About seven years ago, I finally gave in to the voice in my head and invested in international real estate in India, my country of birth. I had been contemplating the idea for a while and had some surplus cash lying around that could be put to good use. Of course, the fact that the real estate market in India was in the middle of a boom didn’t hurt as well.
I was prepared for some challenges and milestones along the way but ended up learning a thing or two (or five). Here are my lessons in my 8 years of buying and holding a couple of apartments internationally. While each geographical real estate market is different, the lessons are applicable to any international market no matter where you’re investing.
1. Do Your Due Diligence
The international real estate is not as transparent and liquid as more mature markets. It changes in response to available cash, stock market sentiment and foreign institutional investors, especially in an emerging economy. During boom times, there’s always a shortage of homes as folks have higher-than-ever disposable incomes and a fear of missing out.
While it could be argued that these circumstances easily apply to the US as well, I believe the uncertainty is compounded by geopolitical risks, other economic factors and sudden changes in government policy.
I did some basic due diligence by talking to friends and asking the family to check out potential neighborhoods, builders, and properties. I devoured all the information I could find online but didn’t drop $1200+ on a plane ticket to check those properties out personally. In the end, I relied on the expertise of a friend in the industry, combined with the reputation of the builder and the site visits made by family members. I went for an under-construction property as that meant I got in at a lower price point. It would also give me time to come with the funds instead of taking on a home loan at double-digit interest rates.
The friend’s recommendation, despite best intentions, ended up being off the mark.
2. Invest in Growth Markets
There’s also a tendency to invest in what’s familiar to us and for good reason. I decided to invest in the suburbs of Mumbai, the city where my parents and extended family resided. The city’s real estate market was booming, and having family close by meant that they could help keep an eye on it.
I could have hedged my bets better by investing in smaller Tier 2 or Tier 3 towns. Tier 1 cities were beginning to get expensive and would get even more so in the coming years. Availability of land was becoming an issue, and employers were moving to smaller cities and towns in search of cheaper real estate and an affordable talent pool.
This meant that the pool of prospective buyers would shrink drastically as the properties appreciated in value, and thus out of their financial reach. I feel that there’s a psychological threshold with a $1 Million price tag in southern California. There’s a similar one at the Rs 1 Crore (approx. $155,333 today) mark in Indian metros.
3. Currency Fluctuation Risk
This one is obvious as currencies will fluctuate vis-à-vis the US Dollar, so I knew this going in. What I didn’t expect was the extent of the fluctuation and the corresponding loss that it would entail.
I made my initial investment in early 2010 and over the next 2 years made payment as bills came due. Funds were converted from USD to the Indian Rupee (INR) @ Rs 45-54 depending on the month and year. Even if I were to go with a rough ballpark of around Rs 49 to $1, as of July 2017, the exchange rates are hovering around the Rs 64 mark. That means that all else being equal, if I’d sent $50,000 from 2010-2012, I will get $38,281.25 back in July 2017 i.e. a 23.4% loss. This is excluding all the transaction fees & hidden charges incurred in converting from and back to, the dollar.
Conversely, if I’d invested towards the end of 2013, the exchange rate was hovering around Rs 62 and my losses due to currency fluctuations could have been around 3%. What a difference a year makes!
4. You can’t predict the market, despite all predictions
There’s a lot that is not under your control when it comes to real estate. The market can change too quickly, or sometimes too slowly, despite all indications to the contrary.
Apartment #1 is in an up-and-coming suburb of Mumbai and close to a new international airport. The airport was initially conceived in 1997 but finally received government approval to move forward in 2008. It would take a few years for the ball to get rolling, but the idea was (and still is) that property prices in the region would shoot up once the airport was under way.
Almost a decade later, the airport’s construction has yet to start and the project has been caught up in one hurdle after another. There has definitely been some appreciation and progress is still being made, albeit slower than expected. Current ‘predictions’ are that further appreciation will happen 2020 onwards but it’s a roll of the dice as far as I’m concerned.
Apartment #2 is closer to the city, but there are construction delays aplenty. The builder sold apartments in buildings it didn’t have the approval to build, and eventually didn’t receive. The C-suite was put behind bars for various scams, thankfully unrelated to this construction, which meant there was no true leadership at the helm for a while. Then they started multiple projects and had cash flow problems, putting the brakes on all but a few sites. The story goes on…
5. It costs more than you think it will
There are fees that you know of and expect. Then there are those that come out of left field, and you have no choice but to pay them.
Stuff you expect
- Stamp Duty: A government tax, levied on all property transactions.
- Registration: Similar to the Recording charges we pay here in the US. Copies of documents are ‘registered’ with the appropriate authorities before you get ownership of the property
- Carpet area vs Super Built Up area: This is a concept possibly unique to India, although I wouldn’t be surprised if it exists in some way, shape or form in other developing countries as well.The former is defined as the area enclosed by the walls but excluding the thickness of the walls i.e. the actual living area. Super Built Up is the carpet area plus the thickness of the outer walls, the balcony, your proportionate % of the lobby, elevator, stairs, etc. In some cases, it may also include common amenities like swimming pool, garden, clubhouse, etc.When sellers quote you a rate per sq ft, guess which area measurement is used?
Stuff you don’t expect
- Additional charges: The builder effectively adds on miscellaneous charges that may throw off your initial numbers. Note that this wouldn’t be applicable if I had purchased a flat directly from a private seller – it did so because I went for a new one from the builder. I calculated that these fees were an extra 8% over my initial cost estimates.
- Greasing palms: I’m going to attempt to be as transparent as possible on the blog, which means also talking about the uncomfortable stuff. If you’re living on the other side of the world, you end up asking the family to run errands for you which includes getting documents approved by various authorities. I could have asked my elderly parents/in-laws to make multiple visits and stand in long queues to get it done.Alternatively, I could take a smoother approach where it gets done in hours instead of days. In some cases, it’s as simple as hiring another person to get in line for you, who just happens to be a very good friend to the official in question. You can judge me all you like, but chances are you don’t get anywhere unless you’re ready to pony up. This is the reality of the situation and an unfortunate necessity.
Would I do it again?
The short answer is yes, although I might gone about some aspects a little differently. I didn’t lose money but could have made more had I invested it in a property here in the US, possibly with fewer headaches. Even then, I’m glad I did what I did.
I think investing is a journey where I learn from my stumbles, despite how many ever books & articles I might read.
What do you think? Have you invested in any international real estate? Write your own ‘lessons’ list and let me know about it in the comments below.