Here are some tips on how to successfully diversify your portfolio:
Don’t move all your investments overseas: Some investors make the mistake of moving all of their real estate capital from their home country to another country. They seem to overlook the fact that the result is the same. They’re still undiversified…only in a new country.
Think locally: Even as many countries have entered new, downward cycles, certain localized regions can still make sense for investment. Particular regions…and particular kinds of buys. It is not enough to say you should or you shouldn’t buy in Panama, for example. You’ve got to look more closely to understand the local opportunities.
Choose different types of properties: Your portfolio should include rental properties, short-term and/or long-term, pre-construction, raw land, and lots in developments.
Rentals: The income from rentals gives you cash flow…to cover mortgages if you’re leveraged and to offset the holding costs of your other properties. Keep your expectations in line, though. Don’t count on more than 5% to 8% net a year. That’s the range worldwide. If a market promises some return outside this range, you have to ask why. A lower yield may indicate the property is overpriced. A higher yield may indicate it’s under-priced…because it’s in an undesirable location, for example…meaning it could be hard to find a next buyer.
Pre-construction: A pre-construction investment can turn into a rental if you can’t flip the unit before it’s completed. And that can be ok. The most important thing to remember with pre-construction is not to buy if you don’t have the means to close…either with cash on hand or an available local mortgage. The upside of pre-construction is free leverage during the construction period. Potential profits can run into the triple digits, but with high returns come greater risks.
Raw land: Raw land in the path of progress is a low-maintenance investment with big potential upside. Buying right is the key to any real estate investment, including raw land. However, here the other important thing is to make sure you buy at the local price. Pay the gringo price, and you’ll have to wait longer to see your return…and maybe it won’t ever come at the level you’re expecting.
Building lots: Building lots in residential developments are typically low maintenance as well, but can offer better liquidity. The downside is higher carrying costs—taxes and community fees, for example. Buy early in a development, when the developer is trying to get the project off the ground, though, and you can see excellent appreciation over the mid-term (three to five years).
You aren’t going to build a portfolio containing all these kinds of investments in multiple markets overnight. But real estate investing is a long-term game. However, from the outset, set a goal. Give yourself six to eight years, say, to diversify effectively in terms of both asset types and markets.
Excerpted from International Living
christiborden