Last Updated July 27, 2020Dateline: Kuala Lumpur, Malaysia
Recently, I attended a talk by a financial guru who specializes in diversification. Although he had plenty of good suggestions, I noticed that all of the mutual funds and other investments that he mentioned were located in the United States.One of the largest problems that I’ve noticed in the investment community is that when most people discuss diversification, they focus too heavily on what they’re investing in and not enough on where.Obviously, you wouldn’t dump all of your money into a single business, bank account, or rental property. You want to protect your assets in case something goes awry. But if all your investments are in just one country, then you’re negating all the diversification efforts that you’ve made.Think about it – if your home country experienced political instability or economic decline, how would your investment portfolio fare?Chances are, not too well – unless you’ve diversified internationally.Put simply, international diversification is the key to any modern investment strategy. Not only are there plenty of great opportunities in markets overseas, but you also further secure your wealth by ensuring that one government cannot make or break you financially.But where do you begin?With so many different investment opportunities around the world, deciding where to go and what to invest in can be difficult. International real estate, however, can be a great way to start.
The Benefits of Owning International Real Estate
Investing in foreign real estate is a good way to start internationalizing your portfolio and your life, and there are plenty of benefits of owning it aside from just diversifying your assets.In addition to protecting your wealth, buying international real estate also allows you to earn higher returns and enhance your tax strategy. In some countries, you can even get a second residence or passport out of your investment.If you’re considering investing in international real estate, here are five benefits to think about:
1. Earns Higher Returns
The number one reason people want to buy international real estate is to get higher returns on their investments.In most developed countries, you’re not going to see huge profits from your real estate investments. For example, my friends who live in Australia tell me that they’re happy if they get a 2% return on their properties each year. That’s right – only 2%.These kinds of markets are also somewhat cyclical. While you likely won’t lose your whole investment if you buy a condo in New York or London, you may end up stuck with it for longer than anticipated if you have to wait for the market to rebound.My friend who runs a property fund in Cambodia, on the other hand, is faring much better. He makes around 7-10% percent in rental yields on his properties while earning 10-15% in value appreciation each year. Granted, my friend’s returns are on the higher end of the scale, but you wouldn’t even come close to those kinds of numbers in cities like Sydney or Los Angeles.
2. Protects Your Assets
Buying international real estate is also a useful method of protecting your assets. By owning property outside of your country of citizenship, you insulate yourself from all kinds of issues and instability that may arise at home.Suppose that you owned property in both the US and Asia during the 2008 recession. While your property values in the US may have gone in the toilet, your Asian properties likely remained fairly stable.Additionally, owning international real estate can help protect you in the event that you become the subject of a frivolous lawsuit.If you own a business in a lawsuit-happy country like the US, then there’s a real chance that you can become the subject of some kind of facetious legal claim.However, if a substantial portion of your wealth is invested overseas, then anyone filing suit against you will need to actually go to those jurisdictions if they want your assets.And unless they actually have a legitimate claim against you or your business, they likely won’t be very successful in their pursuit – if they’re willing to even go there in the first place.Investing in international real estate can thus help you protect your assets from a variety of adverse events that could affect your wealth and assets.
3. Provides Government Insurance
In addition to helping protect your assets, international real estate also acts as a form of “government insurance” in case of serious economic problems or political instability.If you live on the west coast of the US or Canada, then you may have noticed a large number of Chinese investors buying up properties in places like Vancouver and Silicon Valley. Many of these investors want to buy property in western countries because of their anxieties about China’s government and future economic prospects.Issues like currency devaluation, trade wars, and political changes have made them nervous, so they want to invest in more stable markets as an insurance policy against potential problems back home.
Citizens of western countries, on the other hand, tend not to think this way.Because these countries are largely regarded as stable democracies, their citizens are less inclined to seek this kind of protection against problems with their own governments. However, this mindset ignores some of the frightening things happening in the western world today.Brexit, for instance, has created quite a bit of panic in the UK as negotiation deadlines loom with no agreement in sight.Although the UK isn’t going to collapse or turn into a third world country anytime soon, some UK residents have been acting as if that were the case and have even started stockpiling food and medicine. In western countries, we mistakenly believe that nothing truly bad will ever happen, so when something like Brexit or the Coronavirus pandemic shakes that sense of stability, we tend to panic.That’s why having some kind of government insurance is important.I’m not one for tinfoil hats and doomsday prepping, but I do believe that having an insurance policy against government nonsense is generally a good idea. Insurance guarantees that some kind of expense or loss will be covered in the event of an accident or unforeseen circumstance.You pay a certain amount and, in exchange, you get protection.As anyone who has ever been in a car accident will tell you, insurance is important. Although paying premiums isn’t pleasant, it’s far less expensive than hospital bills and car repairs.However, while most financially savvy people see the value in having car, health, and homeowners insurance, very few people take out an insurance policy against their own country.To see what I mean, let’s revisit the Brexit example.The average UK citizen is panicking because they don’t have any backup plan in place. If all of their wealth is invested in the UK, for instance, then they could suffer tremendously if the British economy takes a tumble.However, if you’re a UK citizen with a second passport or a second home abroad, then you’re probably less worried. You know that you have the ability to easily leave the country if things go belly-up.You have government insurance to protect you.And investing in international real estate is one of the best ways to get this kind of government insurance.International real estate allows you to establish a second residence abroad while giving you a permanent place to go in case you need to leave your home. In some cases, it will also give you a second passport. Additionally, unlike regular insurance, the premium you pay can actually earn you money through rental yields and value appreciation. Therefore, by investing in international real estate, you’re also investing in an insurance policy against serious political or economic issues at home.
4. Produces Diversification
Investing in international real estate can help you diversify your life in many ways.When you own property in another country, you can reasonably plan to live there part-time or in the future.Because you actually own a home or apartment in that country, you won’t have to fuss with renting if you decide to move there for an extended period of time.Additionally, many countries will allow you to obtain a residence permit by investing in property there.Although residence by investment programs vary, many countries allow you to obtain a residence permit for a year or more with a large enough investment, and a substantial number of them will allow you to apply for permanent residence or citizenship after you spend a certain amount of time there.Therefore, getting residence or citizenship by investing in international real estate can benefit you in a number of ways.In some cases, it can serve as an “escape hatch” if you’re concerned about political or economic stability back home. If you’re buying real estate in a country that uses a different currency, you get the added benefits of currency diversification (my friend Matthew Partridge sees Poland as a great long-term bet for this).In the worst-case scenario where you have to leave your home country for good, you’ll have a home waiting for you in a more peaceful part of the world.On the other hand, you may want to own property in a place where you spend a large portion of your time. Recently, I worked with a couple who fell in love with the idea of spending their summers on the coast of Montenegro. Instead of spending money on hotels every summer, they decided to buy a more permanent home, which allows them to save money on rentals and earn money while their property accrues value.To put it simply, investing in international real estate allows you to create home bases in various countries and begin to craft a more diversified and internationalized lifestyle.