.
As
the US Dollar continues on what seems like an intended path to
devaluation, even the most mundane items cost more these days.
Wheat, Sugar, Beef, Coffee, Cotton, Oil, Copper, and many other
commodities that are priced or traded globally in US Dollars are more
expensive today than just one year ago. On the same token,
salaries for the vast number of people have not gone up (Wall Street
and Banking Executives excluded of course). And in addition, real
estate values in many parts of the United States have declined by as
much as 25 percent or more in some markets, with no near term recovery
in sight
for many states (California and Nevada being two notable problem
states). So, the question becomes: Where can you invest or
convert
your US Dollars without
losing
your shirt on the exchange rate or otherwise, get fair value for your
money? How can you protect yourself in an environment of currency
devaluations and specifically US Dollar devaluation?
.
Aside
from
such
traditional
inflation
hedges
such as gold or silver, real
estate has also been one asset class that has tended to at least hold
it's value during periods of currency devaluation (currency
devaluation or what is also known as inflation). Of course,
today's economic environment is a bit different than what has been
experienced before, which is why we might be seeing both
inflation in consumables (higher prices for items such as food, and
other consumer goods) with deflation in some asset classes, such as US
based real estate. However, not all real estate is created equal,
which is why it is just as important what you pay as to where you
buy. In this regard, real estate in the Dominican Republic has
held it's value, and has in fact increased in value whereby such values
in countries like the US and Spain have declined. In fact, real
estate in many other emerging or developing markets can report the very
same thing, and there is a reason for that.
.
However,
inflation
or
devaluation
of
a
currency
by
the
politicians
is
nothing
new.
The Roman Emperors starting clipping coins, or better said,
slowly but surely reducing the gold content of the Denari until such a
point that it was nothing more than base metal. It took them 500
years before the coins became worthless or junk in other words (without
the gold or silver content). Paper money used to be backed by
gold or exchangeable into gold, until it too was taken off the gold
standard altogether, and now it is, quite frankly nothing more than
paper with fancy engravings on it. That too is on the path of the
Denari. And since we are talking about the US Dollar in this
case, one dollar printed in 1913 has almost lost 100 percent of its
value in 100 years - progress over the Romans to be sure.
.
If
you
hold
paper,
or
money,
then
you
must
get
an
interest
rate or return
on your funds to at least equal the inflation or devaluation
rate. As of April 2011, many private
economists
and number crushers put the current inflation rate in the United States
at about 10 percent,
with a prediction of 15 percent by the end of 2011 (despite the
official line from government bureaucrats that there is no
inflation). With the US Federal Reserve seemingly bent on
devaluation of the currency via so-called Quantative Easing, keeping
pace or treading water in regards to inflation by using traditional
bank or savings deposits does not look like the answer.
.
Regardless,
this
is
not
meant
to
provide
a
synopsis
of
how
politicians
and other
leaders defrauded the citizenry over the centuries (although a
fascinating study of human history indeed), but rather to discuss some
ideas to convert the paper money into something of worth, that will
hold onto its value over the long-term. Certainly owning gold
fits the bill (and we are fans of gold to be sure). However,
aside from gold's use in jewelry and some commercial applications, it
does have a fairly limited utility value to us in our everyday
lives. Real Estate, on the other hand, is another matter.
Which is to say, you can live on it, you can grow vegetables on it, you
can rent it out to someone else to grow vegetables on it, and so
on. In other words, a utility or use, while you wait or while you
hold onto it as a store of value.
.
Property
or
land
has
historically
appreciated
anywhere from about 2 to 5 percent
annually, with some periods of slow growth or a stagnant market setting
in from time to time, and some periods of double digit growth as well -
sometimes to the point of bubbles being created. But, the main
point to be noted is that real estate usually holds it value and acts
as a hedge against inflation (along with gold, of course). We say
usually, as there are exceptions to everything, such as the current
sub-prime nonsense in the US at the moment, which is wrecking havoc
with the US real estate market and probably will skew the traditional
calculations because of all that debt and leverage that is out there
(the market was driven up by debt and leverage, so it is no surprise
that these same two factors will make a correction that is much more
dramatic and painful as well).
.
However, since we
are on this theme, it is worth mentioning that the
Dominican Republic does not thave hese same kind of problems mainly
because the local banks are very conservative in their lending
practices. In other words, while you can certainly apply for a
mortgage with a local Dominican Bank, you can expect the bank to look
for at least a 20 to 30 precent deposit, downpayment or equity in the
property. In addition, current mortgage rates in Pesos are about
12 to 14 percent, which is considered a bargain as rates were in the 20
precent range previously. Also, there is no such thing as a
no documentation loan, so-called LIAR loans, or some similar kind of
mortgage lending practice - - and some of the banks may ask for a local
co-signer (regardless if you are a local person or foreigner applying)
that can demonstrate solvency and local assets as well. So, the
main point is, if real estate has increased in value in the Dominican
Republic over the years (which it has), such is NOT a result of cheap
money or sloppy mortgage standards.
.
Moving along with
our general discussion,
the question becomes: If you are going to swap your paper money for
something else, and presumably real estate for some portion of it -
then where? Good question. The answer has to do with if
whether or not the market where you are looking to buy is over-valued,
under-valued or fairly valued at the moment. In addition, if
there has been increases lately, what has caused it. Is cheap
money or debt to blame, or are properties being purchased for
cash? Is it a case of supply and demand or something else?
.
Real
estate
in
some
parts
of
the
Dominican
Republic,
such
as
on
the North
Coast, Semana and Punta Cana had seen price increases of 20 percent or
more annually in years past. Will that continue to be the
case? If history is any guide, probably not or not indefinitely,
at least not at that rate of appreciation indefinitely, but then again,
much of that real estate has been purchased for cash, so no debt
bubble has been the cause either. However, there still are
bargains and fairly valued real estate or properties out there - you
just need to know where to look. Often enough, that means not
following the crowds and staying away from where the current boom
is. The idea is to be the investor with some common sense and
long-term vision, buying for fair value and holding it. For
example, if your grand-father bought twenty-five acres on the beach in
Punta Cana 30 years ago, when there was nothing but noisy seagulls and
weeds, he probably would have gotten the land dirt cheap. He also
proably would have never stopped hearing his wife, your grand-mother,
tell him what an imbecile he was for buying a property in some banana
republic. Of course you, one of his grandchilren would most
likely be laughing all the way to the Mercedes dealership, telling
everyone along the way what a genious your grand-father was. And
so it goes.
.
The
key
point
in
all
of
this is of course to make your real estate
purchases in such a way that you are not over paying, or at least
getting current value. In this regard, once again, the Dominican
Republic on average is still about 25 to 30 percent less expensive when
you compare similar properties in the rest of the Caribbean. As
just one example, The Global Property Guide (a real estate guide from
the UK) says that prime beachside property in the Dominican Republic
sells at an average of US$2,000 a square meter, compared with US$10,400
in Barbados. There is nothing wrong with Barbados, but it is
worth 5 times the cost of similar, beautiful beach front property in
the Dominican Republic? We think not.
.
Looking
even
further,
the
Dominican
Republic
has
a
large
number
of
luxury
condo's,
single family homes, rural or farm land and undeveloped beach
lots at prices that most middle class Americans and Europeans can
afford. Looking for a single family home? Some of our
clients have recently purchased homes in middle and upper middle class
sections of Santo Domingo for prices ranging from about US$145,000 to
US$220,000. And these are what you would call homes, NOT garaged sized shacks that some
real estate brokers in California are trying to convince you are worth
US$500,000 or more.
.
In
summary,
is
there
value
for
money
when
it
comes
to
real
estate in the
Dominican Republic? The answer is YES. In addition, adding some
fairly priced Caribbean real estate to your investment portfolio could
also help protect your assets from the eroding nature of inflation as
well.
.
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