Make Sure Your Knowledge Trumps Foreign Ignorance
Real estate in America has historically been a a very good investment for anyone wanting solid returns. But it seems investing in U.S. homes isn't just appealing to Americans anymore.
Foreign investors aren't immune from the draw of U.S. real estate, in part because they see investing in American markets as a choice alternative to returns available in their own countries. In comparison, everything in the states looks to be "on sale", drawing novice foreign investors to flood the market with capital and snap up as many distressed properties as they can get their hands on.
The question is, should should you be nervious at all about this? Or just keep plugging away, business as usual?
Let's look a little closer...
No, the Sky Is Not Falling
First and foremost, know that the blue skies above your head are not about to come crashing down to Earth to crush you (and your business) under their massive weight.
While the foreign investor wave does bring some challenges to investors and to the real estate market as a whole, it will also doutblessly bring opportunity. Whenever new challenges arise, opportunity always comes along for the ride.
But we’re jumping a little too far ahead in the game. First things first.
Here's the Deal
Before we can really talk about risks and rewards, it’s important that you be able to wrap your head around exactly what’s happening today.
So here's what's happening:
We've discussed before our concern over a growing trend of major Wall Street players actively aiming to scoop up billions in residential properties. We see this as one of the toughest pills for many mom and pop investors to swallow right now in the current market. Since we first brought it up, it's a trend that only seems to be ramping up...and now foreign investors are apparently aiming to cash in.
Dozens of pension investors and private-equity firms (like Blackstone and Colony Capital for example) are falling over themselves to snatch up homes in beaten-up markets, and now often using money from foreign co-investors to do so.
Foreign investors, primarily from Europe and Australia, are increasinly present in U.S. real estate markets, doing one of two things:
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Investing capital into American institutional investing companies which are then purchasing distressed properties on a buy and hold basis; or,
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Investing cash in foreign REITs, which then invest in distressed American properties.
Either way, once the cash is invested - so far, somewhere between $6-$9 billion (or about 15% of the outstanding foreclosures and REOs on the books) - these foreign investors commence snapping up properties.
Why They're Doing It
We all know it takes a certain amount of knowledge to make investing in American real estate pay dividends. At this point, many of these foreign investors are dropping their cash into residential properties, and doubtlessly overpaying more often than not.
The reason?
First, just like many U.S. investors, these guys are seeking high returns by renting out the houses initially and eventually selling them into what they are betting will be an improving housing market. This phenomenon is being referred to as "REO to Rental" and is expected to grow robustly over the next two years, firmly establishing itself as a legit institutional asset class in and of itself.
Secondly, these foreign investors are also making a gamble that favorable currency conversion rates - which let them offer more for properties than they could if they were trading in U.S. Dollars - will also pay off for them in the long run when they’re ready to sell.
But let's be honest: Banking on favorable currency conversions is a crapshoot at best.
For instance, the Australian Dollar is historically worth about 80% of the American buck. Right now, as these foreign investors are shelling out cash and diving into the housing market, the dollar is down. They’re banking on the idea that the buck will rebound in the next five years or so, putting the Australian-American Dollar conversion back to where it historically has been. If their power play is right, these investors’ ROI could push somewhere near (or beyond) 30% when they sell. (Think of this concept as the currency conversion equivalent of “Buy Low, Sell High”.)
The Problem With All This
For starters, where currency's concerned, what if they’re wrong?
People like Ron Paul and Peter Schiff are adamantly predicting the near inevitable demise of the dollar due to government money printing policies, runaway spending and a host of other political and financial reasons.
Without saying we’re on-board with everything these guys are saying, let’s play devil’s advocate for a minute and ask the really hard question: What if Paul and Schiff are right?
If things pan out the way Paul and Schiff seem to think they could, these foreign investors would lose their shirts. If this happens, these foreign investors won’t be the only ones hunched over trying to cover their nakedness from the harsh wind of financial reality: With a few major institutional buyers holding so much real estate - billions and billions worth - couldn't the fallout from this stand to imperil the entire American real estate market?
Remember, REITs (real estate investment trusts) alone raised $6 billion to $9 billion for REO-to-rentals. This suggests potential acquisitions of 40,000 to 90,000 properties just from the REITs...and growing steadily.
If these guys go this deep into U.S. real estate, then their shirts, who's going to be left with the short end of the stick in the end? The homeowners, and the American real estate market as a whole. We the taxpayer.
Another potentially devestating problem with all this: They're pushing tenant occupancy over homeownership, which tends to depress values and hamper recovery.
Third potential problem: These guys are agressively and stealthily squeezing out local home buyers and investors in certain communities - the very two people groups who form the very backgone of a healthly housing recovery. Is this wise?
Not only that, but let's be honest: These guys likely have no idea what they're getting themselves into. Sure, the investment looks great on paper. But managing thousands and thousands of rentals/tenants en masse? A hedge fund? Ahoy, ice bergs ahead.
The Investor's Perspective
As an American residential real estate investor, you obviously care what happens in the housing market. If things play out this way, a few realities come to mind as distinct possibilities:
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If these guys down slow down, then things turn upside down on them, your real estate market could take another hit. And any properties you own could of course lose value;
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You would also have almost unparalleled opportunity to buy some of these properties at real fire sale prices.
We've given you some interesting points to ponder. While we want you to have the knowledge necessary to succeed in the distressed property market in the next few years, we don’t want you to let fear overcome any incentive you have to invest in these markets. After all, foreign buyers have only tapped into about 15% of the distressed market, and if things do turn south for them, there’s still an upside for investors who know what they’re doing.
Bottom Line For Investors
Look, we all believe in the free market, and we’ll fight to defend it. But we don’t feel this trend is healthy at all – not for the “regular” investor on the street (the backbone of true recovery) and not for the market as a whole. When one of these funds blows up after buying thousands of houses (and they will), the fallout will be widely felt.
That's why we've got our lobbyist (i.e. your lobbyist) acting as our foot soldier in Washington, actively making moves to draw attention to this issue to the powers-that-be who can rethink it. Here's his input on the matter:
"We all believe in the free market, but also have seen suggestions from major Wall Street players that they want to buy billions in residential properties. If one of these funds blows up, I don't want the fallout impacting all of us. Therefore I think asking for a study on potential systemic risk to the housing market of one firm owning a billion in residential properties makes sense. Plus we don't want to have a situation where three or four outfits are buying everything in sight. This study should help us on multiple levels. This will NOT impact small and midsize bulk buyers, we're talking about the big ones here.
I think we maintain our commitment to the private market, and simply call for a study on the issue. We are going to be more active in getting our press releases moving forward as we expand our influence in Washington even further this year."
We're in this together. And rest assured, we'll keep fighting the good fight and keeping you informed along the way.
As a fellow Mogulite, you've got your eye on the prize. Small, incremental challenges or tiny financial carrots being dangled in your face won’t sway you.
You’ll make smart investing decisions by purchasing properties at prices that reflect solid market fundamentals, not the potential future value that might - or might not - eventually come to pass. You’ll watch the market diligently and sell when it makes sense, not when television talking heads give you their best (often inaccurate, incomplete and flawed) advice.
We'll keep working together to find new ways to exploit the opportunities presented to us by whatever market we happen to find ourselves in. Up...down...in between...it doens't matter. I say again, we're in this together. Real estate moguls are always prepared for any eventuality.
You can prosper in the short-term by using the tips, tricks and strategies we give you every day here at Mogul.
The most important thing is that you continue making intelligent decisions based on solid market fundamentals and that you not be swayed by possible foolish decisions made by investors who lack the knowledge of your market that you've invested the time and effort in acquiring.
What strategies will you use in the coming days/weeks/months to ensure that you’re always well positioned to intelligently profit in distressed properties? And how will you protect your financial interests from the fickle movements the market can take when ill-informed investors make plays in markets they don’t know?