2009-09-03

Opportunities in Foreign Real Estate Market -- Part I

Last time, we talked about a safer way to invest in real estate. We discussed how one should build instead of buying to lower the entry price, look for a stable to growing market and think of returns in terms of renting rather then selling.

Now, let's look at a practical example. I'll start with the market.

Foreign Real Estate Market.

I happen to know a bit about the real estate market in Brazil, since I've been following it for a few years now, from a distance. I also know some savvy real estate investors there. So Brazil was a potential candidate market for me.

Because the Brazilian economy has been doing remarkably well over the past 10 years or more and inflation has been tame all along, two things happened that spurred investments in real estate.

First, people got effectively richer. The lower middle class who previously couldn't afford houses now can.

Second, with inflation under control, long-term mortgages start to make sense again. You see, until recently in Brazil banks didn't lose. They didn't hold the risk of fixed-rate mortgages in the same sense as here in the US. Fixed-rate in Brazil until recently meant after inflation. That's right, your payment would fluctuate with inflation, so that banks were protected from the robbing power of inflation, while consumers had to take that risk themselves.

But with inflation under control, banks started to accept the risk of inflation. So truly fixed-rate mortgages are now a practical reality in Brazil.

With these two things -- more people with money and fixed-rate mortgages -- buying real estate starts to make more sense now for more people. And thus, real estate prices have followed suit.

One region I track prices is the shore area of Rio de Janeiro. There, in the last 2.5 years, some low-end single-bedroom apartments have appreciated 49%. That's a 17% annualized return in an environment of no more than 5% annual inflation.

Another area is the southern city of Porto Alegre, where investors are seeing about 8% annualized price appreciation, depending on the neighborhood, of course. This is a more reasonable price appreciation and appears less speculatory than the Rio de Janeiro scenario.

With the Brazilian stable to growing market in mind, I set out to find raw land to develop, build and sell, with the assurance that a worst-case return based on rent would still make financial sense. I will get into the specifics next time.

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