June 12th, 2009
The first major risk management tool was insurance. The insurance industry had its origins in the ancient practice of bottomry, in which the owner of a ship borrowed money for equipping the vessel and, for a definite term, pledged the ship as security. If the ship was lost in the specified voyage or period, the lender (insurer) lost his money. Clearly, a rich lender had opportunities for diversification unavailable to the owner of a single ship. Bottomry is virtually extinct today, although the maritime insurance business (which lacks the lending aspect) that replaced it is alive and well. Bottomry was a remarkable development because the risk to the lenders could still be very significant in view of the massive potential losses from a single storm or pirate, whereas the ability to diversify these risks could be limited to the commercial fleet operating out of a single port. Interest rates must have reflected these risks.
The underwriting of accidental risk became an important business in 1771, when 79 underwriters pooled their activities and created the original Members of Lloyd’s. They would appear to have intuitively understood the value of diversifying their risks.
Benjamin Franklin set up the first American insurance company in 1752, writing fire insurance. Since then, a massive global insurance industry has developed to handle a host of relatively small risks whose occurrence is statistically predictable: Health and dental insurance, life insurance, fire and flood insurance, and automobile collision and liability insurance are examples.
These instruments are familiar because they work their way into most household budgets.
May 23rd, 2009
Modern risk management depends absolutely on modern mathematics. 7 In its absence, the ancients were as handicapped as mariners without a compass. The introduction of modern arithmetic allowed thought pioneers such as Cardano and later Galileo to develop the theory of combinations—essential for figuring the probability of outcomes when rolling dice or drawing cards. Here the modern concept of probability was born.
Though useful at the gaming table, probability theory was still not very useful for real world events. The theory of statistics was needed for that, and the first statistician might have been a Londoner, John Graunt, who studied the age distribution and the causes of death from bills of mortality in London parishes.
The primitive database (i.e., the church records) from which Graunt derived his study was itself an innovation and was less than 60 years old at the time of Graunt’s study, published in 1662. Databases would go on to become a powerful source of wealth and value, but that is another story. The astronomer and mathematician Edmund Halley extended Graunt’s work into an analysis of life expectancies, creating in 1693 a scientific basis for the valuation of annuities. Still, it would take nearly another century for a modern life insurance business based on actuarial data to evolve.
From a mathematical viewpoint, the remaining big step was the discovery of the bell-shape curve. Abraham De Moivre in the 1730s, using the binomial theorem,8 developed the concepts of the normal distribution and the standard deviation, the latter being a measure of the dispersion of the distribution about the mean. In Chapter 5, we relied on his formula, coded as NORMSDIST in the Excel spreadsheet program, to calculate Black-Scholes option values! And how did we calculate volatility? We used De Moivre’s formula for the standard deviation.
April 30th, 2009
The chambers of commerce of many countries put on events all over the world to lure investors to their countries. In many countries, when you go there and reveal that you are an investor, you will be treated with respect and given a lot of support and assistance.
When you have invested in a country, you will often be treated like royalty and offered even more investments that may not already be publicly available. And when you have invested sufficiently in some countries, you will get invitations to advise them, joint-venture with them, or sit on their corporate boards.
What a sharp contrast to other professions! A few people have admonished me for suggesting investors look beyond their own borders, claiming that real estate is so complex, and that the laws regarding real estate are so involved, that it is difficult to keep up with the regulations in your own turf, let alone in a foreign country. Consequently, they claim, investing overseas is risky and foolish, and I am just grandstanding or showing off by talking about investing internationally.
Well, let’s consider a few alternative attitudes. First, few people living in the United States realize this, but the value of the U.S. dollar, when measured against a trade-weighted basket of currencies, has fallen in the seven years since the year 2000 by a massive 58 percent (as tourists traveling to Europe are finding out through the increased cost of a vacation there). In other words, if you had shipped $1 million overseas with the intent of investing it in real estate, but you never quite got around to making the investment, and today you repatriated the funds back to the United States, you would have more than $2 million. I have investors who took my advice and invested in New Zealand at a time when a United States dollar bought NZ$2.40. Today, that same NZ$2.40 buys over US$1.90. In other words, the value of their investment has nearly doubled without even taking into account how the investment in New Zealand has fared.
April 29th, 2009
When you are eligible or required to take distributions, you can opt to receive either the entire sum or periodic distributions for the Rest of your life. You can also take in-kind distributions. The taxable amount, if applicable, is based on the fair market value of the asset at the time of distribution. For example, Babette’s and Peter’s Roth IRAs each owned a 50 percent share of a flat in London. Because they were prohibited to use it, they leased it. The rent was paid to their IRAs, which also paid for all expenses. But when they turned sixty-five, they each took their share of the flat as a distribution without tax consequences. Now they are enjoying living in it themselves.
If your IRA owns assets offshore, determining the fair market value is not quite as straightforward. If you have real property, you will need to get an acceptable appraisal and have the amount converted to U.S. dollars. In the case of cash, the value of the currency being distributed must be established on the date of distribution in U.S. dollars. For required minimum distributions, the fair market value of the account is determined as of December 31 of the previous year. This information needs to be reported to the IRS, regardless of whether the IRA is a traditional or Roth. When distributing an offshore asset, timing is important because of fluctuating exchange rates, so select the day of distribution carefully.
April 28th, 2009
If you do not have ready cash to pay for your investment, you need to borrow money. Depending on the country and type of investment, there are several options.
Local bank. Taking a mortgage in a bank located in your country of investment may be constrained by currency exchange control rules. Another concern is that local banks or lending institutions may charge nonresidents higher rates of interest.
Bank where you are a resident. You may have trouble finding a bank that is willing to loan you money for an investment outside the country. In addition, if you are using retirement funds, you may have other considerations.
Developer. New developments sometimes offer their own mortgages and financing to increase sales.
International institution. There are a growing number of international mortgage brokers that offer products that are tailored to meet the needs of international investors. These are good options, because these companies are familiar with the processes and issues applicable to nonresident investments, which a local bank may not be fully aware of.
April 27th, 2009
With so much to take into account, you may wonder whether it’s even worth the trouble. The answer to that depends on your personal circumstances: what your goals are, how much you can afford, and how comfortable you are in dealing with new situations. There are a wide range of investment opportunities, from the ridiculously expensive to the amazingly affordable. Despite the additional challenges that international real estate investment may pose, it can be an excellent investment. Diversifying your portfolio by buying property in different countries can help cushion you against economic downturns in a particular area. Or you may find that you can enter the market easier in a less expensive country, giving you the opportunity to leverage these investments over time. Then, of course, there’s always the good fortune of snapping up something in an upand-coming country. Investing in a real asset as compared with an intangible one, such as a stock, can provide more stability. Property tends to hold its value better than other commodities, and historically it has provided a good return on investment. Or, having an investment portfolio may not be your goal—you may just want a nice, less expensive place to retire to. Regardless of your reasons or circumstances, once you’re ready to buy something, the first thing you need is money. So let’s take a look at some of the money matters to consider when buying offshore.
April 24th, 2009
Evaluate where you want to buy in terms of the “local” perspective. Around the world, people perceive nationality, institutions, leadership, government, economic stability, international debt or surplus, ethnicity, geography, environmental practices, religion, and laws in many different ways. As an American, you may perceive another nationality based on what you read in the news, a local restaurant that supposedly represents that country’s cuisine, immigrants that you’ve met, or prejudices that you have based on stereotypes.
When you visit the country, the perceptions and stereotypes that you have developed may cloud your ability to see things as they are. If you are looking for investment opportunities, it’s best to come with an open mind. If you don’t know the language and the culture, you may be very surprised by how the general population treats you if you are on a fact-finding mission. You may find that individuals and professionals that you meet have opinions about your nationality and culture. If you have a clear vision of what you want to know grounded in a plan that you have developed, and you have done some research before you arrive, you are more likely to have success and not be traveling seventeen hours just for a nice time (although that is always a part of your real estate investment journey).
April 23rd, 2009
Price in itself does not determine the value of an investment property. When purchasing a property, you look at whether it’s in concert with your goals, and other factors such as appreciation and cash flow. And then there’s the actual cost of the acquisition, which is important to take into account. Price is what first attracts you to the deal—and it is negotiable. But almost without exception throughout the world, the agreed-on price does not include the costs to complete the purchase. In the United States, you can easily calculate the costs because they are generally consistent with a HUD-1 closing statement. Outside the United States, the costs vary from country to country. Many of the elements are similar, so you can translate the knowledge you’ve gained from U.S. transactions, but some you may not have any experience with. For example, in France, the fee level can be affected by the age of the property—new properties have lower fees. Some countries have stamp duties, value-added taxes, and a variety of registration and conveyance fees. In addition, when you are investing beyond your backyard, double taxation, currency rates, and international mortgage rates can make the purchase more expensive than anticipated.
September 26th, 2008
The cost for a loan, despite raising the rates within a few weeks back significantly fallen. Borrowers need for a ten-year mortgage rate is currently 5.13 percent on average pay.
Less than one months, the burden still increased by 30 basis points higher. The increase in interest rates by the European Central Bank (ECB) in early July by 0.25 points to four percent is on credit abgeprallt.
“The fact that mortgage rates will fall, was in sight,” says Max autumn by the Financial FMH. The ECB has raised interest rates only to a sign against the rising inflation must be set. By so doing, but they also the economic development puts a damper. Autumn expects that interest rates will fall further. Especially as the pressure on the ECB to increase, given the economic development as the key to cut back. At the same time, inflation is likely a result of falling oil prices go back.
Another indication of falling interest rates is the current yield, the most recently fallen significantly more than the loan interest. For a loan of ten years, it is at 4.15 percent after 4.70 percent in early July. The current yield measures the average capital procurement costs of banks for a loan of ten years and taking into account both short-and long-term refinancing loans. The greater the distance between the current yield on the loan interest is, the more the banks have leeway for further rate cuts. Even now give the banks the interest rate advantage in varying amounts to customers. To the contrary, the cheapest provider for a loan with a ten-year rate currently 4.70 percent, the most expensive, however, 6.17 percent. Borrowers should therefore take time and accurately compare offers.
September 26th, 2008
The following sites are currently under our patronage: