Dateline: Kuala Lumpur, Malaysia
One common question I receive, particularly in real estate, is where to invest overseas.
Investing opportunities are everywhere and many promise great returns. In previous articles, we’ve discussed the benefits of owning international real estate. But today, I would like to discuss what to do when you’ve found a great country to invest in and want to decide exactly what city and neighborhood to buy into.
The main thing to consider is that real estate is not a liquid asset.
Unlike stocks and cryptocurrency, you are often locked into your real estate purchase for years. Because of this, you must ensure that any property you acquire is in a location that will remain important and desirable for ten, twenty, even fifty years into the future, regardless of what is in store.
In this article, we’ll examine historical examples that bring to light important property investment principles and then dive into how you can find these properties and navigate the real estate investment landscape wherever you go in the world.
- Lesson From the Great Recession
- How to Compare Global Real Estate Prices
- How to Invest in Real Estate as a Foreigner
- How to Find Real Estate With Built-In Moats
- Why Cheap Things End Up Being Expensive
- Don’t Buy Real Estate Before You Consider This
- How To Negotiate a Real Estate Deal Overseas
- How to Invest in Real Estate: A Summary
Lessons from the Great Recession
I’ve seen firsthand what happens when people make major investment decisions without considering the long-term viability of their investment.
Back in 2007, early in my career in the radio industry, I had a gig that required me to move to California for seven months. Just as I was about to move back to Arizona, I remember watching on my television as the stock market crashed.
The Great Recession had made its grand entrance onto the world financial stage.
Being in California, I got a first-hand glimpse at the frenzied investment scene there both before and after the descent into chaos. Before the bubble burst, those who got priced out of LA had begun buying houses in the desert. The only way they could afford to own a home was to accept a two-hour commute to LA.
What happened when the market fell apart? Naturally, nobody actually wanted to live in the desert and all the bedroom-community properties there became worthless.
This destroyed many people’s livelihoods as they had all bought in and overleveraged themselves under the expectation of infinite growth.
I learned valuable lessons from these events that I have integrated into everything we do here at Nomad Capitalist.
The first lesson? Housing prices don’t always go up.
In fact, economic data supports the opposite view, that all things being equal, housing prices will only remain in line with inflation.
Some years ago, there was a real estate study conducted in Amsterdam by real estate finance professor Piet Eichholz of Maastricht University; as there is a street there that has remained relatively untouched since its construction in the 1600’s and has always catered to high-class residents.
Not without reason, it is still known as the Herengracht – or the “Gentlemen’s Canal”.
Owing to good Dutch record keeping, we have pricing information going back hundreds of years, meaning that we can see how the price of real estate has fluctuated over time. And yes, it went up and down as time went on, but over long enough periods it averaged out to be in line with inflation.
But this is a unique situation.
After all, cities and neighborhoods tend to be more dynamic than the Herengracht street. Neighborhoods fall in and out of favor, population increases and this implied stability is rarer than originally imagined, both for good or bad.
How to Compare Global Real Estate Prices
You could look at all manner of metrics to try to compare real estate prices, from the cost of living, GDP per capita, and local purchasing power. Those metrics are fine and well, but often they introduce more complications.
What you want is a shorthand way to be able to compare multiple properties from around the world with each other. Looking at Dollar Cost Per Square Meter is that magic bullet.
Many countries, like Georgia, already use USD prices in their real estate deals, as it’s a far more stable means of making large purchases than the local currency. S,o it isn’t usually a major leap to compare apartments via this ratio.
This metric will allow you to calculate your return on investment, rental yields and the like in a comparable way.
Through this, I was able to determine that property in Kuala Lumpur, Malaysia was undervalued when I compared it to a similar location in Bangkok, Thailand.
Looking at nothing else but the apartments and equivalent residential area, Kuala Lumpur is about half as expensive as Bangkok.
By many metrics, Malaysia is on its way to becoming similar to what mid-range EU countries are like nowadays, by 2030. Indeed, it already has a level of development comparable to some of the poorer EU member states.
The reason that real estate is cheap there at the moment is that there has been an oversupply of real estate development in Kuala Lumpur in recent years, which pushed prices downwards. But as the economy develops and more people from inside the country and abroad go to benefit from the booming economy, prices are not likely to stay down for long.
Conversely, Thailand has a developmental level compared to China and some Caribbean countries. It has a future, but it’ll take a while to develop. Branding and tourism have pushed the value of property up in Thailand, rather than fundamentals.
Be warned though, while Dollar Cost per Square Meter is a fantastic shorthand way of looking at investments, you should ensure that the currencies are stable as well and that you are comparing apples to apples.
For example, if you buy a Château with a vineyard in France, it will surely cost you a lot per square meter, even after factoring the help that governments give such historical properties. Not only that, but it tends to be a vanity purchase by incredibly wealthy investors, that bid up the price.
Chances are that yields, if any, will be abysmal and the market liquidity will also be close to nonexistent. Just because something is expensive does not mean it’s a good and safe investment.
Compare that to investing in far more dynamic economies and geographic locations – far easier and far more profitable
In other words, the Dollar Cost per Square Meter is a good metric, only insofar as you are looking at comparable locations.
But that brings us to a different concern altogether, imagine you have a list of apartments that you found, they’re all in similar residential locations and they’re comparably priced, but in different countries.
How do you know which one of these is a good deal and which one isn’t?
How To Invest in Real Estate as a Foreigner
From a historical standpoint, even before becoming its own independent country, the US has always been the exception when it comes to land and real estate. It used to be the case that settlers received a land grant upon crossing the Atlantic, assuming that they didn’t owe anyone money.
Hence, from before its foundation, the US has been overly centered on real estate.
Compare that with the likes of Europe, where it was mainly aristocrats and merchants that controlled the land. Then, when communism came along, the bureaucrats were the power that divvied up the real estate.
In other words, in the US there has always been a culture of trading and selling real estate on a much freer basis. Whereas in places like Eastern Europe, most sellers have been living in the house they’re selling for their entire lives.
Because this land speculation culture does not exist, there just hasn’t been a need to develop the necessary infrastructure to buy and sell a property quickly and transparently in many countries overseas.
For the most part, you have to depend on real estate agents who, in turn, have mediators that go into their communities and find deals for them. Each and every single one of them gets a piece of the pie.
Because properties have historically been so difficult to acquire in these locations, the assumption is that the one with the property is the one that controls the negotiation. Hence, all these little add-ons will be tacked onto your bill.
To make matters worse, not only are you dealing in an opaque environment when you’re trying to buy overseas and in third world locations, but you don’t know the culture. So, the locals might try to take advantage of your lack of knowledge.
If there’s something that I would like you to remember from this article it’s this: There are almost no honest people in real estate, and that goes double if you’re a foreigner in an overseas market with a language barrier.
I’ve seen it happen first hand – those beautiful newbuilds that you see in the glossy inflight magazines look amazing, don’t they? If you follow that ad, you’ll certainly be taken to an area in Istanbul that indeed has that building. What they won’t tell you is that the area it’s in is incredibly dangerous, and they are still having to deal with illegal settlements from Syrian refugees.
Years (or more than likely weeks) later, when you realize your mistake, you’ll want to sell. But as luck would have it, most other property buyers aren’t ignorant foreigners that are so easily fooled.
The shinier it looks, or the more it seems to be geared towards foreigners, the faster you should run. This is why I generally avoid investing in any country where there’s an investor Golden Visa program – as wealthy foreigners stampede into the region and bid up the value of subpar sites because they don’t actually care for the real estate itself.
The same goes on the local level, with catering to foreigners, and that’s why we usually hire locals to find properties for us on a freelance basis. After recently doing it in Skopje, Macedonia and comparing the prices that our field expert found to the readily available foreigner catering agencies offerings, we found that they were 40% cheaper.
This markup is not unheard of either. I’ve seen anywhere from a 10% – 40% increase be common around the world when catering to foreigners.
I’ve also had less than reputable characters offer me a 30% commission if I plug their properties. I’ve never taken them up on it, but if they’re in a position to offer me that high of a percentage, imagine the markup they have!
If at all possible, try to always deal with sellers directly, with few to no intermediaries.
Furthermore, don’t just think of buying into a property because it looks like a good deal. It’s important to have a “moat” around your real estate investments.
How to Find Real Estate With Built-In Moats
Now, as fun as it would be to have an actual moat around your properties to fend off bill collectors and the taxman, I’m talking about economic moats – competitive advantages that your assets have over others to ensure their long-term profitability.
The wider the moat, the more difficult it is for outside forces to take or outcompete your assets, all while they grow stronger inside the moat’s protection.
We recently helped a guy who owns twenty McDonald’s franchises with some tax planning. In our conversations, he off-handedly said that McDonald’s was the only franchise he would ever buy into because, as opposed to any random no-name fast-food franchise, everyone knows McDonald’s and most people like it,
In other words, McDonald’s has a moat.
This is a common mindset in finance circles among those who invest in businesses. But many miss the boat and fail to apply the same mindset to real estate investing. Instead, they simply go for what’s affordable.
This makes about as much sense as a king building a castle and refusing to fund a defense system. No moat, no army, just the castle.
A wise king knows it’s worth the cost to ensure his castle is well protected.
So, where do you find the properties with built-in moats? Look for Tier A locations.
I’ve learned this lesson the hard way. When I started my Nomad Capitalist journey, I made some investments that didn’t have much of a moat around them and they never worked out for me.
I never lost money on a single international property deal, but because I had invested in lower-tier locations, it was a pain to get rid of these properties. As an investment, they didn’t have a moat – no built-in protection that would ensure that I could always find a buyer.
Because of these experiences, I now search for markets where I can afford the best property that I can find.
If you can’t do that, follow the rule that real estate agents will often tell you and purchase the cheapest, ugliest house in the best neighborhood. You can always make the property look better. And unless it has historical value, what appreciates is usually the land, not the structures on it, as those usually depreciate.
It’s a bit of a cliche to say, but it’s a cliche for a reason: Land accumulates in value because they’re not making more of it. It is still subject to the laws of supply and demand.
Barring some unforeseen situation, nobody will want that land out in the Californian desert that people spent a fortune to get back in 2007. It’s a myth that all land will go up in value.
Because of this, you want to be in locations that are not only a store of value but are also most likely to go up every year, and least likely to go down. Space is finite and if there is a growing demand for a zone, prices have nowhere to go but up.
But rather than pretending that we know the future, we will base ourselves on the facts. We are businessmen and not astrologers.
This is why I prefer to invest in capital cities. Sometimes they have over a thousand years of relevancy and they are unlikely to go anywhere within our lifetimes.
If anything, they are becoming more important over time. In most countries of the world, the villages are emptying out as everyone’s moving to the major urban areas.
Why Cheap Things End Up Being Expensive
Of course, within a city itself, there are low-cost opportunities that people are drawn to. Don’t make the mistake of going somewhere that seems inexpensive, instead of something with longevity.
Using Bogota as an example, there are cheap apartments all the way up in Calle 140, and I guess there is some potential to rent out property there. But those properties are far removed from downtown.
I’d rather buy in the 80s or 90s numbered streets where you’re essentially in the Beverly Hills of Bogota. This area has a core demand because of its businesses, malls, and the like. It’s where everyone wants to be.
Here in Latin America, there’s an expression that I think is very applicable in this situation, translated it’s: “Cheap things end up being expensive.” Budget items are often that price for a reason – because nobody would buy them otherwise. Don’t allow yourself to be lured into buying something low-cost when you could buy into something great instead.
There is, of course, a place for personal lifestyle choices. For example, I have a house in Tivat, Montenegro, which is a coastal town. I bought it to be as close to the yacht club as I could and it also has a view. All these things help give it the best fighting chance for retaining value and appreciating.
But it’s not the optimal real estate investment, and it probably won’t increase in value nearly as fast as a major city like Bogota. Least of all, because resort destinations don’t have major moats.
The challenge of a resort environment is that any coastal country can create one. Turkey could decide tomorrow to put a new resort area, or Albania could beef up its areas down the coast from Montenegro and become a competitor.
The situation is far dicier in resort areas, which is why I usually like to invest in big cities or even Tier B locations, in larger countries.
But wherever I happen to buy property now – Tbilisi, Bogota, Phnom Penh, etc – this is my philosophy. I want areas with built-in protection, I want areas that are always going to be hot.
Don’t Buy Real Estate Before You Consider This
Legend says that the King of Siam (what is now Thailand) used to give a White Elephant to courtiers that had displeased him. This was seen as a great honor, but in reality, it was a horrible curse, as you had to feed it and keep it in good health.
It bears saying that unless you happened to be the King, this expense would bankrupt you. But you couldn’t simply get rid of it, as it would be seen as horribly disrespectful to the whole society.
In many ways, government regulation is full of White Elephants just ready to be gifted to you.
Many countries treat their entrepreneurs as if investing in their country is a privilege that only benefits them, rather than being a mutually beneficial affair. And this naturally breeds a somewhat adversarial relationship where they stack fees and taxes just because they think that they can get away with it.
Sensible investors, on the other hand, just leave for greener pastures. But remember that this is a gradient, the choice is not antagonism or free-market anarchy, it’s “how much of either extreme are you willing to tolerate”.
Somalia arguably has the freest markets, but its rule of law is lacking and economic development is unlikely to happen because of this uncertainty. Conversely, North Korea has no free markets, but it does have the rule of law. All other countries fall on a spectrum between those two extremes.
But I’m getting ahead of myself, so let’s go back to real estate.
White Elephants, when it comes to property, come in two shapes:
The price it costs to change the property rights from one person/entity to another. This can be a flat fee in some countries that is more representative of bureaucratic costs.
Or it can be a legitimate source of income for some governments. In Belgium, for example, it’s 12% of the sale of the asset.
Some countries even use it as an informal protectionist policy by only levying the hefty fees if you’re a foreigner.
Property taxes and similar fees, like what you would pay to a homeowner’s association, are yearly expenses that in some places can start equalling what you would be paying in rent in other comparable locations.
When I was a child, my family moved from one side of Cleveland Ohio to another part of the city – not because there was anything wrong with the previous house, mind you – but because, upon crossing an imaginary line on a map, suddenly your property taxes were halved.
This is despite the fact that the other county was so close that you could have thrown a rock at it. But for some reason, the bureaucrats on one end decided that they wanted to disincentivize people from living there.
These are both expenses that few people consider when purchasing real estate, but they’re often so substantial that they can take a very lucrative return on investment to a negative one.
Some level of these fees is unavoidable, it’s simply the way things are. But you should always be wary of this before jumping into a seemingly lucrative investment opportunity.
Usually, the level at which those two “White Elephant Expenses” are set is a good indicator of the overall business-friendliness of the country. Countries that are well off and have various income streams will not get in your way too much.
On the other hand, countries that are overly generous with their welfare state, and feel the need to bully the businessman at every turn, are usually heading down a dark path that’ll take decades to fix.
So, with all that said, you have the knowledge necessary to know how to invest in real estate – good real estate – and not get cheated in the process.
You just have one final hurdle to overcome: the seller themselves.
How to Negotiate a Real Estate Deal Overseas
As pointed out before, the general dynamic of real estate deals abroad is often vastly different than what we are used to. In the West, partially because of the American influence, it’s generally believed that the buyer is usually the one who has the first move in negotiations.
But in other parts of the world, where moving houses is a once in a lifetime occurrence, it’s usually seen as the other way around. They set the price and you take it or leave it.
Hence, in some countries, sellers will flat out refuse to even consider the prospect of negotiating for a more reasonable price.
Time is on their side, after all, they’ve likely lived their whole lives there, so what does it really matter if they have to wait to find the perfect buyer a little bit longer?
However, even if the perfect buyer happens to knock on their door, it’s far from a done deal. It’s often such an emotional affair that they might cancel it altogether.
This happened to me on more than one occasion and I grew very tired of it.
In terms of complications, I would say Eastern Europe, because of the Soviet mentality in regards to homeownership, is the worst whilst Asia comes in second.
So, here’s the solution: if they’re not willing to sell as (in their own words) “they’re not desperate”, then the solution is to be less desperate and have other options.
It might perhaps take finding a hundred apartments, which will be whittled down to twenty because of seller complications, and then of that group you end up with one.
I’m not saying it’s easy – we have people working fulltime and on a freelance basis for Nomad Capitalist to arrange this subject for us – but the results speak for themselves.
How to Invest in Real Estate: A Summary
Not all real estate prices go up in perpetuity. Some areas only have momentary spikes of interest and then crash once the bubble bursts and never recover.
Because of this, you need to consider your moats. Knowing how to invest in real estate isn’t like other financial assets that you can jump in and out of when the mood strikes you.
With millions of properties, neighborhoods, and hundreds of countries, you have to find metrics by which you can compare them. Dollar-Cost Per Square Meter is a shorthand way by which you can assess the relative value of a property with another – though always be sure that you are comparing apples with apples.
For the most part, when you purchase real estate, you should be comfortable that the area that the property is located in will remain desirable for decades, and perhaps even centuries to come.
Thus you ensure that no matter what happens in the world, it will retain its value, and hopefully, even appreciate at a lucrative rate.
The problem is that there are few honest people in the real estate business. Many people make a living out of scamming people, especially foreigners.
Because of this, it’s preferable to have the least amount of intermediaries between you and the seller. And if the seller is a slick businessman wanting to sell you a newly constructed building, then you should run for the hills.
You won’t be able to outsmart the market with fancy investment schemes. Real estate is far too illiquid of an asset to ride trends with, and then successfully disinvest on time.
Be boring yet safe in your choices, yet not boring enough that you go where everyone else has gone before you.
Many countries know that they can get away with charging you taxes and fees for purchasing property, given that the demand far outpaces supply. So, go where you are treated best and don’t be afraid to walk away from a deal if you’re uncomfortable with all the aspects of the purchase.
The whole world is at your disposition, it makes little sense to obsess over a handful of choices that you’re not particularly enthusiastic about.
If you need help figuring out what type of international real estate investment is right for you, click here to get professional assistance.