Six Years Of Guaranteed Yield From A Hard Caribbean Asset
Dear Live and Invest Overseas Reader,
An expectation of rapid capital appreciation is unfounded in most markets today, unless your plan is to add value (by renovating, for example, or by converting a piece of property from one use to another) or you're able to find a particularly under-valued opportunity in one of the few stable real estate markets right now.
Both those things are possible and interesting. However, the bigger-picture play in the current climate is for yields. That's why this continues to be my focus.
This month another good yield opportunity has come to my attention from a long-time colleague in the real estate business on Roatan (the largest of the three Bay Islands off the coast of Honduras).
I'm not a big fan of the Caribbean in general, but Roatan isn't a flat spot of sand in the ocean (as most Caribbean islands are). It's a mountain that sticks up out of the water. And it's close enough to the mainland (Honduras) that you have distant mountain views rather than uninterrupted open water to the horizon, at least from the south side of the island.
Of course, Roatan also has the white sand beaches that define the Caribbean and that most people seem to appreciate far more than I do.
From its hammocks-on-the-beach-for-backpackers beginnings, Roatan has grown into a full-fledged resort island destination. Tourism is the main economic activity. Snorkeling and diving are the big attractions, plus cruise ships call regularly. Along with dozens of resorts and hotels to accommodate the tourists, dozens of real estate developments have been undertaken catering to the retirees and second-home buyers the island continues to attract.
The opportunity I want to bring to your attention today is related to the tourism part of this island market. One of the more established resorts in Roatan's West Bay (the most developed area of the island) finds itself in need of more rooms. To meet this need, they are building a series of four-plex buildings with the intention of selling the rental units to investors.
Henry Morgan Hotel and Beach Resort has been successful since it opened in 1999, mostly because it has focused on all-inclusive packaged vacations. It's known as the "Italian" resort because its management has made a business of flying in charters of Italian tourists for week-long stays. The Italians fly in, check in, and hang out at the beach for a week, eating, drinking, and sunning, then they fly home. This model has worked extremely well, and the resort is now expanding to bring in groups from other countries, including Canada and Germany.
The success and the plan for expansion have created the demand for extra rooms. In fact, the resort has already built some one-, two-, and three-bedroom villas to help with supply. However, they still need more, and they are moving now to a more efficient design for their next round of construction--all one-bedroom units.
The plan is to build 120 units in total, doubling the capacity of the resort. Each building will have four units. The bottom two units will be 899 square feet each, and the upper two units will be 1,564 square feet each. The upper units will include rooftop patios; the inside construction will be basically the same. Obviously, the view from the upper units will be better. Lower units are priced at US$99,000; upper units at US$129,000, all furnished.
Less than US$100k is a good price point, and less than US$1,200 a meter (the metric I use to compare properties) is great. Perhaps more exciting than the absolute pricing is that the resort has worked with a local bank to arrange for financing. The terms are not what you're likely used to back home, but they are decent for Central America.
The bank will lend 80% of the purchase price with payments amortized over 15 years. You'd have a balloon payment at the end of year eight. The interest rate is 9.5%. So your monthly payment on a lower-level unit would be US$825 a month.
On the revenue side, the developer is offering a guaranteed rental income of US$8,000 for six years. That income guarantee is regardless of unit, meaning (obviously) that a lower unit provides a better net yield. In addition to the guaranteed income, each owner gets 28 days use of his unit each year, and owners get a 30% discount on food packages at the resort.
Taking the US$8,000 a year of guaranteed income into account, with the bank financing, you'd have a cash outlay of about US$1,900 a year. Use the unit for your 28 days, and the nightly room rate, amortizing the US$1,900, is about US$67, which is great for a resort on Roatan.
Not to confuse things, but you should know that the resort is also offering a financing option, whereby you pay all but the final US$39,000 of your purchase price and that balance is paid off by the rental income. In other words, you can pay US$60,000 for a lower unit and forgo the rental income for the initial six years...while still enjoying the 28 days of use a year.
Of course, cash works, as well. The payment terms for a cash deal are a reservation deposit of US$2,000 with another US$28,000 due within seven days. The promesa de venta is to be signed within 30 days. Then US$40,000 is due when the construction is completed (but before the unit is furnished). The balance of US$29,000 (plus closing costs) is paid at closing.
In addition to the guaranteed rental income of US$8,000, the resort is guaranteeing the construction time. The contract stipulates that they must complete construction within 18 months, or they have to start paying the guaranteed rental income anyway.
Thinking through the cash flow, you can get into the deal with US$30,000 today and pay the balance in 12 to 18 months (I don't think construction could be completed in less than a year). If you have funds pending from selling other property or a business, that timeline could work well for you.
Typically, I'm leery of guaranteed income deals like this. Usually, when a high yield is offered, you are either over-paying for the property (that is, funding the yield up front yourself), or the return is for a short period only, not long enough to make the deal interesting on its own.
In this case, the guarantee period is decent at six years (it's a three-year contract that automatically renews for three years). And the price, at less than US$1,200 a square meter for a furnished unit, is excellent.
The important thing to factor in (and why I think this is a win-win for the resort and the investor) is that the resort has a track record. It's been operating successfully for 12 years. Now it needs more rooms to expand. Simple enough.
Interest rates are high in Honduras, as indicated by the local bank financing offer the resort has negotiated for interested buyers. In other words, it would be expensive for the resort to seek local financing to build the 120 units itself. Additionally, assuming every owner uses his 28 days, the resort gets added occupancy during which they make some money on food and beverage.
If you like the Caribbean and would be able to enjoy the 28 days a year vacationing on Roatan, then this deal is a no-brainer. Even, though, if you're looking at this opportunity strictly for its investment potential, I think there's a lot to get your attention. The guaranteed 8% annual net yield (assuming you buy a lower unit) is excellent. But even the upper units generate a guaranteed 6.2% net yield annually.
And, at the end of the day (or the six years of guaranteed net yields), you still have the hard Caribbean asset.
For more details, contact Janine Goben in the form below.
Lief Simon
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