Real Estate Without Borders: Episode Summary

Episode Title: Top 4 Metrics to Analyze Deals in Other Countries
Release Date: February 8, 2025
Host: Daniel Fosh
Guest: Dave Hutch

1. Introduction

In this episode of "Real Estate Without Borders," host Daniel Fosh and guest Dave Hutch delve into the essential metrics that American investors must consider when analyzing international real estate deals. The conversation is both informative and engaging, blending technical insights with personal anecdotes that make complex concepts accessible to both seasoned investors and newcomers.

2. Overview of the Top 4 Metrics

Daniel introduces the central theme of the episode: the four critical metrics for evaluating international real estate investments. These metrics are:

1. Cap Rate (Yield)
2. Mortgage Rate vs. Cap Rate
3. Currency Exchange Rate
4. Vacancy Rate

3. Cap Rate (Yield)

Daniel explains that the cap rate is a fundamental measure of a property's return on investment, calculated by dividing the net operating income (NOI) by the purchase price. It serves as a comparison tool across different markets.

Daniel [19:05]: "Cap rate is basically your net operating income divided by the purchase price of the property. It measures the property's operating performance."

Dave acknowledges the importance of understanding cap rates, recognizing Daniel as a pioneer in the concept.

Dave [18:05]: "I remember when I was a newer realtor and I'd hear you talk about cap rates, and I like, I guess I should learn this. So you're the reason I know cap rates. Just so you know."

They delve into examples illustrating high and low cap rates, highlighting how higher cap rates may indicate higher returns but come with increased risks, whereas lower cap rates often signify more stable but less lucrative investments.

4. Mortgage Rate vs. Cap Rate

Daniel discusses the importance of comparing the mortgage (interest) rate to the cap rate. This comparison determines the "spread," which influences the investment's viability.

Daniel [01:00]: "You want to get an understanding for the loan, the interest rate that you're going to be paying and where does that fall relative to said cap rate? Because that kind of determines the spread."

A higher cap rate than the mortgage rate generally makes the investment viable, providing a positive spread for profit.

5. Currency Exchange Rate

One of the standout discussions revolves around the currency exchange rate, a crucial yet often overlooked factor in international investments.

Daniel emphasizes the strength of the USD against other currencies, presenting it as a current advantage for American investors.

Daniel [01:56]: "USD is so strong relative to currencies around the world right now. People who are buying real estate in other countries with USD are getting a relative discount today."

Dave shares a practical example from a deal structured in Mexico, illustrating how currency fluctuations can lead to significant savings.

Dave [02:53]: "In early 2024, the exchange rate from Mexican peso to dollar was about one US dollar was 16.67 Mexican pesos. Today it's around one USD per 20.67 Mexican pesos. That's a $70,000 difference buying one year ago versus today."

They further discuss the implications of a strong USD, potential future trends, and the attractiveness of depreciated currencies for investment.

6. Cap Rate Deep Dive

Returning to cap rates, Daniel provides detailed explanations and calculations using real-life examples from Tulum, Mexico.

Daniel [18:18]: "Cap rate is the net operating income divided by the purchase price. It's useful for comparing properties side by side."

Through a simulated example, they calculate cap rates for different properties, demonstrating how various factors like occupancy rates, operating expenses, and property prices influence the overall cap rate.

Dave [22:05]: "This one's different because it's located at Zamia Fitness—a world-class fitness facility with only 46 villas around it. It offers a higher ROI due to its unique branding."

7. International Financing Considerations

The conversation shifts to the challenges of securing financing in foreign markets. They highlight significant differences between North American financing practices and those in other countries, such as Mexico.

Dave [30:22]: "A lot of these countries expect a minimum of 30% down, which is higher than the typical 5-20% down payments in the US and Canada."

Daniel underscores the importance of understanding local lending markets, cultural attitudes towards debt, and how these factors impact investment strategies.

Daniel [31:29]: "If you're buying in a country where they expect 30-50% down, versus 5-20% in North America, it affects your leveraging ability and overall returns."

8. Vacancy Rates and Market Insights

Addressing the fourth metric, vacancy rates, Daniel and Dave discuss how seasonal variations and local market conditions influence occupancy and, consequently, investment returns.

Dave [32:50]: "In Quintana Roo, Mexico, vacancy rates are highly seasonal. From December to May, occupancy can be 60-70%, dropping to 10-15% in the summer months."

Daniel emphasizes the necessity of incorporating realistic vacancy rates into investment analyses to avoid overly optimistic projections.

Daniel [34:18]: "Many investors assume full occupancy, which is rarely the case. Including an allowance for vacancy is crucial for accurate underwriting."

9. Conclusion and Future Topics

Daniel and Dave wrap up the episode by reiterating the importance of these four metrics in making informed international real estate investments. They hint at future episodes that will delve deeper into topics like yield analysis and comparing investments with and without leverage across different markets.

Dave [35:07]: "We do this podcast to help you make educated decisions in global investing. Understanding currency exchange is just one part of the puzzle."

Notable Quotes

• Daniel [01:00]: "You want to get an understanding for the loan, the interest rate that you're going to be paying and where does that fall relative to said cap rate? Because that kind of determines the spread."

• Dave [02:53]: "That's a $70,000 difference buying one year ago versus today."

• Daniel [19:05]: "Cap rate is basically your net operating income divided by the purchase price of the property."

• Dave [30:22]: "A lot of these countries expect a minimum of 30% down, which is higher than the typical 5-20% down payments in the US and Canada."

• Daniel [34:18]: "Many investors assume full occupancy, which is rarely the case."

Key Takeaways

1. Comprehensive Analysis: Successful international real estate investment requires analyzing multiple metrics beyond traditional domestic measures.

2. Currency Fluctuations: A strong USD can offer buying advantages, but investors must be mindful of potential currency volatility and its impact on returns.

3. Local Financing Practices: Understanding and adapting to local financing norms, including higher down payments, is essential for leveraging investments abroad.

4. Market-Specific Vacancy Rates: Incorporating realistic vacancy rates based on local market conditions ensures more accurate financial projections.

This episode serves as a valuable resource for investors looking to expand their portfolios internationally, providing actionable insights and emphasizing the importance of thorough due diligence across diverse metrics.