We previously wrote about the basics of real estate. In that article, we went over the three different types of real estate investments and the two main ways they provide returns. That said, these points only tell a part of the story. If we want to make sound investment decisions, we need to see both sides of the coin. Here are our pros and cons of real estate investing for expats.
A quick refresher
If you haven’t had a chance to read our first article on real estate, check it out! For those of you short on time, here’s what we covered.
We can break real estate into three main categories:
- Residential: where people live such as homes, apartments, or housing complexes;
- Commercial/Industrial: spaces for businesses such as office buildings and shopping centers;
- Land: undeveloped terrain.
We also looked at the two primary ways real estate provides a return on investment.
- Income generation: rent as revenue;
- Capital appreciation: holding property to sell it for a profit later.
Real estate can also act as a hybrid between these two, where an investor can buy a house, rent it for several years, then sell it for more than she paid for it. Investors can also buy places to renovate and then either sell the refurbished unit for a profit or increase its rental value.
Put together, these characteristics broadly define the types and possibilities of real estate investing.
The 12 pros and cons of real estate investing for people abroad.
Real estate is tangible. We can touch it and feel it. This tactile connection gives us a physical reference point in our minds. Since we humans sometimes struggle with abstract concepts, the physicality of real estate gives us peace of mind, especially during market downturns.
Easy to value
Determining the current value of a piece of property is relatively-straightforward. We’re all familiar with real estate characteristics. We know what bedrooms, bathrooms, and kitchens are. Floors and square meters/feet are standardized measurements.
If that wasn’t enough, we could pay professionals to do thorough assessments of property we’re interested in buying. These reports give us an approximate market value, which we can compare to similar nearby properties. Compare that with evaluating stocks and the hundreds of seemingly byzantine metrics analysts use, and it’s evident real estate is miles simpler to value.
Relatively easy to get a mortgage
If you’re looking to buy or invest in real estate, chances are you need to borrow money. Thanks to the transparent valuation process and number of competitors, investors have little problem getting a mortgage (assuming they are credit-worthy).
Think for a second of going into your bank and asking the manager to borrow 200,000 EUR to invest in a stock portfolio. She’d probably have a good laugh while politely showing you the door. If you want 200,000 EUR to buy a house? She’ll point you towards the chair in front of her desk and ask you to have a seat while she prepares the mortgage documents.
Usable as collateral
Since real estate is quickly assessable and a physical asset, property owners can use it to finance other transactions. For example, if you owned a house and wanted to borrow money to start a business, you could use your home as collateral. The bank would be entitled to it should you be unable to repay your loan. However, having the option to use real estate to borrow money is a big plus.
Property investment provides a great way to diversify a portfolio. Real estate does not move together with stock exchanges and bond markets. As such, it provides a great way to lower portfolio risk.
People living abroad can better access their local real estate market, at least compared to non-resident investors. This localized investment provides even greater diversification to a well-managed global portfolio.
Generally appreciates in value
Real estate value tends to go up. While no one can say for sure what the future will hold, historical trends show that global real estate does have positive returns. This trend should continue to benefit investors over the long run.
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Real estate is great when the market is good. When the market sours, some of its downsides start to rear their ugly heads.
Illiquid, unmovable investment
Unlike many stocks and bonds, real estate is what financial professionals call “illiquid.” This term means that, unlike water, real estate transactions don’t flow freely. If you own property and would like to sell it, there might not be a buyer available (at least not at the price you’d like).
It can take months to complete a real estate transaction. During this time, buyers miss out on other investment opportunities. Furthermore, the market could turn between the first offer and the initial closing.
Real estate’s physicality also creates a problem. Since the property is immovable (fun fact: the romance language root for real estate is “immobil-” as in ‘not mobile’), an owner can’t transfer it to a better-performing market.
As a result of these characteristics, it takes real estate markets longer to get out of downturns than stock markets. Investors need an exceptionally high level of patience to weather these storms.
For the record, real estate does go down. The 2008 financial crisis is a prime example. Although markets can recover, don’t let anyone tell you it’s a guaranteed investment.
Opaque market and pricing structure
On the surface, real estate pricing seems clear. If you walk by any agency or visit any online real estate website, you’ll see the offered price for a piece of property. However, that price is far from the final one. Buyers and sellers will negotiate the actual closing amount, which they do not update in the original listing.
If that wasn’t enough, there is no centralized market for every piece of available real estate (which the industry calls ‘inventory’). Banks and other property managers can make transactions at any time without having to list the property beforehand.
Together, it’s nearly impossible to get an accurate price before making a direct real estate investment. For people abroad, misunderstanding a local real estate market’s pricing structure can prove costly.
Requires significant capital
Unlike investing in stocks or funds, getting into real estate demands, bringing a lot of cash upfront. Most of the time, investors will borrow money to increase their purchasing power. However, taking a loan comes with its risks and obligations.
Likewise, putting a large amount of money into real estate is making a long-term bet that this action is the best use for that money. The investor loses out on an opportunity if that initial could have earned more money in different investments.
Ask anyone who bought real estate, and they’ll gladly tell you how much paperwork they needed to do. Filling out a hefty stack of forms at the bank and signing a myriad of contracts and agreements are all part of the ‘fun.’ Each year, you’ll also need to make tax declarations or other administrative filings.
If you’re living abroad, you might be doing this paperwork in a language you don’t fully understand. And while learning the local legalese is undoubtedly educational, it only adds to your stress.
Depending on the investment method, there are considerable overhead costs
Directly owning a property means paying much more than the purchase price for real estate. These additional costs can quickly pile up into the tens of thousands of euros. They include:
- Notary fees
- Real estate agent fees
- Mortgage processing fees
- Any ongoing repairs and maintenance
These costs vary depending on the jurisdiction and whether or not you’re a resident.
Additionally, many banks will ask you to move your primary accounts to their platform as a condition for having a mortgage. If you’re happy with your current bank or don’t care for the services of the one offering the mortgage, tough taco.
Some shitty actors
Raise your hand if you or someone you know has had a bad experience with a: landlord, real estate agent, or property manager.
That’s what we thought.
Real estate’s universal appeal and easier barriers to entry also mean a low bar for quality control. People with lower ethical standards have little qualms about preying on novice investors. For expats, some of these bad actors will take advantage of foreigners to charge higher fees and provide unnecessary services that run up costs.
Some people have no business owning property at all. Instead of maintaining their investments, they choose to do the bare minimum in hopes that they don’t get caught. Because these folks never sought proper financial advice, they make bad investment decisions, which create negative consequences for everyone.
We tend to remember the bad experiences more than the good ones, which leads to irrational behavior. For example, we hear about the guy who didn’t get his full deposit back even though he kept the apartment he was renting in impeccable condition.
The next time he rented a flat, he decided that he’d skip out on the last two month’s rent, guaranteeing his money back. Unfortunately, there were some minor repairs to do when he left. The new landlord, fair as she was, decided to recuperate her costs by raising the rent on the next tenant.
This price rise increased the local market price, which only fueled animosity towards landlords among renters. The resulting hostility inspired more renters to skip out on paying their last months’ rent, further exacerbating the problem. Renting suddenly became more expensive for everyone, decreasing their quality of life. Now, people complain that salaries aren’t enough to live comfortably, creating more tension in society.
The initial spark started with a bad actor who either invested wrongly or hired a dishonest property manager to take care of their investment. This cycle could’ve been avoided or at least minimized if the landlord either got the right help or avoided real estate as an investment altogether.
While this story is a bit hypothetical, it can and does happen.
Investors looking to avoid these negative situations will need to assess their appetite for the more mundane aspects of real estate.
This list certainly isn’t exhaustive (and we hope you aren’t now that you reached the end of it). If there’s anything you think we’ve left out, let us know! Send us an email here. In our next article, we’ll look at the different ways people can invest in real estate. Until then, keep it real. Estate.
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Note that this article is for information and educational purposes only. It does not constitute financial advice.