Foreign Real Estate: A Scary Investment?

Eric Fry By Eric Fry, Macro Strategist, The Oxford Club

Alternative Income

Editor’s Note: As you’ve probably heard by now, Macro Strategist Eric Fry recently won more than $46,800 on behalf of The Roberto Clemente Health Clinic in Nicaragua in one of Wall Street’s most prestigious competitions, Portfolios with Purpose.

And the Clinic is special to the publisher of Wealthy Retirement, The Oxford Club…

That’s because our CEO & Executive Director Julia Guth founded it in 2004.

It’s special to Eric as well. He has owned property in Nicaragua for the past four years. In winning the Portfolios with Purpose competition, Eric is able to give back to the community that’s embraced him.

In today’s article, Eric outlines the pros and cons of using foreign real estate to generate income.

 

– Rachel


Buying foreign real estate isn’t for everyone. But for those with the inclination to “globalize their lives,” foreign real estate can be a great option.

However, investing in foreign real estate can be very intimidating…

Sure, buying a home or a plot of land in a far-flung locale is not risk-free. But neither is it a risk-free endeavor to invest in U.S. stocks. And an overseas home has one big advantage over stocks: You can visit your home and sleep inside of it, even if its value is depressed.

You can’t visit or sleep inside of “AAPL” or “MSFT.”

Furthermore, thanks to the internet, cellphones and satellite TV, it is possible to export large portions of your existing lifestyle to almost any location on the planet.

In fact, I’m currently sitting on the back deck of my home in Nicaragua. My high-speed internet connection works just fine. The temperature in the shade where I sit is a very pleasant 80 degrees. From behind me, a gentle offshore breeze blows toward the majestic expanse of ocean that fills my gaze.

And whenever I walk out my front door to venture into the surrounding areas, I step into a gorgeous setting that resembles the Southern Californian landscape of 100 years ago.

And yet, it is not California. It is a world away, which is exactly how I feel whenever I leave my California home to spend time down here.

Know the Drawbacks

That said, a buyer of foreign real estate should not be blind to the investment pros and cons.

The biggest con is that it is illiquid. You can’t simply cash out whenever you want. Another potential con is that a foreign property, by definition, doesn’t lie within the United States. It’s possibly a con, but that could maybe be a pro…

Because foreign real estate is both “somewhere else” and immovable, it is an asset that lies well beyond the reach of a revenue-hungry government.


Foreign real estate also happens to be one of the few assets that triggers no automatic disclosure requirements to the U.S. government. Unlike foreign bank accounts, the IRS does not require U.S. citizens to report foreign real estate holdings, unless (or until) that real estate produces income or capital gains.

As an investment, foreign real estate diversifies an investment portfolio in a way that few investments can. That’s because foreign real estate usually does not move in sync with U.S. stocks or bonds.

Foreign real estate usually does not reflect the economic conditions in the U.S. Rather, both the long-term appreciation and the short-term rental income growth of a foreign property tend to reflect local economic conditions and trends. So if the local economy grows and prospers, the market value of your foreign property is likely to appreciate no matter what is happening back in the U.S.

Additionally, foreign real estate can provide a hedge against a falling U.S. dollar. Because foreign real estate is a tangible asset, it tends to appreciate over time against all forms of paper money – both the local currency and the U.S. dollar.

This tendency is particularly important today, when the dollar is stronger than it has been in more than a decade. Because the dollar has gained so much ground against every major world currency, most foreign real estate has become relatively cheap for the dollar-based investor.

So you don’t need millions in the bank to make it happen. In fact, in the best value destinations, you can own for a small fraction of what something comparable would cost you at home.

Furthermore, investing in foreign real estate can be so much more than a financial investment. It can be a lifestyle investment.

Unlike stocks, bonds or precious metals, a foreign residence can provide a great place for vacations or part-time living. But to fully obtain this benefit, it is important to purchase real estate that appeals to you emotionally, as well as financially.

Clearly, there is no one type of foreign real estate investment that is perfect for everyone. This is not a one-size-fits-all asset class. Rather, each individual must establish his or her goals and priorities, and then pursue a foreign real estate investment accordingly.

It is important to purchase property you would want to own no matter what – no matter how mediocre the financial return it gives you may be.

Nicaragua, for example, is a destination that has long attracted me. It isn’t exactly paradise on Earth everywhere you go. But if you enjoy majestic sunrises, breathtaking views, untouched beaches, stunning sunsets and the world’s best rum, pockets of paradise are very easy to find.

For those folks who can’t sit still for long periods of time, there are tourist destinations and eco-adventures aplenty: volcanoes, hot springs, colonial towns, jungle treks, sea turtle preserves, yoga retreats, ocean fishing and a couple of pretty outstanding golf courses.

Oh yeah – Nicaragua also boasts world-class surfing waves that attract surf fanatics from all over the globe.

Is my property a great investment? I don’t know. I know only that I don’t enjoy it any less during moments when the Dow Jones Industrial Average is in a downtrend. That’s a pretty good starting point.

Where is your Nicaragua?

Good investing,

Eric