Property Investment In Istria, Croatia

Return To Istria

Aug. 21, 2011, Istria, Croatia: Istria, Croatia, is one of the most beautiful and most sun-soaked regions of Europe, boasting some of the world’s most magnificent coastline.

Also This Week: Cars, Watches, Banks, And Chocolate--Comparing Two Safe Havens...Who Moved Our Hotel?...This Low-Cost Southeast Asian Choice Is Not Too Big, Not Too Small, But Just Right...Windsor Castle...

Dear Overseas Opportunity Letter Reader,

Six years ago, Lief, the children, and I spent a week touring around Istria, Croatia, with a focused agenda.

We were in the market for one of the old white stone houses you find across this peninsula. We wanted to stake our small claim to this beautiful and historic region that, during previous visits, had so captured our hearts and our imaginations.

On that trip six years ago, Kaitlin, 15, Jackson, 5, Lief, and I followed our property agent from one stone farmhouse to another, up and down the narrow winding roads of these mountainsides, through the medieval villages, and past the expansive fields of olive trees, grape vines, and sunflowers, more infatuated with the region with each passing day.

We had recently made our move, at the time, from Ireland to France, and, one rainy morning of that Istrian family adventure, standing in one muddy Istrian farmyard, Kaitlin observed, "But haven't we done this already? Haven't we already bought an old stone house surrounded by mud? Isn't that what we just did in Ireland? Why do you guys want to do this again?"

Probably Kaitlin wasn't the only one to wonder why we'd decided to make this investment. But we believed in the future of Croatia, a country with an extraordinarily complicated history and an extremely open-minded, forward-looking population. We recognized, a half-dozen years ago, that Croatia was at another turning point in its long history, and we wanted to be part of it.

Plus, the Istrian Peninsula serves up some of the most delightful scenery on this planet. The land seems to rise up to embrace you. Everywhere you look, something nice is growing--olives, grapes, figs, tomatoes, pumpkins, blackberries, wildflowers... Even the buildings seem to be of the earth, built of its white stone and red clay.

In some parts of the world, Nature outdoes herself. In others, that which man has built is impressive. In Istria, Nature and mankind have worked together over centuries, starting with the Romans, to create a land of delights you have to see to appreciate.

One rainy morning on that trip six years ago, we found one 200-year-old white stone house that we particularly liked, perched as it was on a mountainside above a long valley of olive trees and grape vines, made an offer to the Istrian owner, and agreed the terms with a handshake. The seller sealed the deal by making a gift to us of lavender oil his wife had bottled.

We returned to Paris and got distracted. Four years later we moved to Panama. This week, finally, we are back in Istria, to check in on our little stone farmhouse and to see how things have changed on this peninsula in the intervening half-dozen years.

We have arrived, without thinking, at peak tourist season.

Every August, Europe hits the road. Everyone in this part of the world gets four weeks' vacation each year, and, typically, they take it in one go, over the month of August. Those in Northern, Central, and Eastern Europe get in their cars and drive toward the beach.

Beach is one thing Croatia has in spades. This country's long Adriatic coastline is magnificent. What's more, Croatia enjoys more days of sunshine annually than any country in Continental Europe. So when Europeans on the Continent set out on their beach holidays, Croatia is one of the destinations they target. Here in Istria, we've seen dozens and dozens of license plates from Germany, Switzerland, Slovenia, Slovakia, Hungary, Austria, Italy...

The Italians have sunny beaches of their own, but those over here in Croatia can be more affordable.

We're staying in one of the dozen or so big hotels purpose-built to accommodate this influx of European sun-seekers. Every morning the hordes of German, Hungarian, and Italian holiday-makers we're living among for these few days set off, barely clad, with their beach mats and their sun umbrellas, headed for the beach.

We, meantime, head for the hills. We've been touring the same mountain roads we traveled six years ago. We were worried we might, this trip, ask ourselves the question that Kaitlin put to us on our last family adventure in Istria. I can report, however, that we're as enamored of this region now as we were back then.

We're happy to find that we like this sun-soaked peninsula we're rediscovering as much today as we did six years ago, and we're making plans, finally, for the renovation of the little stone farmhouse that, we're even happier to find, has neither fallen down the mountainside where it's been perched for two centuries nor been occupied by gypsies (as Lief feared).

We're traveling around with the help of a GPS we rented with our car. We notice that Croatia has the opposite problem of Costa Rica. In Costa Rica, maps were made for years showing a beach road that didn't exist. It had been promised for so long that map-makers, I guess, figured it must have been built and started including it.

Here in Croatia, on the other hand, we're encountering many roads that don't appear on our GPS map. GPS map-makers can't keep up with the rate of new road construction in this country. Once the warring finished in the region, Croatia embarked on an aggressive reconstruction and expansion program. One result is the new tourist beach hotels I mentioned. Another is the ever-expanding highway infrastructure.

Today, we take to these brand-new Croatian highways again. Destination: Venice.

More soon.

Kathleen Peddicord

----------

This Is Your Final Call

Uncle Sam is working quietly, behind the scenes, to put obstacles in place that will make it more difficult for you to broaden your horizons overseas. And much more difficult for you to be in the driver's seat of your own future.

It's not just the banking arena that's under threat.

In 2008, changes to the Veterans Act allowed for an "exit tax" on U.S. citizens who choose to leave the country and end their citizenship.

What other countries have done this in the past? Nazi Germany. Communist Russia. Apartheid South Africa...

This is your civil liberty at stake. How long before you just won't be able to get your assets out of the States?

I'm not an alarmist. I'm a pragmatist. And, as a pragmatic investor, I've seen the writing on the wall for some time. I've worked all these years and with an added sense of urgency more recently to take control of my own life, my own financial future, and, most important to me now, the future of my family.

Now I'd like to offer you a chance to do the same.

----------

P.S. What else this week?

• You can find anything you might be looking for in Zurich, Switzerland. The question is whether you can afford to buy it.  

Even if we weren't coming from Panama, prices in Zurich would be a shock. A friend from France warned me in advance of our trip. "Be careful," he wrote. "A Big Mac costs close to US$20 in Zurich these days!"

We don't happen to be in the market for a McDonald's meal, but we do have to eat. As I said, you can find any kind of food you might be hungry for in this posh Swiss city, but, seeing the cost, you might lose your appetite. Our first afternoon in the city, we had a pleasant lunch of pizzas and salads in a modest restaurant with outdoor seating in its courtyard. We drank only water. The bill for the five of us came to about US$150.

As we've gotten to know Zurich a little better, we've realized we got off easy with that first meal. The simple Continental breakfast in our hotel is 16.50 Swiss francs per person, and 40 to 50 Swiss francs per head for lunch isn't unusual.

What are we doing in Zurich in the first place? We, along with our 22-year-old daughter Kaitlin, our 11-year-old son Jackson, and our daughter's boyfriend Harry, are on vacation. Last weekend, following our conference in Panama, the five of us flew from Panama City to Zurich, rented a car, and set off for a two-and-a-half-week do-it-ourselves tour of the Continent.

The trip was planned entirely by our children. Lief and I are along for the ride. And to pay.

Seventeen days in a rental car touring Europe with our children... A friend in Panama remarked that it sounds like the script for a Chevy Chase movie...

• "Vicki and I are in remote Tonghai, China," writes Intrepid Correspondent Paul Terhorst, "a two-hour bus trip south of Kunming in the Yunnan Province.

"Talk about complicated travel. We arrived in Tonghai with two pages from a Lonely Planet edition of 10 years ago. That's it. China can change more in 10 days than other countries change in 10 years.

"We quickly discovered the bus station had moved and that the hotel we wanted, near the bus station, had disappeared.

"We only speak pantomime-and-smile Chinese. We were stuck. Signs were all in Chinese, people around us spoke only Chinese. Our map was out of date, the cab stand was empty, hotels were far off--if, in fact, there were any hotels.

"What to do? And what were we doing in Tonghai in the first place?...

• "Nestled at the base of the foothills just east of Thailand's highest mountain ranges, Chiang Rai is in an ideal location," writes Asia Correspondent Wendy Justice.

"Thick, cool forests, majestic waterfalls, elephant camps, and some of the most diverse hill-tribe villages in the world are located just a short distance outside the city.

"At the same time, as it lies at the heart of the infamous Golden Triangle, where Thailand, Burma, and Laos converge in what was once the world's largest opium-producing region, the city offers plenty of mystique..."

• "Queen Elizabeth treats it as a weekend cottage, as it is only an hour's drive from Buckingham Palace, even though it has a thousand rooms and was first built by William the Conqueror in the 1070s,"writes Correspondent Paul Lewis.

"But most visitors to Windsor Castle, famous for its signature fat round tower, take a day trip there by train from London's Waterloo or Paddington stations. With three trains an hour in each direction, just turn up and jump on for the 40-minute ride, following the river Thames for much of the way..."

Also This Week...from Resident Global Real Estate Investing Expert Lief Simon:

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 here.

----------

This Is Your Final Call

Uncle Sam is working quietly, behind the scenes, to put obstacles in place that will make it more difficult for you to broaden your horizons overseas. And much more difficult for you to be in the driver's seat of your own future.

It's not just the banking arena that's under threat.

In 2008, changes to the Veterans Act allowed for an "exit tax" on U.S. citizens who choose to leave the country and end their citizenship.

What other countries have done this in the past? Nazi Germany. Communist Russia. Apartheid South Africa...

This is your civil liberty at stake. How long before you just won't be able to get your assets out of the States?

I'm not an alarmist. I'm a pragmatist. And, as a pragmatic investor, I've seen the writing on the wall for some time. I've worked all these years and with an added sense of urgency more recently to take control of my own life, my own financial future, and, most important to me now, the future of my family.

Now I'd like to offer you a chance to do the same.

----------