5 R's for Investing in Transformational
Real Estate Abroad:
A Guide for
Individual Investors

 

It has never been easier–even for small individual investors–to buy real estate overseas. At a time when the equity markets, bonds, and even precious metals face downward pressures, real estate is one of the few investments where risk-reward remains skewed to the upside. That is, on the condition that you choose carefully what real estate you buy.

For anyone who does not make a living buying and selling real estate (in other words, for 99% of the population), it can be quite a challenge to understand what real estate is worth investing in – and what real estate to avoid. The key concept in this context is "transformation." Wise investors will put their money in places and communities poised to appreciate considerably in the future.

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One can compare the conundrum of investing in the right real estate with the choices of value investing in the equity markets. What company's stock will provide the most wealth to investors? Is it the stock of a company that just beat sales expectations for a third consecutive year or should investors buy stock in a company that has been working hard under the radar on a turnaround?

In what follows, we list five recommendations–conveniently presented as 5 Rs–on how investors can decide to invest smartly in overseas real estate in 2023.

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Right Transformation

The world's most desirable and internationalized places are the ones that are most likely to offer the best opportunities because these are the destinations people flock to in good times and bad. Millions continuously drive demand in these places as tourists, second-home buyers, and renters. Real estate developers build real estate projects to meet that demand, which then pulls in even more people. Talk about a virtuous cycle. Can a pandemic or global financial meltdown cause property values in these places to go through a correction? Yes, they can, but these are usually temporary blips. Thanks to their solid fundamentals, the trend for internationalized places is one of intense and continuous growth.

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Example: Lagos, Portugal, has been an up-and-coming city for some years. The city has been traditionally a favorite with European tourists, expats, and second-home buyers, but that's not all–more and more North Americans are traveling to Lagos, and the new work-from-home set has sent demand soaring in Lagos. Investors who bought condos in or around the marina in 2019 have seen the value of their property increase by more than 50%.

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Right Location

Within certain areas, investors need to pick the right "hot spots." What those hot spots are will depend on the growth dynamic of the area under investigation. Investors will need to do their homework and do a lot of research. Most cities have neighborhoods on the cusp of gentrification, and some areas in emerging countries are opening up to tourism thanks to development (new roads, new flights). While you might see a significant transformation once in your lifetime in your home city, these major transformations are happening all the time in other locations worldwide.

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Right Developer

An investment in what looks like the right neighborhood in the proper city might not stack up unless you're buying from the right developer. Savvy investors will only do business with developers with a long track record of delivering quality real estate. The more storms they have weathered, the better. The ideal developer is creative yet conservative. They prefer to take their time but like to innovate and build desirable, high-end communities.

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Right Real Estate

Investors should not settle for a second or third choice in any given market but seek the best-in-class projects. This means looking for projects with the best amenities and well-designed homes that will appeal to the target market, etc. Cookie-cutter or pedestrian options will typically deliver a lower return on investment.

Example: In Los Cabos, Mexico, the best investment that could be made in 2015 was in two-bed, two-bath ocean-view condos with upscale finishes that appealed greatly to not only second-home buyers but also short- and long-term renters. These condos were set in a 5* resort with a golf course, beach club, spa, and multiple dining options. And, they were in Los Cabos – with its upscale jet-set appeal. Mind the many qualifications mentioned–the business case for this property might have looked very different if all of those conditions had not been met.

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Right Price

A savvy real estate investment is always one that is purchased at the right price. The "right" price is a lower price than anyone else will be paying for the property now and in the future. The lower the property's price is acquired, the bigger the potential gain and the higher the potential yield for investors. Investors can try to find this type of deal on their own (not an easy task, but they might get lucky some of the time), but more often than not, they will be best served by letting someone else do the legwork and give them a shortcut to the best discounts.

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Investing in real estate projects abroad can provide solid risk-reward opportunities for individual investors, but it requires a careful selection of suitable transformational projects. Investors must focus on locations that have solid fundamentals and a growing demand while also identifying the right hot spots and developers with a proven track record. Additionally, investors should seek out the best-in-class real estate options that provide high-quality amenities and design. Finally, the right price is critical, and investors should strive to acquire properties at lower prices than what others are paying. With these considerations in mind, investing in real estate projects abroad can be a profitable opportunity for individual investors. However, it is important to conduct thorough research and due diligence before making any investment decisions.

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Ronan McMahon is the editor of Real Estate Trend Alert (RETA), and a contributing editor to International Living, the top source for all things living overseas. He's the author of three books on international real estate and has participated in more than
$2 billion in real estate transactions over the past two decades. More info available at www.realestatetrendalert.com.

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