Leveraging US property abroad


An interesting twist to investing in U.S. property makes it an international business. Use loans obtained abroad. See in this November 2, 2004 Gary Scott message what an alert reader asked about this now.

Recent messages have looked at the three reasons why north facing Ashe County real estate makes incredible sense now. See http://www.garyascott.com/archives/2004/10/26/1104/index.html if you have not studied this.

Now let’s look at the benefits of using low cost loans from Jyske Bank to finance such investments.

Reader and course attendee Craig McCarty first put me onto the tremendous distortions available when investing in Appalachian sloped, north facing, hardwood forests.

Craig brought a book about ginseng to our recent course and this led us to look at the potential of growing ginseng on our land (we have lots of sloped, north facing, hardwood forests).

We called in an expert that led us to understand that there is far more potential in these woods than just ginseng. Goldenseal, galax, black cohosh and bloodroot are just a few of the high value crops that love this type of woods.

Then Craig added another dimension when he wrote:

“Gary,

“I believe in your October seminar that you felt that a loan through Jyske Bank was the best way of financing international real estate where no mortgage or capital markets exist. Is this still your thought? If so, if one wanted to buy a property for say $500,000 USD, how would you best structure it? Regards, Craig”

This started me thinking on ways to use overseas low interest currency loans to finance U.S. property.

This is a complete flip-flop (though not without merit) from the obvious dollar protecting tactic of borrowing dollars to invest in international real estate. If the dollar drops (as it almost certainly will), the overseas real estate becomes more valuable in its local currency terms. This means the dollar loan falls lower and lower as a ratio of the property value.

The structure of the loan depends on where the property is being purchased. For example Merri and I am currently looking at buying a property in London. We are headed out that way the first week in December. We will likely take up a Swiss Franc loan because the SFR is related to the pound yet the SFR interest rate is much lower than the British pound rate. However, for safety's sake I may borrow the following: 1/3 U.S. dollars, 1/3 Swiss francs and 1/3 euros. The final decision will be dictated by the currency view I take when the property is actually acquired. (Note: Investment banks only lend against portfolios held at their bank. We will use a portfolio not the property to borrow. This means we will own the property free and clear.)

Historically the dollar has taken long parity swings against other major currencies. If the dollar crashes now, this history suggests that there is a good chance we’ll later see the day when it rises again (versus the euro and perhaps hence the Swiss franc at least).

This make take five or six or even more years, but so what? If you own the land and enjoy a lower interest rate, you need not hurry.

Plus there is some protection. If the dollar does not recover, inflation in the U.S. is likely and the real estate probably will rise to absorb any currency loss.

But there is more. If you set up an overseas finance company that makes the loan, you can gain enormous asset protection as well!

This tactic is not without risk, but also possesses great potential. We review all the ups and down sides at our upcoming international business and investing course this weekend. I hope to see you there.

Gary


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