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Foreign Property Investment & Currency Exposure

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Hi folks,

At the moment I'm considering an investment in St Lucia for circa $1m USD. The bank bargin is 3% (it's Carbbean Standard rate...) over US Libor, say 7.75%, that gives repayments of $77,500. As far as I can see, there are only three risks with this investment

1. Rental Risk - recession, terrorism, default

2. Interest Rate Risk - soaring rates devalue property + increase burden.

3. Physical Risk - weather etc.

Let's discount the physical risk for a moment and even the possibility of terrorism and rental defaults. Let's assume the US Housing Market enters a severe depression, consumer spending drops and the economy recedes. I see this as the best thing that can happen, here's why...

1. there is a 2 year build and a solid 3 year rental guarantee (let's presume it'll be paid). That's 5 years before I need to worry about income.

2. the mortgage is a floating rate, drawn down in 2 years.

But you see, St Lucia isn't dependent upon the US Consumer Spending as a tourist destination. It's high value weddings and retirees who are price inelastic. They're mostly from the UK, a lot from Germany as well as the US. Now, if the US Economy goes into a slid and island property in valued in USD, doesn't this give one an opportunity to:

1. Fix a long term rate at reduced recession rates.

2. Ride out the slump with a amoritising mortgage fixed for a long period at low rates.

3. If the USD IR falls, the currency will devalue somewhat giving a "window of opportunity" to further reduce the debt by financing in EURs against EUR assets.

So... at the end of 5 years, you have a cheaper long term loan, a window of opportunity to pay down the debt cheaply and an amoritised debt. There are lots of assumptions there and I ask people to really pick all the small details I missed and knock my argument on the head.

Another thought, if the US Housing Market recedes, does the investment funds dry up or do the investors look further afield like the Carbbiean for investment opportunities?


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