Net Rental Yields Remain High In Medellin—If You Buy Right
Kathie is in Medellin this week and next getting our apartment set up…theoretically for rental, although we’re both hesitant to rent it out at this point. It’s been renovated to a much higher standard than you would normally invest in for a rental. Any ROI objective is long out the window, and I’ve resigned myself to doing what needs to be done to keep the place as nice as Kathie is trying to make it.
We’re not the only couple that has struggled with the ROI versus creating-a-home conflict. One friend who has also invested in a rental apartment in Medellin went through months of back and forth with his wife about what to buy. He was looking for ROI. She wanted a place where she’d enjoy spending time.
The two objectives don’t have to be mutually exclusive. You can usually find a nice property that works for rental and that is also comfortable for you as the owner. The loser in any compromises for personal accommodation, though, is the ROI. Buy nicer furniture, better dishes, and more bric-a-brac than you would for an ordinary rental…and your return, of course, is going to suffer.
Another friend we had drinks with last week is currently searching for an investment in Medellin. On his first visit to the city, he was traveling for business and alone. He liked the city enough to suggest that his wife join him on his next trip. Unfortunately, for my investor-friend, his wife fell in love with the place…and started planning for a home there. My friend, meantime, was still focused on the investment as an investment, thinking about his potential ROI. But he, like so many of us, capitulated, knowing he wasn’t going to win the argument anyway. Better to walk away from the fight.
There is hope, though, for those of us on the ROI side of this conflict. The first friend has been renting out his Medellin investment for months now. And his occupancy rate has been close to 100%, thanks to his rental manager. While he spent more than he wanted on furniture and accessories, he’s currently projecting a decent yield, of maybe 7% for his first full year of ownership.
Considered in context, that is a very good return, within my standard target range of 5% to 8%. However, it’s short of the double-digit rental return expectations that attracted my friend (and me) to the Medellin market in the first place. We know people who have been earning 10% to as high as 20% yields on rentals here. Returns have dropped off from their highs of maybe 18 months ago, as property prices have increased. However, you still can find apartments on the market that will put your return in the double digits…if you approach the purchase and the preparation for rental as an investment. Minimal improvements, basic furnishings.
We also know rental owners in this market who are earning meager yields, as low as 3%. What makes the difference, beyond how much you invest in the property? The rental manager…and where you buy. You have a wide range of options in Medellin, but you can’t just buy anything anywhere.
The best choices for rental, whether short- or long-term, are smaller units. These give you the most bang for your investment buck. And it’s one reason my friend is happy with his current 7% yield. The apartment his wife chose is three bedrooms. He was concerned this would be a problem, that a three-bedroom wouldn’t get much traffic.
However, my friend’s three-bedroom is in a great location…right where everyone wants to be. In his case, size has proven less important than location.
Lief Simon
P.S. One real estate contact in Medellin is refining his listings to sort out which owners are willing to carry a mortgage. When he sends me that list, I’ll go through it to find the best deals, which I’ll highlight in a special alert for my Marketwatch members.
