The secret is out.
In a recent Barron’s article where I’m quoted from an interview I did with Mansion Global, they reference a survey that found 92% of affluent Americans are actively looking into buying real estate overseas… with 67% of them saying they already owned a property overseas.
I see that statistic as a good and bad thing… more buyers for when I want to liquidate a property, but more competition for the properties I’m looking at buying for investment around the world.
Many of these affluent buyers aren’t buying for investment though. They are buying second or third homes. That’s part of a growing trend of living an international lifestyle that Kathleen and I started for ourselves 25 years ago.
More people want to be able to have their own place when they take a vacation… and they don’t want to rent someone else’s place. They want to leave their stuff rather than have to pack a full suitcase.
In fact, at this point, when I go from Panama to Paris or vice-versa, the only thing in my suitcase is my toiletry bag and whatever gifts I’m taking to someone.
One benefit of organizing your lifestyle that way is that you can rent your property out when you’re not using it to help defray the costs of owning the property. You might even make some small profit depending on how much you use the property personally.
This combination of lifestyle investment and financial investment for property can create some stress between spouses along the way, as you have to decide where on the spectrum between pure investment and pure lifestyle each property will fall. A friend calls it the “Spousal Effect.”
The closer to the pure lifestyle side of the equation you are, the less likely you’ll see net yields on the financial side. Moving to the financial side of the spectrum, you’re going to have to give up some personal comforts, amenities, or preferences.
This goes for individual rental properties you plan to use yourself, but it also became a factor for a retiree I know who built a small hotel in Panama.
It’s a small seven or eight room surf-hotel on the coast. The guest room clientele was expected to be mostly surfers. The rooms were sufficient in size and furnishing for someone looking for a basic place to sleep when not at the beach.
However, this guy also fancied himself a chef and an art connoisseur. Both screwed him when it came to his business investment. On the art side, he bought several pieces that he loved that cost tens of thousands of dollars. He told me one was US$50,000. He could have built another room or two with that money.
On the chef side, he built a huge commercial level kitchen with high-end equipment so he could do his chef thing. While the meals he does are fantastic, the cost-to-value ratio of having such a large kitchen with equipment you might see in a high-end restaurant in the United States didn’t make sense… especially considering the limited number of rooms at the hotel.
His return on investment isn’t what it could be had he moved away from the lifestyle end of the spectrum towards the financial end.
Not that I’m one to talk.
I’ve written about our apartment in Medellín for the last dozen years or so. We bought in Medellín ostensibly for the investment opportunity. However, the apartment we bought to renovate was renovated to be a place we wanted to spend time in. Over the course of the renovation, we moved from closer to the middle of the spectrum to the far end of the lifestyle side.
For example, the Belfast sink in the kitchen and the antique clawfoot tub in the master bathroom weren’t purchases that were going to add to the rental rates we could charge.
In the end, we rented the apartment for all of two months. That renter scratched the custom wood countertop in the kitchen. It was a small scratch, but enough for us to decide no more renters. The apartment became a 100% personal property.
That doesn’t mean it wasn’t a good investment. The apartment is worth more in U.S. dollar terms than we paid for it even with the Colombian peso depreciating significantly over the last dozen years. However, it falls into the “Spousal Effect” category.
Shifting along the spectrum is a real danger when you’re trying to combine a lifestyle purchase with an investment agenda. It doesn’t mean you shouldn’t try to achieve both. You just have to be aware of what each decision is going to mean.
The best position to take is treating the property as one you’d be happy to rent yourself if it wasn’t yours, but not necessarily something you’d want to live in full-time. That way you can hopefully avoid spending on things that won’t increase your rental rates… like expensive art, fancy countertops, and antique tubs.
As you build your global real estate portfolio, decide before you start looking where on the spectrum you want the property to fall. If it’s meant to be pure investment, that’s an easy lane to be in. Let the numbers guide you 100%. Focus on the net yield.
If the property is going to be only a second home that you don’t intend to rent out, that can be a little more challenging than a pure investment as it’ll open up many options for buying that may or may not make sense for your long-term plans. One key consideration you shouldn’t overlook is who will be your future buyer. Don’t buy an over-customized place as a second home.
Being somewhere in the middle is the hardest position to balance… especially if you’re building or renovating the place rather than buying something move-in ready. The tiles you really want may be nice, but expensive when a more basic tile will be fine for you and be better for your rental yield. You won’t care if the Ikea furniture gets damaged as it’s easily and cheaply replaced, but if that antique dining room table gets scratched, you are going to get upset.
Each decision on finishes and furniture needs to be weighed.
Stay diversified,
Lief Simon
Editor, Simon Letter
