Tuesday, March 8, 2011

Dominican Republic Real Estate As a US Dollar Inflation Hedge ?

Where can you convert your US Dollars without losing your shirt on the exchange rate or otherwise, get fair value for your money? Even in India at the moment, they are now refusing to accept US Dollars in the country's tourist attractions due to the devaluation, but not so in the Dominican Republic. Some Dominican properties are actually priced or sold in Dollars, and if not, the exchange rate is still favorable.

Inflation or devaluation of a currency by the politicians is nothing new. The Roman Emperors starting clipping coins, or better said, slowly but surely reducing the gold content of the Denari until such a point that it was nothing more than base metal. It took them 500 years before the coins became worthless or junk in other words (without the gold or silver content). Paper money used to be backed by gold or exchangeable into gold, until it too was taken off the gold standard altogether, and now it is, quite frankly nothing more than paper with fancy engravings on it. That too is on the path of the Denari. And since we are talking about the US Dollar in this case, one dollar printed in 1913 has almost lost 100 percent of its value in 100 years - progress over the Romans to be sure.
If you hold paper, or money, then you must get an interest rate or return on your funds to at least equal the inflation or devaluation rate. At the moment, as of December 2007, many economists and number crushers put the current inflation rate at about 11 to 15 percent, despite the official line from government bureaucrats. With the US Federal Reserve seemingly bent on keeping interest rates low, keeping pace or treading water in regards to inflation by using traditional bank or savings deposits does not look like the answer.
Regardless, this is not meant to provide a synopsis of how politicians and other leaders defrauded the citizenry over the centuries (although a fascinating study of human history indeed), but rather to discuss some ideas to convert the paper money into something of worth, that will hold onto its value over the long-term. Certainly owning gold fits the bill (and we are fans of gold to be sure). However, aside from gold's use in jewelry and some commercial applications, it does have a fairly limited utility value to us in our everyday lives. Real Estate, on the other hand, is another matter. Which is to say, you can live on it, you can grow tomatoes on it, you can rent it out to someone else to grow tomatoes on it, and so on. In other words, a utility or use, while you wait or while you hold onto it as a store of value.
Property or land has historically appreciated anywhere from about 2 to 5 percent annually, with some periods of slow growth or a stagnant market setting in from time to time, and some periods of double digit growth as well - sometimes to the point of bubbles being created. But, the main point to be noted is that real estate usually holds it value and acts as a hedge against inflation (along with gold, of course). We say usually, as there are exceptions to everything, such as the current sub-prime nonsense in the US at the moment, which is wrecking havoc with the US real estate market and probably will skew the traditional calculations because of all that debt and leverage that is out there (the market was driven up by debt and leverage, so it is no surprise that these same two factors will make a correction that is much more dramatic and painful as well).
So, the question becomes - if you are going to swap your paper money for something else, and presumably real estate for some portion of it - then where? Good question. The answer has to do with if whether or not the market where you are looking to buy is over-valued, under-valued or fairly valued at the moment. In addition, if there has been increases lately, what has caused it. Is cheap money or debt to blame, or are properties being purchased for cash? Is it a case of supply and demand or something else?
Real estate in some parts of the Dominican Republic, such as on the North Coast, Semana and Punta Cana has seen price increases of 20 percent or more annually recently. Will that continue to be the case? If history is any guide, probably not or not indefinitely, at least not at that rate of appreciation indefinitely, but then again, much of that real estate has been purchased for cash, so no debt bubble as the cause either. However, there still are bargains and fairly valued real estate or properties out there - you just need to know where to look. Often enough, that means not following the crowds and staying away from where the current boom is. The idea is to be the investor with some common sense and long-term vision, buying for fair value and holding it. For example, if your grand-father bought twenty-five acres on the beach in Punta Cana 30 years ago, when there was nothing but noisy seagulls and weeds, he probably would have gotten the land dirt cheap. He also proably would have never stopped hearing his wife, your grand-mother, tell him what an imbecile he was for buying a property in some banana republic. Of course you, one of his grandchilren would most likely be laughing all the way to the Mercedes dealership, telling everyone along the way what a genious your grand-father was. And so it goes.
The key point in all of this is of course to make your real estate purchases in such a way that you are not over paying, or at least getting current value. In this regard, once again, the Dominican Republic on average is still about 25 to 30 percent less expensive when you compare similar properties in the rest of the Caribbean. As just one example, The Global Property Guide (a real estate guide from the UK) says that prime beachside property in the Dominican Republic sells at an average of US$2,000 a square meter, compared with US$10,400 in Barbados. There is nothing wrong with Barbados, but it is worth 5 times the cost of similar, beautiful beach front property in the Dominican Republic? We think not.
Looking even further, the Dominican Republic has a large number of luxury condo's, single family homes, rural or farm land and undeveloped beach lots at prices that most middle class Americans and Europeans can afford. One area we have highlighted is the Barahona region, whereby you can still get beachfront or ocean view property for about US$35 per square meter, compared to about US$100 per square meter in more built up or otherwise, better known areas of the country. In terms of luxury ocean front condos, while you can pay US$800,000 for a sea view apartment in some projects in Punta Cana, the point is you do not have to. As an example, we found a very well done project of brand new 1100 square foot condos right on the beach in Juan Dolio, complete with swimming pool for US$195,000. Looking for a single family home? Some of our clients have recently purchased homes in middle and upper middle class sections of Santo Domingo for prices ranging from about US$120,000 to US$180,000. And these are what you would call homes, not garaged sized shacks that some real estate brokers in California are trying to convince you are worth US$500,000 or more.
In summary, is there value for money when it comes to real estate in the Dominican Republic? The answer is YES. In addition, adding some fairly priced Caribbean real estate to your investment portfolio could also help protect your assets from the eroding nature of inflation as well.

Real Estate In Another Country As a Hedge To The US Market

When you discuss the idea of owning real estate in another country with Americans, many will claim that this is a risky idea, that legal protections for titles do not exist, that living in foreign lands may be dangerous, along with a whole slew of other comments - which are not entirely accurate or true. In fact, in many countries, such as the Dominican Republic, title insurance is certainly available (from well known firms such as Stewart Title) and legal guarantees under the law for foreign investors as well. In many countries also, you need not be a resident or citizen at the time you make a real estate purchase either.

Europeans of course have no problem investing in real estate overseas and generally make the leap to ownership abroad much quicker and easier. Regardless, both Europeans and Americans do have a current problem at home they need to consider in the decision making process - namely a housing boom or bubble that resulted in a outright bust in some cases (the US and the UK) or otherwise a market slowdown in their respective countries.

What has been the culprit and why do these problems not appear in other countries, such as the Dominican Republic, Ecuador, etc.? Well, for starters it has been noted that artificially cheap interest rates have been partly to blame. Even more so in the US, where housing prices have not gone up as dramatically as in some other countries, YET the debt incurred to purchase the properties had indeed lead to a serious problem going forward. In fact, in some areas of the US, it is estimated that over 50 percent of new home financing is interest only and or hybrid adjustable rate mortgages, whereby buyers are not even paying off the debt principal as part of the payment plan (in the case of interest only and so-called 1 percent ARM option loans). In addition, some newer statistics would indicate that about 70 percent of all residential real estate is mortgaged, in one form or another. In other words, about 30 percent or so of US homeowners actually own their own home outright with no debt or mortgage against the property, while 70 percent of US residential property has a debt liability. But aside from that, home prices as a percentage of average income is at one of its highest levels or ratios historically, making housing even more expensive or less affordable for many middle class people. European housing prices are even worse or have gone up even more shockingly over the past five years, yet there may be a major difference in terms of the consumer debt supporting it (in comparison to the US market). However outrageous home prices are still outrageous regardless, and a boom is also a bust waiting to happen, which of course we already know has happended. However, one thing is certain - real estate in many other countries is still less expensive and not over leveraged with debt. Why is this so?

Financing is available in most other countries, but it often doesn't make any sense, said Elizabeth Makatura, vice president for international service and operations for Coldwell Banker. Interest rates can be as high as 30 to 50 percent in some parts of Latin America or the Caribbean. Down payment requirements are also more stringent. While it's not uncommon to put down as little as 0 percent to 5 percent in the United States, in many other countries buyers need a hefty amount of cash to qualify for a loan. According to Fannie Mae, buyers in Italy may need to put down 50 percent of the cost of the house. In Germany, a 40 percent down payment may be needed, and in Mexico a 30 percent down payment is the standard.


Sounds terrible, does it not? But it is true in many countries that local banks require a 50 percent down payment or will only offer a mortgage for 15 or 10 years only. But is this really such a bad idea? We know that according to some US statistics, roughly 70 percent do NOT own their own home. Which is to say, people that have purchased homes think that they own it, but they really do not. The bank does, and in effect these people are tenants making monthly payments to the bank. Where as in the past, this was a fairly sound idea - many people today are making interest only payments. In effect, remaining on the hook for the full debt amount while making monthly payments to the bank for interest only. In any event, from a socio-economic point of view, certainly a case of citizens living on credit (in terms of their own home) and certainly very much so exposed financially should things become difficult economically going forward. Contrast this now to a country where most of the citizens own homes outright (paid in full with no mortgage) or whereby the requirements are steep in that a loan applicant must be very solvent in order to qualify. What are possible differences in financial outcomes for people living in the easy credit environment (no money down, etc.) versus the later more difficult one? One thing that comes to my mind, in terms of the easy credit environment, is that many people are going to loose their homes and face severe problems (which often enough translate into social problems). In the country where most people pay cash for their homes, they may loose their job, the economy may turn negative - but they still have their own home (free and clear). Ergo, even with a poor economy, certainly the probability of LESS social strife and not more, in the country with the high down payment or cash only real estate purchase environment. Where have we seen real case studies of this? Where have we seen a country where the people actual do own their own property, and often have more real personal wealth that have allowed them to weather economic torments? Argentina is one and the Dominican Republic yet another.

This is in contrast to accepted wisdom in North America, whereby everyone can borrow money and buy a home - but without the savings to do it with. No money at risk often means no personal responsibility, or at least the probability of walking away if things go wrong (and certainly not a pretty site for the banks that have loaned the money either). In any event, let us put our long-term rational thinking caps on for a moment. If you do believe that there is a debt and leverage problem affiliated with the housing market in the US and the UK, then where will this lead socially and economically? The final question is, depending of course how you answered the first two questions - Where do you go?

The surprising answer for some might be - those very countries where credit is strict and housing equity in the hands of the owners and not the bankers. For many people, the equity in their current home is the bulk of their wealth or savings. So, it stands to reason, the opportunity exists to tap into that wealth and buy a home, apartment or small farm in Argentina, Brazil, Dominican Republic, Ecuador and a host of other places where the climate is good year round, and real estate prices are not overblown.


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