Property Investing For Annual Yield

Chasing A Reliable Yield—How To Net 5% To 8% A Year In A 0% World

Dec. 8, 2011, Panama City, Panama: How to build a global property investment portfolio of global rental properties in markets where you can earn a reliable annual yield of 5% and better.

Dear Live and Invest Overseas Reader,

"I haven't paid much attention to rental investments throughout my real estate investing career," explained a reader who contacted me recently for advice.

"But I'm interested in understanding current opportunities worldwide right now, because, in the current climate, a reliable net annual yield from a rental property, even of, say, 5% a year, sounds pretty good."

I agree.

How do you choose a rental investment buy?

First, look for a market with a tourist track record. Paris. Tuscany. Even Puerto Vallarta. Places that should continue to attract visitors even while times are tough.

Second, understand who your end-buyer would be. This helps you 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 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.

Leaseback opportunities aside, an apartment in Paris (or Medellin or Panama City, etc.) could, theoretically, eventually be resold 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, in my opinion, 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 more than 19 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 marketing, for reservations, for inventory control, for reporting, etc.).

Our first apartment investment in Paris (this was years ago) 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 renting 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," she told us.

"And 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.

Rentals, unless you build a big portfolio of rental properties, won't likely make you rich, but they can provide solid, reliable returns in the range of 5% to 8% net per year. Leverage can take that return into double digits. I'm netting (after all associated costs and expenses) more than 12% a year right now, cash on cash, from a leveraged rental I own in Panama City.

Of course, you should see some appreciation on the property over time, as well, but don't count on any when doing your investment analysis and making your buy decision.

Lief Simon

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