April 2003

Currency traders are probably not getting much sleep these days as global concerns cause exchange rates to fluctuate widely. Several banks have even set up overnight shifts to monitor international rate changes as the war in Iraq progresses.

So far, the outlook for the U.S. dollar looks good. In fact, investors assuming a speedy victory sent the dollar to its highest level in months.

But what if public sentiment shifts?

Putting all your eggs in one country’s economic basket can be risky. In the past, when foreigners bought American products, that generated export dollars. In turn, the U.S. spent that money on imports, like German cars and Japanese cameras. Theoretically, the sellers would have taken that money back to their countries. But a lot of them invested it in the United States instead, wanting the benefits of a strong U.S. economy and appreciating currency.

Now, however, with an uncertain economy and things in a state of flux, the United States runs the risk of a capital flow reversal. There might be a migration of money from the dollar to the Euro, for instance. If that’s the case, the value of the U.S. dollar will come down, creating a snowball effect. Fewer investors will want to invest in the U.S., and existing investors may want to pull out.

What does that mean for real estate investors? It’s just one more reason to spread your investment wings. Particularly for larger investors, it might be time to open your eyes to opportunities abroad.

I know that means you have to travel. But let’s face it, a lot of people work hard all their lives to save enough money to be able to do just that—travel. When investing overseas, you can essentially travel to find deals or look after existing deals using pre-tax money. What’s more, other countries have some very real tax advantages that make international investing appealing. New Zealand, for instance, has no capital gains tax and no inheritance tax.

And here’s another important point. As a real estate investor, you can operate just about anywhere. Think about it. If you’re in most professions—if you’re a doctor, dentist, lawyer, pilot, therapist, surveyor or even a registered real estate agent—you can’t just go to another country and hang out a shingle for business. You have to study, pass local exams and make sure that you meet regional requirements. But when you’re a real estate investor, you can go just about anywhere in the world and governments will welcome you with open arms on the assumption that you’re bringing money with you.

Which brings me to a crucial point. Never take capital with you to a foreign country. If you do, you—like those sleepless currency traders—are at risk of an adverse change in the exchange rate. Sure, if it goes in your favor, you might make a lot of money. But if it goes against you, you could borrow a million dollars and end up having to pay two million back. Always borrow locally.

Consequently, as an investor, you don’t really bring money into a country. Instead, you use a country’s money to buy real estate in that country. (You may, of course, bring the down payment or deposit.)

Currencies do change. I remember in 1972, one New Zealand dollar bought $1.25 U.S. Last year, in 2002, it was down to 39 cents. Today it’s back at 55 cents. That’s why when you have a portfolio of real estate holdings in various parts of the world, you are much more protected. When one economy is down, another is likely to be up. It’s called diversification.

A lot of financial planners talk about diversification. They advise you to protect yourself by putting a dollar in stocks, a dollar in mutual funds, a dollar in treasury bills, a dollar in Certificates of Deposit, a dollar in bonds, a dollar in platinum and a dollar in baseball cards. It sounds sane on the surface, but when you diversify to the extreme, you do only as well as the economy. You might as well buy a futures contract on the GNP or CPI. And anyway, how could you possibly learn enough to make wise investment decisions in all those sectors?

It so happens I also believe in diversification. However, when I talk about diversification, I mean being diversified within real estate. I think it’s smart to buy some residential, some commercial, some industrial, some hospitality, and some specialist real estate. I also mean being diversified geographically. Buy some real estate in your own city, in the next town, in the next province or state, and then consider buying something in another country.  Of course, I’m not advocating this for your second property purchase. Buy your first handful of properties locally, then look in other cities. Once you’ve achieved a certain level of comfort (exactly when this happens differs from person to person), it’s time to start thinking internationally.

Of course, I’m not advocating this for your second property purchase. Buy your first handful of properties locally, then look in other cities. Once you’ve achieved a certain level of comfort (and when this happens is different for every investor), it’s time to start thinking internationally.

I realize that not everyone will end up investing internationally for a host of reasons, some of which may be valid for particular individuals. However, for those who do, it can be fun, exciting, and richly rewarding.

Successful investing!

Dolf de Roos