Security, Control and up to 300% Returns | Pathfinder International

Friday, September 04, 2009

Dear Reader,

There has never been a better time to buy development land in Latin America. It’s a buyer’s market. Many landowners are under financial pressure…and buyers are thin on the ground. Buy land well and you have the key to a profitable development.

Meantime, retail sales in most markets (northeast Brazil where I am writing from is one of the few exceptions) have slowed dramatically as a result of fear and financial and economic problems in the US. This helps keep land prices artificially low, and means that many developers need to tap alternative sources of finance.

This slow down is retail demand is temporary. The medium-term drivers are just too strong.

More than 4.5 million North Americans (mostly Baby Boomers) are now considering living or owning property in Latin America.

Many more boomers will consider this option as they painfully learn that neither they nor government programs can sustain a reasonable standard of living for them in retirement. We need to pay attention to boomer activity.

Baby boomer retirement will largely drive the market for overseas real estate in parts of Central and South America over the next 20 years. This trend is in its infancy. Financial and economic difficulties in the US will increase this trend, not retard it. Many retirees simply can’t afford to live in the US on their retirement savings. Boomers will look to the tropics for new, affordable lifestyle opportunities.

There’s more than one way to skin a cat!

Of course, we could just buy retail (lots, condos, etc) as I continue to do…or we could take another approach to profit from this trend.

The biggest returns in development come to those who get in at the ground floor at a wholesale level.

Buying large tracts of land, obtaining permits, master planning and building, selling and marketing is only for those with the experience, resources and the team to pull it off…or for those of us who invest in the right people.

Today, there are opportunities to get in at this ground floor wholesale level and let someone else do all the work. Here’s what I look for in deals in like this.

I look for deals where the promoters get a piece of the upside…not crippling management and administration fees. I’m looking to back someone who has the same type of equity at stake as us…so he’ll work just as hard for us as he will for himself. I’m not interested in investing in someone who’s going to use our money to pay himself a fat cut before he puts our money to work.

I’m looking for deals where we get to participate in the purchase of development land at undervalued prices. This land needs to be in a market I like. Debt will be kept to a minimum.

Most importantly the team needs to be right…they need to have a track record of delivering projects like this and getting things done. The deal needs to be structured in a way that we get to enjoy the maximum upside potential.

There are number of way we can participate at an investment level from our armchairs.

• Pure equity investment. This amounts to becoming a shareholder in a development company. You make an investment for which you get an agreed number of shares in return. Invested amounts are large, from a couple of hundred thousand dollars to seven figure sums. Some groups offer opportunities where smaller investors can get in with as little as $50,000. Return on investment can be several years—but sometimes deals like this can start making disbursements to shareholders as soon as sales start flowing. I like these because investors’ returns are uncapped. They enjoy the same upside potential as the developers.

• Hard money loans. More and more developers are offering this type of investment as banks tighten their lending policies and credit dries up from other sources. A hard money loan behaves in a similar way to a corporate bond. A developer borrows money from you and agrees to pay it back in one or two years. Meantime, you get monthly or quarterly interest payments. Your loan should be backed by a real and liquid asset. You need to be comfortable that in a default scenario you could recoup your investment by selling the asset your loan was secured on. Interest rates can be high…20% and sometimes higher. Unlike the equity play, your return is capped at this level. With the right security available, this can be a relatively easy way to earn an annualized 20%.

• Bulk purchase of units. Once a developer has locked down a piece of land, it takes time to nail down the master plan and get all the relevant permits…usually a couple of years. During this period, a developer may offer an agreed number of lots in return for a cash investment. In effect, you are buying lots before the master plan has even been drafted. In return, you get lots at a deeply discounted price to the expected retail price. Sometimes deals like this are structured in a way that you buy shares, and your dividend payout is lots. You receive your dividend once the master plan is finalized and permits are in place. I like this type of arrangement because once you are allocated your lots you have control and flexibility. For example, you might want to sell some of your lots to recoup your original investment.

The bulk purchase of lots is perfect for a small or mid-sized investor who wants to retain full flexibility and control over his asset. Again, security is key. You need to be sure that your investment is secured against land or held in escrow until title is transferred on your lot. Follow this strategy and pick the right deals and you could triple your money in 3-4 years with the security of an underlying asset.

Ronan McMahon

P.S. As with any real estate investment, you should do thorough due diligence on the representations made by the developer or their agent. Always bite the bullet and pay for independent legal advice. Don’t let the sun (and the rum!) distract you.