Opportunity for Diversification. In terms of market, type of investment, type of property, and currency, a rental apartment in Medellín gives you an asset in Colombia that could generate cash flow in Colombian pesos. An agricultural investment in Brazil means another asset type, another economy, another currency, and so forth. The important thing to understand on the topic of diversification is that owning different kinds of properties in different cities and states across the United States isn't diversification. It's being invested in the United States.
However, neither is moving all your real estate investment capital out of the United States and placing it in any other single market—Panama, for example, or Colombia, or Brazil. Many investors we speak with recognize that holding property investments in two or three different U.S. cities means they are still fully exposed and vulnerable to U.S. market and U.S. dollar risks. Many, though, don't see that selling off all U.S. assets and reinvesting the capital in property in a single other country—even if, again, in different kinds of properties in different cities or locations throughout that single other country—is a similarly vulnerable position.
The point of diversification is to make sure you are not at the mercy of any single market, economy, political landscape, government, or currency. A global property diversification strategy could or could not include investments in the United States, but it must include investments in at least two (and preferably at least three) countries, ideally each with its own currency.
Note that not all foreign property markets bring currency diversification, because some countries use the U.S. dollar (Panama and Ecuador); some peg their currencies to the U.S. dollar (Belize); and, in some countries, though they have their own currency, real estate is traded in U.S. dollars (Nicaragua and some parts of Mexico), meaning that your currency hedge isn't as clean as it could be.
Also note that, while currency diversification can be one big benefit of investing in real estate overseas, we don't recommend you go chasing it. That is, don't try to time a property purchase based on moving exchange rates, not long term and not in the short term either. It's impossible to know which way any currency is going to move against any other currency day-to-day or month-to-month. Meantime, while you're trying to time the currency, the property market is moving, too.
If you know that you're interested in a particular market and the local currency takes a sudden hit, you could take that opportunity to move money in anticipation of making a buy. However, waiting for the currency to do what you want it to do, you run the risk of missing out on a good investment just because the time isn't “right” from a currency point of view. You can't time when you'll find the piece of property that you're searching for unless you don't allow yourself to begin looking until the currency moves to where you want it. That's a backward approach. Much better to lock in a good deal on a property than worry too much about a few percentage points on a currency move that may or may not happen according to your timeline.
Costs of Acquisition and Disposal. Remember that these, which we refer to as the “round-trip costs” of making an investment, go beyond agent commissions and vary dramatically country to country. This is an important thing to research and understand in full no matter why you're making a purchase; however, the investor–buyer who underestimates or underplans for the costs of acquisition and of eventually reselling can undermine his investment before he makes it. Depending on the market, the costs of purchasing a piece of real estate in another country can include, in addition to agent commissions: legal fees, notary fees, registration fees, title insurance, and transfer taxes (sometimes called “stamp duty”). In Ireland, for example, stamp duty was as much as 9% of the purchase price when we bought, payable in cash upon closing and not a cost you wanted to overlook in your budgeting. (Today it's 1% if the purchase price is less than 1 million euros.)
Again, though, remember, we're talking not only about the costs of acquisition, but the round-trip costs of a purchase. Exiting comes at a cost, too. When selling, you may have another agent commission to pay, and you'll likely have additional attorney fees. These are usually minimal, even negligible. The more significant cost associated with exiting a foreign property investment can be the tax hit. We discuss strategies for how to figure and how to minimize this in Appendix D.
The total round-trip costs of investing in a piece of real estate overseas can range from a few percentage points to more than 25% at the extreme and that can be before taking into account capital gains taxes. These costs shouldn't keep you out of a market where you want to invest, but they definitely should be taken into account in your budget.
