyond his ability to make up for the shortfall, and his portfolio collapsed. He lost all of his properties.
This investor thought he was diversified because he owned properties in different neighborhoods of Boston. He realized too late that wasn’t the case. Changes to the Boston market affected all of his properties.
Of course, in 2008, investors worldwide took a hit to their property portfolios, but, frankly, mine remained relatively unscathed. I did have two rentals in the U.K. that followed the Boston story. Rents dropped, and I couldn’t (really, didn’t want) to keep up with the negative cash flow. I did some math and decided it was better to just give the properties to the bank.
However, my rental property in Panama dropped in value, and the rent went down, but even with a lower rental income, the mortgage was more than covered. Plus, the value drops in Panama weren’t as dramatic as many other markets… and recovered more quickly.
My rental in France continued to rent. Prices for land investments were down, but with no mortgage payment, I could ride out the downturn for that property.
The person who asked the question about the effort to set up infrastructure for one or two rental properties in another market got the point of diversification but didn’t recognize that, in fact, his rental portfolio has gone from investment to business.
He has staff, even if they aren’t on salary. He has responsibilities even if he isn’t managing the day-to-day operation of his rentals. He doesn’t need to set up the same business infrastructure to make investments in another market or another country.
Turn-key opportunities for real estate investment are out there. Some are riskier than managing a rental property yourself. You don’t have the same control.
All that said, I understand his position. I’m not interested in investing in U.S. rentals because I don’t want to set up the infrastructure to manage them or do the research to understand any specific market there.
Part of that is because the United States has a lot of real estate investors competing in the market. You can do well if you specialize in a single market that’s strong, like this guy has done, but what do I do when the market turns?
For me, diversification has been my friend, and with my current portfolio generating income in multiple currencies, I don’t worry too much about any individual market downturn… or another global downturn.
The real answer to his question is peace of mind. Put some of your assets to work in another market for peace of mind.
Stay diversified,
Lief Simon
Director, Overseas Property Alert