Estate and mortgage
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International Investors Like U.S. Real Estate, Shouldn"t You?
[Note: To follow is an excerpt of an interview with Edward Mermelstein, managing principal of the international law firm Edward A. Mermelstein & Associates, who has assited in more than 300 real estate deals with foreign investors, and my special co-host this week Adrian Arriaga, broker/owner of AAA Real Estate and Investments in McAllen, Texas, a major player in both commercial and residential real estate and a leader in the international section of the 1 million member National Association of REALTORS. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/091609.] Mosca: Why has the U.S. been an attractive market to international investors and why today is our country attracting so many from afar to come here and pour billions of dollars into ourreal estate? Mermelstein: My clientele is from Eastern Europe and South America and they tend to see the United States as a “Plan B.” Any country that has an unstable political or economic situtation tends to look at the United States as a very favorable place to invest funds, especially since the returns that they"ve seen here over the past more several decades have been outperforming their country"s. Plus, their concern is always what happens if we have a new president or our economy collapses, which happens quite regularly, especially in Eastern Europe or in some of the South American countries. Mosca: So, while we are dealing with what we think is spreading incivility right now, international investors maybe scoff at that and say, “let"s go, you have a real estate market here that makes a lot of sense, why don"t we start looking at some of these opportunities that we are hearing about?” Mermelstein: That is the other side of the coin. Today we have a market that"s been created out of a bubble that has burst and many foreign investors see an opportunity that they haven"t seen in the United States in the last 15 or 20 years. They look at our real estate market as a fantastic opportunity. Whereas before foreign residents were looking at the United States as more of an opportunity to have just a second home and own a residence in a major metropolitan area, today they are looking at investment opportunities, they are looking at commercial properties, malls, or anything they see as value. Arriaga: How do your investors find financing? If it"s cash, how do they send the money to the U.S.? Mermelstein: These days we are seeing that the opportunity to obtain financing has dwindled. Lenders still will provide financing where the property makes sense. As far as how the money comes into the United States, normally it"s through offshore entities that have been set up and anyone that has the funds to invest in US properties generally has businesses outside of their country that they are investing through your typical offshore entities, like the Carribean entities and in the British Islands. Mosca: Are they looking for a specific rate of return on their investments? Mermelstein: They have been used to IRRs that are over 20 percent in their home countries and that"s their expectation in the United States. It"s not necessarily the reality in terms of current returns but in terms of longterm returns they are looking at three year returns of IRRs over 20 percent on the back end. Mosca: Is there a difference between an international investor versus a domestic buyer? Mermelstein: The most prominent difference is the fact that the international buyers are always ready to pay cash simply because their expectations of obtaining financing is much lower. Although they are all very interested in trying to have the option of obtaining financing they are always prepared to close in cash. Arriaga: How did you get started? Mermelstein: I was born in Eastern Europe, the former Soviet Union and having retained some of the language growing up in the Northeast and spending a lot of time with other people of like mind and language, I started working with some foreign purchasers that started coming into the United States. This is back in the mid 1990"s. If your experience and name starts to be put out there, one person refers to another etc. and then 14 to 15 years later they find that it"s a good place to come in terms of feeling safe. A foreign purchaser that comes into the United States wants to know that they are not being taken advantage of. That is definitely something that we are very much known for is a lot of hand holding and having foreign clients feel that they are in the proper place in terms of knowing that their funds are safe with us. Mosca: A past guest, Dr. Marc Lee Levine, author of an excellent book called International Real Estate, spoke about the importance of knowing various cultures, of understanding the business communities and relationships within those countries. Is that why your expertise helped you create and put together those couple of hundred deals I referenced earlier? Mermelstein: Very much so. I am in that part of the world every other month so having had the experience of understanding the mindset of the foreign purchaser/my client, understanding what their concerns are, understanding what their expectations are, which are very much different from any local investor, gives them that comfort level in knowing that they"re talking to a like minded person. Arriaga: Can you give us an idea, without breaking any confidentiality agreements, of your last transaction? Who, what, where, how much? Mermelstein: New York. A residential acquisition where the price has significantly been dropped. Normally these are high end residential properties that are priced over $5 million dollars where someone absolutely must sell and we have a client basically step in who can close all cash, very quickly. It"s an opportunity play where the price is 20-to-30 percent below market and the investors feel comfortable that they are not going to lose anything especially in a market like New York City. Mosca: What"s your take on mortgage notes right now? Mermelstein: We are very aggressive. One of the investments followed by many of our clients and ourselves these days are commercial mortgage notes, both performing and non-performing. There is quite a bit of opportunity in that market right now especially if you are buying properly. Arriaga: The U.S. is doing great in terms of investments for forward investors. Counselor, what is the next merging area that you are looking at? Mermelstein: We tend to follow situations where others tend to be scared. We started following the hotel market and the mall market simply for the fact that not a lot of people want to be in those markets. Mosca: Do you like a currency appreciation play or do you stay away from that? Mermelstein: I would always tell my clients that keep an eye on the currency but never have that be a major consideration simply because real estate as far as I"m concerned is a long-term play. I"m bullish on the U.S. and the dollar. If I didn"t look at it that way, there would be no reason for me to be in the business that I am in. Learn your markets first and foremost and know where you want to be in terms of an investment but as a foreign investor I would say consider the currency play as the last issue. Arriaga: If the dollar is the biggest upside, what is the biggest pitfall for an investor outside the U.S. to look for? Mermelstein: There is a major concern for foreign investors in considering the tax implications and if the funds are brought in and structured improperly. There could be a tremendous difference for a foreign investor in terms of getting out of the investment. In certain cases, you could be facing up to a 50 percent tax differential, so my advice for any foreign purchaser who is looking to do any serious investing in the United States is that before the funds come in to the United States, structure your entity properly and make sure you bring in the funds into the United States through a proper structure. Otherwise you stand to lose quite a bit on the sale and not just on the sale, if your property is income producing, you stand to lose quite a bit of the income that the property is producing. Arriaga: In Washington, DC we had a change of administration as we all know. Do they look at the Federal Government and the direction they think we are going? Mermelstein: There is a big question mark from any foreign investor. There is not enough of a track record with the administration where they know especially when it comes to real estate which direction we are heading. There is very much an apprehension with respect to the administration and there is very much a concern but when the investors looking at the United States for a long-term play that issue becomes a little bit less of an issue simply because politically it"s not made a major difference long-term. It"s definitely a short-term concern. Mosca: Do smaller markets across the country make sense to a lot of investors as well? Mermelstein: Absolutely. We own properties in places like Dayton, Ohio and Swansea, Massachusetts. It doesn"t matter where the asset is, it"s basically pricing the asset properly and when you are going into the deal, knowing that in two-to-three years from now where that property is going to be. As your ad earlier mentioned, it is knowing at the time of the purchase what your end game is. Mosca: What is your golden nugget for today? Mermelstein: One of the first opportunities that we are following today is in the mortgage note market, especially on the commercial side because that"s where the market still stands to fall significantly. That opportunity is just making itself come into the market right now. With respect to residential, we are very much always trying to be ahead of the market. Residential note sales and foreclosures as far as I am concerned are still an opportunity but that"s where everybody is today so you always want to see where the market isPages: [1] 2
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