Foreign folly: Why think twice with property investing?

It’s incredible how the internet has opened up our investment options. No longer are we limited for investment choice, as we can easily access different types of investments both locally and internationally. However, as some property investors have found out the hard way, this is not necessarily a good thing. The lesson in this is to understand your risk no matter where you invest, learn from the mistakes of others and think twice when making a potentially risky investment decision.

What has been concerning me over recent years is how investors with little knowledge are being lured into risky property assets overseas. While these people have been investing in Australia for a long time, they wrongly believe this knowledge can be transferred, limited as it is, to property assets elsewhere, and this is exactly how people get burnt.

Remember, it only takes one bad sizable investment decision to blow a hole in your wealth creation plans. Therefore it makes sense to do the appropriate level of research and be aware that the more complexity you add to your investments, the more knowledge you will need to make decisions.

Speaking of research, it’s a good idea to understand yourself first and consider the level of risk appropriate to you as sometimes it is greed or fear that motivates us to take risks and step out of our depth. This doesn’t mean don’t take higher risks; it simply means be aware of your reasons for wanting to invest.

Just as there are different rules for different assets classes, there are different rules to be applied if you are considering investing in property outside of your own backyard, and I would go so far as to say that for many this course of action is high risk. The worst part is many don’t understand the risk they are taking. So to ensure you don’t make the same mistake, your first consideration ought to be risk, with what you might stand to gain coming in second.

While some of the rules you apply to invest locally could also be applied to investing overseas, there are a whole lot of other considerations outside of what you might already know – these include legal and regulatory issues, and also how a foreign property market operates. For example, did you know that in America a property owner can hand back the keys to their bank if they cannot pay the mortgage?

So how do you make these same considerations when you know little about the market? How do you find the right people to work with? If the property needs renovations how do you know whether you are being charged a fair price? How much time and research do you need to invest before you can buy? There are many questions that only hours upon hours of research can answer.

One thing to beware of is a free seminar where the presenter is offering a great property opportunity in the US, and cheap. Let me ask you this: why would Americans sell property here if the opportunity is so good, and who are these property sellers really helping? The answer has to be them and probably the US banks that want the properties off their books.

As a simple investment approach, I suggest sticking to two main asset classes: local property and shares. Why? Because both provide the two essential ingredients on my shopping list for any investment – income and capital growth.

With any investment, make sure you understand your risk before you invest.