Real estate investing can be a great way to build wealth for many reasons. One is that you are buying an income-generating asset, not just something that will increase in value. Another benefit, of course, is the interest deduction on mortgage interest and real estate taxes during the time you own it – depreciation recapture also counts as a tax deduction when you sell your property. If you’ve ever bought or sold a home, it’s likely that you either received expert assistance or spent hours reading online material to get the best deal possible.
There are many different ways to invest in real estate, but one of the most popular strategies involves investors who buy up distressed properties at steep discounts relative to their estimated market values — then fix them up, rent them out and sell them when prices rebound. Depending on where you live, the foreclosure crisis has forced many of these types of opportunities to go begging. But what if I told you there was a place where distressed real estate investors are beating a path to your door?
That’s the case in one particular economy, where I happen to have a strong network of contacts. What’s this economy? It’s America — just not the United States. The country I’m talking about is Japan.
On February 11, 2011, an earthquake resulted in a tsunami devastating Northern Japan resulting in thousands of deaths, injuries, and property damage estimated at up to several hundred billion dollars. Immediately after the quake, stocks tumbled as investors fled to safe investments like gold and U.S Treasury bonds. But among those outperforming other assets were these real estate funds. For example, shares of International Seaport Capital Inc., which invests mainly in container terminals around the world soared 35 percent that day.
One fund, in particular, the Japan Opportunity Fund has returned more than 36 percent so far this year. In fact, from early December to mid-February, investors can have chosen from about a dozen real estate investment trusts that were up an average of 13.5 percent.
There’s something to be said for investing in foreign markets and currencies: diversification is king and it comes with some extra currency risk built-in. And if you want to really go alpha hunting, these kinds of opportunities certainly fit that description while still offering high yields (between 5 and 7%). The problem is only accredited U.S citizens (which means you make over $200,000 annually) can invest in Japanese real estate funds like those I mentioned above because they are regulated under the U.S-Japan Income Tax Treaty.
So I have a solution to your problem, and it’s a fairly simple one: invest in an American real estate fund instead. There are several great ones out there, including Saber Partners Fund III ( SABR X, closed to new investors), Golub Group Fund III ( GBF III, open), and Platinum Capital Strategy Fund II (PRCIX). These funds have all outperformed the market so far this year and show no signs of slowing down.
Again, I must warn you that these types of investments are not for everyone since they fit into a more advanced category that requires quite a bit of research prior to investing. But if you’re willing to put in the time and effort, I can promise you that your efforts will pay off.
That place is Brazil. As in most parts of the world, Brazil’s once-hot housing market cooled off in 2008 as the global financial crisis took hold. And it got downright icy early last year when investors began defaulting on their mortgages en masse. An estimated 1 million homes were rendered vacant overnight, helping push property values down by 20% or more – while annual rental rates dropped 15% during 2010 alone.
In early 2010, the Brazilian government responded with a stimulus package designed to reignite its economy through building public works projects. As a result, housing prices in major cities were overbuilt and under-demolished. Developers couldn’t be bothered to knock down half-completed apartment buildings or fix up run-down properties when they thought the market would rebound by next year.
I have a friend in Brazil who bought a house in Rio de Janeiro for $100 four years ago and is trying to sell it today for $200 because there are at least 10 empty houses on his street alone thanks to developers taking their profits and running. And these empty homes don’t even show up on them; they just sit there collecting dust while the government tries to figure out what to do with them. Meanwhile, Brazil’s real estate market has been in a tailspin, and my buddy is losing money hand over fist.
So where there is a risk, there is also an opportunity for investors. And since next week is Brazil Week here at Outstanding Investments, this would be a good time to talk about my favorite way of investing in Brazilian real estate: funds that invest directly in individual properties. One such fund I found is Alfa SICAV Iberia VI, which invests in apartment buildings in major cities including Rio de Janeiro and Sao Paulo. The fund charges a 12% annual management fee but can return up to 18% when it sells one of its properties.
Factoring in plunging rents and property assessments, banks in Brazil were sitting on roughly US$13 billion in bad loans by mid-2010. Because most borrowers had used their homes as collateral, the value of the underlying real estate has been estimated at around US$5 billion – but with an average recovery rate of only 10%, it’s possible Brazilian lenders could end up eating a loss of more than US$4 billion over the next several years.
But there is some good news: Many investors and even some listed companies are already buying up these distressed properties at bargain prices – and we think they’ll keep doing so for years to come. That’s why we’ve put together a special report that will give you all the details about this unique opportunity. It outlines the steps you’ll need to take to get started, provides a list of the best companies doing the buying, and tells you where to find properties for sale.