International Renting Investments

Dear Live and Invest Overseas Reader,

Scouting in Medellin this past week, I've been reminded of the long-term sense of having some of your real estate investment portfolio in rentals.

Rental investments won't make you rich, but they can provide solid, reliable returns in the range of 5% to 8%.

In the current climate, to me, a reliable 5% or 8% net annual yield sounds pretty good (and any appreciation in the value of the property is a bonus).

How do you get started building a portfolio of rental investments?

And where should you be looking now to expand an existing portfolio?

There are no "golden markets" anymore, no place where you could buy almost anything and do well. Those days are over.

But that does not mean it's not possible to make solid returns using this strategy. What it does mean is that you need to be discriminating. While there are no more golden markets, it is also true that it's possible to buy a rental that could produce a reasonable net yield (5% to 8%) in many, many markets right now, even those that may seem down or struggling overall.

Start by looking at markets with tourist track records. Paris. The Algarve. Places that attract visitors even while times are tough.

Second, think through your exit strategy from the start. Even if your intention is to hold the rental long-term, understand who your eventual end-buyer would be. You won't likely hold forever, and it's a good idea to have an idea going into any investment who you might sell to when you're ready to cash out.

This helps to put the acquisition into perspective. The French leaseback, for example, is a great hassle-free rental investment in the world's top tourist destination (France). But it's an investment. You aren't going to live in a leaseback unit (no more than maybe several weeks a year)...and neither is anyone else. So your buyer, when you're ready to exit, will have to be another investor.

On the one hand, this limits your potential universe for selling on. On the other hand, investors are always going to be looking for ways to own French rental units.

Meantime, an apartment in Paris (or Buenos Aires or Panama City, etc.) could, theoretically, eventually be resold either to another investor or to an end-user, someone interested in residing in the city.

Third, consider inventory supply and demand. The Costa del Sol, for example, is ridiculously over-supplied.

The key consideration, though, when looking to buy to let overseas is the rental manager.

You can act as your own rental manager, but I don't advise it. If you're not residing physically in the same place as the rental unit, I say definitely don't do it. I've had 15 years of investor landlord experience in more than a dozen countries. This isn't something you want to take on yourself, unless you're prepared to make it your full-time occupation.

Engage someone who knows the market, who has marketing infrastructure in place, who has developed a client list you can leverage, and who can show you proven management systems (for reservations, for inventory control, for reporting, etc.).

Our first apartment investment in Paris rented extraordinarily well the first year. However, the rental manager spoke no English and was perpetually late with reporting. So we switched to another manager, an American. Yes, he spoke English (though, by this time, it didn't matter so much, because we'd learned to speak French), but he, too, was perpetually late with reporting...and, more to the point, he got us less than half the occupancy we'd enjoyed the year before (though the market was stronger and tourism figures were up).

When you make a rental investment, you're choosing, first, a market; next, a rental manager; and, finally, a property. Before you make a particular buy decision, seek advice from the rental management agency you're planning to work with. What's more rentable? Two bedrooms...or one?

What matters most to would-be renters? Location, of course...but other, less obvious things can be critical. In Paris, you'll struggle to make a decent return off a fifth-floor rental in an apartment building with no elevator.

I don't recommend long-term unless you're well familiar with the market and have a rental manager who really knows what he or she is doing. In many markets, it can be difficult to evict a long-standing renter.

When we made the decision to rent our Paris apartment long-term, we interviewed potential rental managers. The one we chose impressed us because she made a point of telling us, with a voice of long experience, to whom she would not rent.

"We won't rent to such-and-such people, because they throw wild parties."

"We won't rent to so-and-so people, because they don't respect other peoples' property."

Etc.

In some contexts, her positions might be termed discrimination. We saw them as risk management.

Lief Simon

P.S. As I said, this past week in Medellin, my attention has been focused on rental investment opportunities. This is a market where the demand seems to be strong enough to make a rental investment make sense. Certainly, the per-square-meter purchase prices are low enough to make the numbers work.

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