Editor’s Note: Ronan McMahon is Bill’s personal overseas real estate scout.
He’s also the editor of overseas real estate investing advisory Real Estate Trend Alert.
As you’ll learn in today’s Weekend Edition, investing in overseas real estate is a great way to diversify your wealth outside of the US dollar
It can also be highly profitable.
As Ronan told me for the December issue of Bonner & Partners Investor Network, his subscribers recently had the chance to make a 20% profit “in a matter of months” on Mexican real estate.
Who Else Wants a 20% Profit in a Matter of Months?
By Ronan McMahon, editor, Real Estate Trend Alert
Chris Hunter (CH): So, what’s the case for overseas real estate in your view?
Ronan McMahon (RM): As I tell members of my Real Estate Trend Alert (RETA) advisory, buying real estate overseas is fun. It can also be very profitable.
For instance, one recent deal in Mexico’s Riviera Maya region – which runs south of Cancún to Tulum – gave RETA members the opportunity to buy pre-release, pre-construction condos at prices starting from $159,000.
On retail launch to the general public those same condos sold at prices starting from $191,000. That’s a roughly 20% profit in a matter of months with little money down.
But you need to be clear about what you want to get out of this kind of investing strategy… and what you are willing to put in.
CH: What kind of questions should you ask before you invest?
RM: First, you need to decide if you are looking to buy for an investment or for a second home or a retirement property.
If you’re looking for a pure investment deal, your real estate choices will depend on your financial objectives, your existing portfolio – of real estate, stocks and bonds – and your tolerance for risk.
It depends on what kind of investor you are. So that’s the first decision you need to make when entering the global real estate investment market.
CH: How do you find out what kind of investor you are?
RM: I like to think of an investor’s motivation as falling along an investment continuum. On one end of the continuum there’s the buyer who wants to use and enjoy his property… and maybe pass it along to his heirs.
Eventual resale of the property is not an issue for this buyer. Arguably, this may not even qualify as an “investment” in the financial sense. It’s more of an investment for the family.
At the other end of the spectrum there’s the buyer who cares only about the investment potential of the property. It’s not important for him what type of property it is… or where it is… as long as the potential return is high. Some of these investors never even see their properties.
For instance, I recently bought a pre-construction property in Brazil along with some of myRETA members. We are only in it for the investment upside potential.
There are plenty of gradients between the two. Many of your readers will fall somewhere in the middle. They’ll want to buy a property they like in a place they enjoy visiting. But they’ll also want reasonable potential for capital appreciation… or income from rental returns.
Reducing Risk
CH: What is the number one way someone looking to profit from overseas real estate investing can reduce his risk?
RM: Do your own boots-on-the-ground research. It’s important you understand the dynamics of how the local market works firsthand. That’s the most important thing you need to do by far. Either that or have someone you trust do it on your behalf.
And related to that, you want to avoid what I call the “Margarita Effect.” This is particularly important if you plan to buy a second home that you intend to live in for part of the year.
I see this happen all the time. You’re on vacation somewhere exotic. You meet a slick salesman. He shows you a good time and then sells you something. Then you spend a couple of weeks in your home and you realize you hate the climate, don’t like the food and you’re a long way from the airport.
It’s easy to find yourself in the arms of someone whose only interest is to sell you something that might not at all be appropriate for you. You need to just be sensible and to apply the same rigor as you would at home to any opportunity.
The Path of Progress
CH: How do you identify great markets to invest in?
RM: One of the big things I look for is something I call the “Path of Progress.”
As I tell RETA subscribers, anything that improves the accessibility of a piece of real estate increases its value. Think roads, bridges, airports, air and rail routes.
A question you absolutely must be able to answer as a real estate investor is: What’s going to drive the value of the real estate you have bought higher? Don’t buy if you cannot explain in 30 seconds to the next person you bump into why prices or income will rise.
You would be amazed at the number of investors I meet who cannot answer that question.
CH: Can you give me an example?
RM: Take Cancún on the coast of the Yucatán Peninsula in southeastern Mexico. It was once described as a “small, swampy finger of land in an isolated part of the Mexican Caribbean.” Land there sold for a song. Folks thought it was good for nothing.
That was before the Path of Progress came along. It turned Cancún into one of the world’s largest resorts. For example, today, Cancún International Airport is Mexico’s second-busiest airport, after Mexico City International Airport. But Cancún is the biggest in Mexico for international flights.
Well, guess what… Visitors need somewhere to stay and eat. Workers to cater to the visitors also need somewhere to stay and eat. Real estate values went through the roof.
The Path of Progress has now moved further down the coast to Playa del Carmen. Today, a modern highway brings you right there.
Before the Path of Progress made its way down the coast, $10,000 bought you a building plot in the unpaved village. Today, a 1,000-square-foot oceanfront condo would set you back about $500,000.
A Rising Middle Class
CH: Is there anything else you look for?
RM: A rising middle class is hugely important. I’m always looking for signs of an emerging middle class and emerging consumers.
This started happening in the US in the 1950s. In the early 1990s, after the fall of the Berlin Wall, the collapse of the Soviet Union and the end of the Cold War, we saw this happening in the new democracies of Central and Eastern Europe.
Today, the same trends are happening in parts of Brazil, Colombia and other emerging markets.
In Poland during the Cold War, for example, several generations were crammed into drab Communist apartment buildings. But after more than a decade of economic freedom and progress, twentysomethings were buying new condos. Banks were lending. Businesses opened up renting premises. Foreign money came flocking in. A new consumer class was born… and grew. All categories of real estate soared.
Brazil officially became a middle-class country in 2009. And there’s still a lot of growth to come, despite the bad headlines you read today.
Job growth, car purchases, beach vacations and property purchases – they all follow a similar upward trend. Growth in Brazil’s northeast – centered on Brazil’s fifth-largest city, Fortaleza – has been even stronger.
This is a classic case of the Path of Progress. Just outside Fortaleza, a mega government program is working on creating best-in-class manufacturing and transport infrastructure. Hundreds of thousands of jobs will be created. Already, some employees are being offered a 50% salary increase to go there.
CH: Are there other factors you look for? What about valuations?
RM: When you boil it all down, you want to look for three things. You want to buy relatively inexpensively. You want an already buoyant rental market… for your rental yield. And you want something big happening that is likely to drive up valuations even further.
CH: And that something is usually the Path of Progress or a rising middle class?
RM: Right. Or both. Preferably both.
P.S. We’re working with Ronan to organize a trip to his new favorite real estate destination: Cabo San Lucas in Mexico. So look out for details of that offer in your inbox soon.
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