The Crisis in Europe, and Real Estate Investors

by Benjamin Bach on 19. Jun, 2010 in Real Estate Investment

Why Europe is in trouble, and how it affects Real Estate Investors

The EU Debt Crisis

Anyone who invests their money anywhere should be watching the economic events unfold in the Euro Zone.

People who know me know that I’m not too optimistic about Europe’s chances to emerge unscathed (and united) from their latest economic debt (or rather, spending) crisis.

Why? The leaders don’t seem to be willing to sit down at the proverbial kitchen table, make a budget that is realistic, and live within their means. Until that happens, they have a problem.

What is the crisis? Most countries spend more than they make, and borrow to make up the difference.

Imagine you spent $150,000 for every $100,000 you made, and you had to borrow the additional $50,000 every year. This can only go on for so long.

To understand why this is a really really big problem, imagine that you and your friends all live this way, and you all are the ones loaning each other money to live this extravagant life.

Eventually, the bill comes, none of you have any money (and you all owe each other $$), and something has to give. Watch this quick video for a better idea of what I mean, then keep reading:

But that’s Europe – why should we care?

Investors will be impacted by what happens in Europe, either directly through stock in European companies, owning mutual funds or stocks of North American companies that invest (or do business) in Europe.

If you own European Banks, you’ve probably seen some of your wealth evaporate (and get ready – more will go soon!); If you own gold, you’re probably doing pretty well watching the credit chaos unfold.

If you invest in real estate, and have loans against the property (like a mortgage or a line of credit), then you’re exposed too (We wrote about this previously here: From Greece with Love).

When lending to Europeans looks riskier, money sources look to stable markets like Canada and the United States to loan to, increasing the amount of capital our banks have access to, pushing rates down (or allowing them to stay low, as we’re seeing this month).

So, what should I do?

I would (and, all of this is just what I would do… talk to a financial advisor for advice thats right for you) minimize my exposure to Europe.

The riskiest assets to be invested in, in my opinion, would be assets that have strong links to the EU economy, or that are sensitive to fluctuations in the Euro or the EU stock indices. That means alot of financial stocks, and the stocks of many companies that do significant business in Europe. Needless to say, I also don’t think buying the Euro is a good idea right now, but what do I know…

Buy tangible assets. Something you can see & touch – that you understand. Residential real estate rentals (either smaller investment property or Apartment Buildings) tend to do very well, since people always need a place to live, and they produce a consistent cash payment every month (that the property is rented).

If you’re investing in real estate, buy in areas that have a strong emplyment base, good schools (K-12 and College & Universities), prices that haven’t skyrocketed recently, and are near other major centres. Just my two cents.

What do you think? Let me know in the comments.