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Investments for Expats in 2023 – Part 1

Investments for Expats in 2023 – Part 1 (REITs, Private Debt, and Loan Notes)

If you want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.

Introduction

In essence, expats have different types of investment requirements compared to normal people.

These requirements are influenced by factors such as taxes, lifestyles, foreign currency fluctuations, and so on.

Let us have a brief look at some of the contributing factors that influence investment requirements for expats.

Taxes

First of all, the tax implications play a key role when choosing an investment suitable for expats.

Such complications in taxes may arise in the home country as well as the destination country.

Certain aspects such as tax reporting requirements, tax treaties, etc., impact the investment choices for expats.

In most cases, the destination country may have a tax treaty with the individual’s home country.

If there is no such treaty in existence, it is important to consider the effects of it on your investment.

Therefore, it is essential to have a better understanding of the tax obligations while making an investment as an expat.

By doing so, one can abide by the tax laws and reduce their taxes while investing.

Currency complications

Expats usually have expenses and income in their home country as well as their host country.

Because of this reason, expats need to keep an eye on currency diversification while investing.

Some assets offer the flexibility of investing in multiple currencies, which helps in eradicating such issues.

When the base currency of an investment is only available in a single currency, it could lead to issues.

Adding to that, expats would also need to deal with transactions between their home country and host country.

Currency exchange rates may play a key role during these transactions, especially during huge ones.

Therefore, managing currency-related complications is necessary while living as an expat.

Cross-border retirement planning

One of the major objectives of investing is to make sure that money can be useful during retirement.

However, expats need to have a retirement plan that is on par with their global lifestyle.

For that, they need to have an understanding of the following aspects related to retirement.

Employer-sponsored retirement plans
Personal retirement plans
Ability to transfer their retirement assets between countries

By knowing about these, expats can easily come up with investment goals that are in compliance with their retirement.

Legal/Regulatory issues

Not just the taxes, but there may be some other legal or regulatory complications related to investments.

Each country has its own set of rules when it comes to investment options available for expats.

Therefore, expats need to make themselves familiar with the investment-related regulations/restrictions/limitations.

They should also be aware of the regulations related to the repatriation of funds.

Investment opportunities

Investment opportunities available for expats are based on their country of residence.

In some countries, there is a possibility for certain restrictions to be in effect based on the investment asset type.

For instance, expats may not be allowed to invest in real estate in certain countries.

There may also be a possibility for limitations on the investments made by expats.

Such limitations may also occur in the home country because of the residency requirements or other restrictions.

Additionally, expats may also have specialized banking needs such as international money transfers, offshore banking, etc.

They might also need investment accounts that are tailored to their specific needs.

Investments for Expats in 2023

Based on what I’ve described above, expats do need to take care of a few things before they start investing.

That being said, most expats find it hard to get their hands on an investment that suits them.

That’s why I wanted to shed some light on some of the best investments for expats in 2023.

These investments are usually considered to be best and suit all types of investors (in most cases).

Nevertheless, investing is a complex process and it should be done with utmost caution.

Particularly when you are an expat, it is important to understand that there might be a lot of hurdles while investing.

Now, let us take a look at some of the best investment opportunities for expats in 2023.

Real Estate Investment Trusts (REITs)

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Over the past few years, I have been trying to bring REITs into the spotlight as most people don’t know about these.

If you have been following me, you might know that I’ve mentioned REITs a lot.

Nevertheless, let us take a look at the information related to REITs again to have a good understanding.

What are REITs?

Real Estate Investment Trusts, popularly known as REITs, happen to be lucrative investment vehicles.

A REIT is a company that owns and manages real estate properties or relevant assets.

A few examples of real estate assets that can be owned or operated by REITs are as follows.
Commercial properties
Hotels
Apartments
Warehouses
Mortgages or loans

REITs were created in 1960 as a method of allowing small-scale investors to have a piece of the action.

The action I’m referring to is access to large-scale income offering real estate properties.

Most people usually want to invest in real estate, yet they may not have enough capital to get involved.

That’s when REITs come to the rescue and offer investors to participate with a smaller amount of capital.

In layman’s terms, REITs allow an average person to own and finance real estate.

This process would mostly be similar to the process of investing in a publicly-traded stock.

REITs are a great way of diversifying a person’s portfolio, especially when they want real estate exposure.

How to invest?

Publicly traded REITs are usually offered by brokers and are listed on a stock exchange.

This is as simple as opening an investment account with the broker of your choice and investing.

Most brokers will require mainstream information like:
Basic contact details
ID proof
Income source
Other relevant details

The entire process can be completed online or by visiting a branch of the broker (if any exist).

Non-traded REITs are somewhat exclusive and can only be offered by a broker participating in a non-traded REIT offering.

Mostly, REITs would be available in the form of mutual funds, closed-end funds, and ETFs.

Alternatively, you can also buy individual REITs directly through your brokerage account.

Note that there are many websites and financial professionals who are offering REITs these days.

This means you can easily get into REITs, but make sure you are doing this with a reputable professional or firm.

Which REITs to buy?

While DIY investing, the process of choosing a REIT can be troublesome.

There could be some funds that invest in hundreds of real estate properties.

The Vanguard Real Estate Index Fund (VGSLX) is a great example of such funds.

Another example is the Prologis (PLD), which owns properties in more than 19 countries. Most of them are warehouses being rented by global companies like Amazon.

There might be some REITs that invest in unique real estate properties. The American Tower Corporation (AMT) is a good example, which invests in cell phone towers all over the world.

In such a way, there is a multitude of REITs that differ based on the unique real estate properties they own or operate.

Some REITs may also be invested in real estate-related instruments such as mortgages.

Therefore, it is essential to know which type of REIT you want to invest in to have a better strategy.

Advantages

Now, let us take a look at the advantages of investing in REITs.

Diversification made easy

One of the noteworthy advantages of investing in REITs is that you get to diversify your portfolio.

Especially, when you want to invest in real estate properties and don’t have the required amount of capital.

No need to manage the underlying asset

When you invest in a real estate property, like buying a house, you will have to handle all things by yourself.

For example, when you buy a house to flip it for profit, you will have to take care of things like renovation, listing the property, etc.

But with REITs, you won’t have to go through those hurdles as the operations are handled by the REIT.

Hedge against inflation

It has been found that the dividends from REITs are known to offset inflation almost every year since 2000.

This is according to the analysis from the National Association of Real Estate Investment Trusts (NAREIT).

Higher dividends

REITs offer dividends that are mostly higher than that of a typical equity investment.

This is because REITs are necessitated to pay at least 90% of their taxable profits to their shareholders.

Disadvantages

Having discussed the benefits of investing in REITs, let us now have a look at the drawbacks of investing in them.

Taxes

In a country where there are taxes on dividends, expats may not be able to benefit from investing in REITs.

This could become much more complex when the home country also has a tax on dividends and the expat’s home country and host country do not have a tax treaty.

Involves Debt

Mostly, real estate is usually tied up with debt (mortgages) regardless of the type of property.

In some cases, REITs may often acquire new properties which involve more debt. This, in turn, leads to a possibility of poor management or higher levels of debt.

When the REIT has a higher debt-to-assets ratio, which is a higher leverage ratio, may not be lucrative.

Rising interest rates

When the interest rates become higher, REITs may lose their value. This is because higher interest rates result in a reduction of the value of real estate owned within a REIT.

Additionally, high-interest REITs seem less profitable compared to high-interest fixed-income products.

What do I think?

REITs are sometimes riskier investments based on changes in interest rates and market trends.

Nevertheless, they are a great way to diversify your portfolio and expect long-term profits.

Keep in mind, REITs offer profits in the form of dividends and involve taxes and fees.

You should contact your investment advisor before getting into REITs for a better investment portfolio.

Private Debt

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What is Private Debt?

To understand private debt, you must have a basic understanding of debt financing.

Debt financing is when a firm gathers funds from investors by selling debt instruments to them.

Debt financing is in contrast to equity financing, which refers to issuing stocks to raise money.

Debt financing usually comprises typical debt instruments such as bonds, bills, or notes. Almost all the debt instruments are fixed-income products and offer lower profits.

Small and upcoming companies rely on debt financing to boost their growth.

Coming to private debt, it is a form of debt financing offered by private lenders or non-banking firms.

Private debt can be offered to individuals, companies, or other entities, and it can be of various types.

Let us have a look at a few types of private debt to have a better understanding.

Direct Lending

In this mode, the private debt funds are provided directly to borrowers. Direct lending is common among corporate entities, where the funds can be used for:
Business expansion
Real estate projects
Financing for business activities
Financing for private equity transactions

Apart from private debt, institutional investors also offer such loans directly to borrowers.

Distressed Debt

Distressed debt is the type of debt offered to entities that have been facing financial distress.

This means such entities do not have creditworthiness because of reasons like defaulting on their previous loan payments.

The risk involved with financing such entities is usually higher.

At the same time, the interest offered by such debt instruments also tends to be higher than usual.

Peer-to-Peer lending

Nowadays, this type of private debt has been becoming popular and is available for average investors.

An online platform acts as an intermediary where investors act as lenders and offer funding to the borrowers.

Other noteworthy examples of private debt include:
Corporate Bonds
Mezzanine Financing
Senior Secured Debt
Asset-Based Lending
Real Estate Financing
Leveraged Loans

Advantages

Let us now have a look at the advantages and disadvantages of private debt starting with the pros.

Higher returns

Private debt investments come with higher returns compared to other fixed-income products.

This is best for people who wish to get involved with debt instruments with higher profitability.

Diversification

In most cases, people think of diversifying their portfolios with mainstream assets.

Even when they think of debt investments, they usually rely on low-income bonds.

But with private debt, not only do they can diversify their portfolio, but they can also get higher returns.

Furthermore, you can choose from different types of private debt instruments, which offer further diversification.

Regular income

With private debt investments, investors can get regular income in the form of interest payments.

This means that the investors can expect a foreseeable and ongoing cash flow.

This is helpful to those seeking regular income-generating investments as well as those looking to offset their liabilities.

Low volatility

Unlike most other investment assets, private debt instruments come with lower volatility.

Private debt is not affected by market sentiments or short-term market fluctuations.

This makes private dent investments a steadier addition to your portfolio.

Risk mitigation

In most cases, private debt instruments involve borrower protections or collateral.

These may also include other risk-mitigating measures for additional security and downside protection for investors.

Disadvantages

Having discussed the advantages of private debt, let us have a brief insight into the drawbacks as well.

Illiquidity

Similar to some other distinctive investments, private debt instruments happen to be illiquid.

This means that you may not be able to sell them as easily as you would sell publicly-traded assets.

Therefore, the lack of a secondary market tends to be one of the huge issues faced by private debt instruments.

Risk

Another major drawback of private debt instruments is the risk they carry compared to fixed-income assets.

There might be a possibility for default or credit risk, especially from investments like distressed debt instruments.

Lack of transparency

Unlike publicly-traded assets, private debt investments happen to have a lack of transparency.

You may only be able to access limited information about borrowers, financial data, collateral, etc.

Investors with a habit of conducting due diligence before investing may find these less attractive.

Limited regulations

Private debt investments may not have a regulatory environment as much as publicly-traded assets.

Yes, they offer borrower protections and collateral, but a lack of regulations can be risky.

Higher minimum requirements

Most of the private debt instruments come with higher capital requirements to participate.

Concentration risk

These investment vehicles are concentrated within a specific geographical location, sector, or borrower.

Therefore, when things go south regarding those aspects, the investment is prone to a higher impact.

Valuation

The valuation of private debt can be a troublesome task because they are not traded publicly.

Because the true market value is not made available, it becomes hard to evaluate these investments.

Economic impact

As private debt investments are sensitive to economic situations, a downturn may lead to risks.

Such risks include the possibility of a default, impairment, lower recovery rate, etc.

These, in turn, cause a negative impact on the investment making them less reliable during economic downturns.

What do I think?

Well, private debt can be a great way of diversifying your portfolio with exposure to debt instruments.

At the same time, certain investment options like distressed debt involve a higher amount of risk.

Therefore, it is wise to make sure that you can benefit from the investments made.

Loan Notes

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Loan Note is also considered to be a form of private debt, but it can be defined as a separate investment vehicle.

A loan note is a promissory agreement that can be short-term or medium-term.

This agreement comprises details such as repayment details, interest, etc.

With a loan note, the borrower agrees to repay the debt along with interest over a set period.

Notes are just like bonds, but the major difference between them happens to be the date of maturity.

Notes usually have a short- or medium-term maturity period, whereas bonds can be around 10 years or more.

Notes can either be secured or unsecured while secured notes have assets as collateral.

Secured notes can be obtained by collateral such as an automobile or a real estate property.

The common types of loan notes are listed below.
Promissory Notes
Structures Notes
Treasury Notes
Municipal Notes
Mortgage Notes
Convertible Notes

Let us now have a detailed look at each of the listed loan note types.

Promissory notes

This is a common type of loan note used by companies or individuals to raise capital.

There will be a legal agreement between the lender and the borrower regarding the loan/repayment terms.

Structured notes

Financial institutions issue these loan notes, where the valuation is done based on the underlying asset.

The underlying assets can usually be an equity index, commodity, or a basket of securities.

The returns offered with a structured note are based on how the underlying asset performs.

Treasury notes

Treasury notes usually come with a maturity period of 2 to 10 years and are issued by treasuries.

The funds acquired from issuing these loan notes are used for government activities.

Treasury notes can be more reliable compared to other types of notes as they are backed by the government.

Municipal Notes

Similar to a treasury note, a municipal note is also issued by the government. The only difference is that it is usually issued by the local or state government.

These happen to be short term and the interest is paid in full upon maturity.

Convertible Notes

As the name suggests, these notes can be converted into equity at a future date.

Startup companies issue convertible notes during the early stages of their business.

Advantages

Let us now have a look at the advantages of loan notes.

Regular income

Loan notes are debt instruments, and therefore, they offer steady income in the form of interest payments.

Diversification

Loan notes can be a good way to diversify investments when spread across different borrowers.

Collateral

In some cases, loan notes are secured by collateral such as real estate, which offers a sense of security.

Fixed returns

Loan notes have fixed interest rates, which lets the investors have an exact idea of how much they can make.

Disadvantages

Let us now take a look at the drawbacks of investing in loan notes.

Default

There may be a possibility for the borrower to default on the loan, which results in a loss of interest payments or principal.

Illiquidity

Since they are debt instruments, they don’t have access to a secondary market like mainstream investments.

This makes it kind of hard for investors who want to sell their loan notes prior to the maturity period.

Market risk

The value of loan notes is usually impacted by the changes occurring in the interest rates.

Regulations

Loan notes do not have a highly regulatory environment as that of traditional investments.

It is essential to conduct thorough research such as evaluating the creditworthiness of the borrower before getting into these.

Lack of information

The information related to borrowers may be limited, which is inconvenient for due diligence.

What do I think?

Compared to usual fixed-income products, loan notes seem to be lucrative.

They also provide steady income and diversification to investors, which is a good thing.

However, you should remember that they do carry certain risks like a possibility of a default, illiquidity, etc.

Therefore, it is wise to make sure that these investment vehicles are apt for you based on your financial profile.

Bottom Line

The investments mentioned in this list, i.e., REITs, Private Debt, and Loan Notes are apt for most investors.

There is another part where I discuss ETFs, Investment Funds for expats, and Treasury Bills. Do read that.

However, an investment is decided as the best based on the investor’s financial profile. This financial profile may include aspects such as income, goals, risk tolerance, and so on.

DIY investing is practiced by most expats, but it is always better to leave these matters to a professional.

Therefore, contact your financial advisor or investment manager before investing.

That being said, I hope that you were able to find this article informational.

I have been helping various expats over the past few years regarding their investments.

If you are an expat finding it hard to access top-notch investment services, then you are in the right place.

Contact me to find out whether you can benefit from the best-in-class services I provide.

Pained by financial indecision? Want to invest with Adam?

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Investments for Expats in 2023 – Part 1 8

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

This website is not designed for American resident readers, or for people from any country where buying investments or distributing such information is illegal. This website is not a solicitation to invest, nor tax, legal, financial or investment advice. We only deal with investors who are expats or high-net-worth/self-certified  individuals, on a non-solicitation basis. Not for the retail market.

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