Here are two propositions for you - you decide which one
you like better.
Proposition One: Invest in spectacular real estate in an
exotic location like Bulgaria, Malaysia or even a condo on
a cruise ship.
Proposition Two: Put your money into a rental property investment
far from your home, in a country where you don't speak the
language, don't know anything about the laws or the government,
and can only get to with two days of travel at a cost of more
The first proposition sounds a lot better, doesn't it? But
these are actually just two different ways of looking at the
same deal. Sales pitches for overseas property investments
focus on the "heart" aspects of the proposed deal
- the glamour and status of owning property in a place your
friends have never even heard of, much less ever visited.
The "head" aspects, which go much further to determining
if you will recover the cost of your original investment,
or earn a tidy profit, aren't mentioned.
On a purely rational basis, investing in your own country
usually makes much more sense than investing overseas. Overseas
investments only make sense in certain very special cases,
for a small percentage of investors that meet certain qualifications
(which I'll describe later).
I am writing from the perspective of an American investor,
so if you don't live in the United States, the same conditions
apply - but in reverse. I think American investors usually
should invest in the United States, for common-sense reasons.
On the other hand, if you live in Europe, a Bulgarian investment
probably makes much more sense than investing anywhere in
the United States. It will certainly be less risky on every
(I am also not singling out any particular overseas area
as bad for investment. I picked these examples at random,
but they are all heavily promoted for property investment.)
The added risks in overseas investing come because you must
rely much more on the honesty of both the property seller,
and the property manager. (For most overseas investments that
are promoted heavily in the US, the seller and property manager
are partners, or even the same company.)
Consider: your first job in evaluating a deal is to look
at the area surrounding the property. If you are buying year-round
rental property, you want the area to show strong job growth,
because job growth is the single biggest indicator in predicting
future growth in real estate values. If you are buying vacation
property, you want a relatively undeveloped area that is becoming
"hot", with a stable local and national government,
good travel options, and very good weather.
If the potential deal is in your country, you have options
to make an independent review. You can find stories about
the area in local and national media, read up on the local
government, and even call local experts. You can even look
up complaints and comments about the seller and property manager.
With an overseas investment, you may not be able to find
newspapers and web sites that cover the area and report in
your language. And good luck calling a local official or expert
Long-distance property investors should always visit the
areas where they are investing. There should be at least one
visit before the first deal is made, and another visit every
six months to a year afterwards to make sure the property
is being managed and maintained properly. Just the travel
costs of these visits make many overseas investments financially
Consider that you can get from one corner to the other of
the US for less than $400 at almost any time of the year.
On the other hand, going from Boston to Kuala Lumpur, Malaysia,
costs $2,300 - minimum. And the cheapest flights take nearly
42 hours each way.
Faced with these added costs to the bottom line, many overseas
investors simply choose not to visit their investments, before
or after making the deal. Once again, they must rely on the
honesty of the seller and the property manager.
Even if the seller and property manager are honest, overseas
investors may run into huge problems because of legal and
accounting issues. Investors often shy away from certain cities
in the US because they have ridiculously biased landlord-tenant
laws. They simply don't know which overseas locations have
the same laws or worse.
There are some cases when overseas property investments make
sense. If you have a special connection with an overseas area,
you will be much more likely to make a smart investment. That
is, if you are from a certain region or country, or have other
reasons to visit there frequently, you'll know the area far
better than other potential investors will. You probably speak
the language and have friends who can answer your questions,
or even visit your property in your absence.
In addition, because you are visiting the area regularly
anyway, the travel costs of going there won't be a "real
expense" associated with the property investment. You
may well decide to record that expense against the income
from the investment, but you were planning to go to Bulgaria
or Malaysia or Costa Rica anyway.
Even if you don't have this local connection, there is another
potentially good reason to make that overseas investment.
It's important to remember that many foreign countries are
showing remarkable economic growth, much higher than the United
States. For that reason, an overseas investment in one of
those countries may promise annual returns in profit plus
increased equity that are far better than you'll get in most
That means that if you are the kind of investor who doesn't
mind taking a lot of risk for potentially a lot of reward,
an overseas investment may work well. Or, here's another way
to look at it - why not use some of that extra money to mitigate
some of the extra risk? Suppose an overseas investment promises
you $15,000 per year in positive cash flow, against an up-front
investment of $100,000. Spend $5,000 of that money doing extra
due diligence to make sure the property deal works well, and
will continue to perform well. Make another trip, find another
expert, and do some additional research. You'll still get
a 10% return, but with far less chance of losing money.