Returns Too Big To Be True Probably Aren't

Jan. 29, 2010
Panama City, Panama

PLUS:

• Only Fools Go To Malaga...
• "Your Recent Comments On Taxation For Americans Abroad Are Over-Simplified And Grossly Misleading"...
• In Defense Of Life In Costa Rica...

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The Perks, Privileges, And Peace Of Mind Of Retirement Overseas

The trouble with some Paradises is that they make it difficult for foreign residents to enjoy what they have to offer...

While others roll out the welcome mat, offering benefits, discounts, and other perks for foreign residents. Some countries are even competing to get your attention, offering tremendous advantages and benefits for you...

Whether you're moving for a better life...a lower cost of living...or a chance to keep more of what you earn and pay less in taxes...

This is the Next Step Guide you need to make your dreams of a new life overseas come true.

Go Here Now For More Details

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Dear Live and Invest Overseas Reader,

A current worry among many real estate investors around the world (the ones who haven't lose their holdings altogether to foreclosure or other calamity) is that their property assets are worth less today than they were a few years ago. We're all in this same boat. However, worth less is not the same as worthless. Remember that capital appreciation is only one play in the real estate investing game, and property investors paying attention, including my colleagues and clients, have turned to a different one. About 18 months ago, we began investing, not for growth, but for yields.

Properties that generate cash flow are a critical part of any portfolio. Invest in something that throws off a decent yield, and you're happy to hold on to that property even if its value drops. You don't mind waiting for potential recovery, as long as the cash flow remains stable.

Rental properties come in different types: long-term rentals, short-term rentals, condo-hotel units, even farmland. Generally speaking, your net yield will work out more or less the same across the board, in the same range of 5% to 8% per year over the long term. However, arriving at and certainly projecting your true net yield can be complicated, as the expenses of owning, maintaining, and renting vary market by market. This is why many real estate types (especially those trying to sell you on a particular opportunity) speak in terms of gross yields.

Don't make this mistake. Drill down to a net figure.

The rule of thumb for long-term rentals in the United States is 1% of the property value per month, or 12% gross yield per year. However, the net yield on that gross could be less than 5%, depending on your costs. Depending on the state where you're operating, for example, property taxes can take a big bite out of your gross. By way of comparison, the gross yield on a rental I own in Panama City is 9% right now. My net in this case is more than 8%, thanks to low costs and no property taxes.

Another point when projecting and tracking your yields: Understand the difference between making your calculations on original purchase price versus current value. Rental yields work like bond yields. If the property value goes down and the cash flow remains the same, then the yield goes up. And vice versa. Calculating current yields on the purchase price of a piece of property can lead to bad decisions. Especially if you've owned the property for a long time or prices have recently spiked.

Returning to the Panama City rental example from above, the net yield based on purchase price would be more than 13%, as I bought the apartment several years ago when prices were much lower than they are today. That yield is misleading. If I sold the property and reinvested the proceeds in another investment, I wouldn't be able to earn the same yield on the greater capital amount.

Yields are the name of the game right now, so, I say again, as you set off in search of them, be sure you understand how to calculate and analyze them. This is critical to your ability to compare different opportunities. A colleague in Bali got my attention last year by quoting rental yields of up to 18%; however, when pushed for details, it turned out that true net yields are running more in the range of 5% to 6%.

References to exceptionally high yields are one of two things--blatantly untrue (once you drill down to true net) or a market distortion creating a window of opportunity that won't last long. A few years ago, for example, you could, in fact, earn double-digit net yields from a beach rental in Punta del Este. After a couple of years, though, the gap between cost of acquisition and annual rental revenues narrowed, and, today, net yields in this part of Uruguay are in the range of what you should more or less expect generally--5% to 8%.

As I've mentioned, Panama City continues to offer opportunity for better-than-average net yields. Where else is that true?

The Philippines. I've seen one condo-hotel offer quoting net annual returns of as much as 19%. However, after further analysis, I realized that that figure is dependent on what I believe was an unrealistic ratio for splitting revenue between owners and the management company. Management was promoting a 75/25 split, with 75% of net operating revenues going to the owners. I don't see how a split like that could continue long term. However, even if that ration fell to a more typical split of 60/40 or 50/50, the net returns would still be excellent.

Other deals I'm finding in the Philippines also quote higher than average net returns. There's a reason for the distortion. The condo-hotel units are selling at prices based on local real estate values and local construction costs. Meantime, hotel rates in the tourist areas (where you want to invest) are based on what the foreign tourist clientele currently can afford and is willing to pay. These premium rates relative to the capital cost of the condo-hotel properties is creating the kind of market distortion you want to be looking for.
Another key is the management company, but we'll leave that discussion for another time.

Lief Simon

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The Live and Invest in Panama 2010 Conference

Where: The Four Points Sheraton Hotel, downtown Panama City.

When: February 24-26.

Who Should Attend? Anyone thinking about the idea of living, retiring, investing, or starting a business in this country.

Why Panama? Top banking and offshore center...tropical sunshine...easy residency...first-class health care...best place on the planet to start a business right now...best land opportunities in the Americas...Gold Standard pensionado program of benefits for foreign retirees...two long coastlines...best infrastructure in the region...more than two-dozen top international schooling choices...affordable cost of living...tax haven (you could pay zero tax)...easy access to the States, Europe, and the rest of Central America (they're not joking when they call this country the "Hub of the Americas")...

How Long Should You Plan To Be In Panama? When you register for the Live & Invest in Panama Conference, you're also invited to join our experts on Real Estate Tours around the city and country. Once you register, we'll get in touch to help schedule your tour. Plan to stay in Panama for a couple days before or after the event.

Is The Special Discounted Hotel Rate Still Available? Yes, the special rate is guaranteed as long as you make your hotel booking by February 1. After that, the rate will still be available...but only if the hotel has available rooms.

Can You Avail Of This Special Conference Attendee Hotel Rate If You Arrive Early Or Stay On At The Hotel After The Event Is Over? Yes, as long as you book with the help of Conference Director Sofia Hogan.

What Will The Program Cover? Cost of living, health care, banking, residency, visas, pensionado benefits, real estate purchase, shipping, telecommunications, transportation, taxes, real estate investment opportunities, business opportunities, introductions (to attorneys, bankers, mortgage brokers, insurance agents, etc.), health insurance, medical care, the weather, the bugs, import duties, Spanish study, capital gains, the property tax exemption, investor incentives, renovating an historic building, furnishing your new home, building a house, finding a doctor, expat stories of success...expat tales of horror, financing, sightseeing, bird-watching, tourism investment, monthly living budgets...

Full program details here.

If you still have questions, don't be shy. We're standing by to take your call. Here's where you can reach us: 1-888-627-8834, or email at
SHogan@LiveandInvestOverseas.com.

---------- "I get a bit excited when I read references to sun, sand, and sea in Spain that's only accessible to those with US$250,000+ and those brave (foolish?) enough to head for Malaga," writes Euro-Correspondent Lucy Culpepper.
 
"There is so much more to Spain than that.
 
"Take, for example, the Costa de la Luz on the far western side of Spain (Atlantic coast), just below Portugal's Algarve. The Coast of Light has 300 days a year of sunshine, long white-sand beaches, fabulous food (based on fish and shellfish), and great history (de la Frontera referes to the ancient frontier between the Moorish and Catholic areas).

"This is a region that has cherished and preserved its natural beauty. It's also quieter and less brash than some of the other Spanish costas.
 
"I took a quick look at property in this region, focusing on the towns of Conil de la Frontera and Chiclana de la Frontera. Conil is a picturesque seaside village, in the Cadiz province of Spain in Andalusia. It is a typical Spanish fishing village, with white walls and streets--a 'Pueblo Blanco.' I found a two-bedroom fully furnished apartment with kitchen, living room, and one bathroom listed for US$175,000 (negotiable).
 
"In Chiclana de la Frontera, about 3 miles inland from some of Spain's most beautiful beaches, with a 36-hole golf course (designed by Ballesteros), I found a recession sale--a  three-bedroom villa (with land to build a swimming pool) for US$159,000.
 
"¡Viva España!" "Kathleen, as a new subscriber, I must take issue with your recent comments regarding taxes for Americans residing abroad. To wit: '...An American residing abroad can pay no tax in the United States. As an American residing abroad, you pay no tax in the States, because you owe no tax in the States. Depending where you're residing overseas, you may owe no tax in that country either...'

"At best, this is grossly misleading and over-simplified. Sure, there's an overseas tax exclusion, but the article makes no reference to that. Rather you stoop to broad, sweeping, and, dare I say, even illegal advice. I resent this and ask that you take a more responsible approach and provide greater clarification on this obfuscation."

-- Tom H., United States

Yes, we should have been more clear in that reference. We'll be more careful in future.

"An American residing abroad can pay no tax in the United States." This is a straightforward and correct statement.

"As an American residing abroad, you pay no tax in the States, because you owe no tax in the States." Less straightforward, not clear, and, as you say, not strictly correct.

An American residing legally and full-time outside the United States (the point of the article you cite), can, in fact, not owe and, therefore, not pay tax in the United States. The foreign-earned income exclusion is one tool an American abroad can use to reduce or eliminate his U.S. tax bill. Living outside the States and running a non-U.S. corporation is another.

"Depending where you're residing overseas, you may owe no tax in that country either..." Again, this statement is straightforward and true. "Kathleen, I agree that the roads in Costa Rica could be better in some places. Potholes may be a nuisance. But for whom? The intrepid tourist who craves the paved expressways of back home? I am personally glad that we still have dirt and gravel roads. The new road about which you write is not what we need. We need the wild rivers of the pristine Costa Rica and Panama of a few decades ago.

"I don't care if I drive at 35 mph in Guanacaste. I still can do that on my favorite roads in Northern Virginia out Middleburg way. I still don't like the new bridges over Goose Creek. My memories of Baltimore, where I believe you're from, Kathleen, are of farms in Timonium.

"Those of you in need of a faster pace won't find it in Panama, Belize, or elsewhere in Central America. You came here, Kathleen. You understand. My advice to you is to slow down. From my point of view, your new president [Ricardo Martinelli] is not good for healthy living.

"Best wishes to you in paradise. Just slow down enough to enjoy it."

-- Walter M., Costa Rica