As you know I am bullish on the real estate market in Fortaleza, Brazil. Fortaleza was Brazil’s #1 domestic tourism destination last year. Visitor numbers were up by 16% in the early part of this year. There is a hotel and short-term rental shortage. Soccer’s world cup is coming in 2014. Over $5 billion will be spent on infrastructure and tourism upgrade in the lead up to the tournament. Best of all there is a limited supply of developable land in the prime boardwalk area.

The type of real estate I recommended to members of Real Estate Trend Alert (and bought myself) have been pre-construction deals in these prime areas. We got in with preferential terms such as a 1% down payment with monthly stage payments of 1%.

Real estate in Brazil is priced and sold in the local currency—reais. Buying a condo for BRL 190,000 involves a down payment of BRL 1,900. You then make monthly payments of BRL 1,900. Today BRL 1,900 is $1,060. Who knows how many dollars the payment of BRL 1,900 will be next month?

Locking in today’s exchange rate would seem like a sensible option to make sure you know what your cash flow will be. Here’s a way you can do this:

Move your U.S. dollars or other currency into a Brazilian real (BRL) CD and you will lock-in today’s exchange rate while earning 5% interest on the BRL deposit.

Some members of Real Estate Trend Alert do this. I wrote to them about this early this year. This is an e-mail I recently received from a member:

“I hedge the Brazilian currency through a Brazilian Real CD account. I did that for the Beach Class project….Had I not done that, I would have lost nearly $18,000 just in the first few months! Instead, I hedged the currency so it has not cost me anything above what I budgeted, and the property has appreciated $18,000 and I have earned about 7% on my money!”

The real isn’t forward traded. You can’t hedge using a forward contract. That’s why a BRL CD is the best way to lock in today’s exchange rate, fix your monthly payments in $ terms and see your real deposit accumulate interest.

Many of you are fearful about the medium term prospects for the dollar. This is one of the reasons investing in real estate in Brazil is so attractive. Real estate here is denominated in the Brazilian currency—the real. Brazil has energy, food, manufacturing, water and a young middle class population. Exactly what an emerging economy needs.

The real/dollar exchange rate has fluctuated wildly in the past couple of years. Exchange rate fluctuations have a direct impact on your investment.

The units I have recommended and have purchased myself will be perfect for short-term rental. They will generate real-denominated income. I like the idea of a future real-denominated income stream.

Today, we need to consider how we mange payments during the construction period. To remind you: A typical condo purchase in Brazil involves monthly payments of 1% during a three-year build period. Once you take possession of your unit you typically have the option (although this can vary from deal to deal) to continue to pay 1% per month plus interest on the outstanding balance.

What options do we have that will hedge this exchange rate exposure? Let’s assume the unit you are buying costs 200,000 reais ($106,000 at today’s exchange rate).

The real isn’t forward traded so you can’t hedge using a standard forward contract. We need to be more creative.

Read the full article here.