When it comes time to flip the switch to retirement, Lief and I hope to have organized our lives so that we’re able to move around during that stage among a handful of destinations where we most enjoy spending time, with established infrastructure in each so that we can come and go as residents, not tourists, with friends and connections, social circles and, important to us, homes of our own.
When making your own plan for spending at least some of your retirement overseas, the starting point, key to the success of the adventure, is to be honest with yourself as to what kind of lifestyle you’re after.
When Lief and I ask ourselves what kind of life we want in retirement, the answer is: Varied.
City and coastal, Caribbean and highland, spring and summer, fall and winter, developed and emerging, sophisticated and raw, refined and gritty… we appreciate it all. So we’ve conceived a retirement strategy, that we’ve been working for more than 20 years to engineer, that will allow us to enjoy it all, perpetually, in turns.
We’ve held on to the apartment in Paris that we called home when we lived in that city with our children. This will be our co-retirement base, along with the beach house we’ve built on the Pacific coast of Panama, meaning we’ll be able to reposition ourselves regularly between the Old World and the New. This might seem like an ambitious plan, but we’ve had time to evolve it.
Whatever your intentions, if you haven’t already begun developing your plan, I urge you to get started now… today.
An easy first step can be the purchase of a piece of property in a locale where you want to be able to spend time now and that you think eventually could become part of your retirement plan.
Meantime, whenever you’re not using the property yourself, it could be generating cash flow from rental, and, over time, it could be increasing in value, too. Your future retirement residence could be a nicely income-generating and appreciating asset on your balance sheet.
Indeed, that’s the ideal situation—when the holiday home-cum-retirement plan you buy also qualifies as a cash-flow investment.
That’s why, when sizing up the global marketplace and the world map for potential real estate opportunities, a short-term rental property can be the place to start.
How To Choose A Short-Term Rental Buy
What’s specifically important when considering a potential rental property purchase overseas?
One driving consideration should be the pleasure potential for you and your family. Buy what and where you want.
Balance that objective, though, against what matters most for rentals in your chosen market. This is key to maximizing cash flow. Property type and size are universally important rental factors.
In most markets, a one- or two-bedroom property is more rentable than a three- or four-bedroom place. The incrementally higher rental rates you should be able to charge for a three-bedroom usually don’t compensate for the higher cost of purchasing the larger apartment.
And, while a super high-end property might suit your personal preferences, a higher-end (read: more expensive) property probably means a lower rental return. To keep your occupancy up, you’ll likely have to compete on price with the general (not high-end) market.
Here are questions to answer when considering any potential vacation rental overseas purchase:
Question #1: Where in your target location do people most want to stay?
In Paris, for example, perhaps the world’s most recession-proof rentals market, the traditionally best arrondissements for rental are the 5th and 6th. These are also among the priciest arrondissements. More affordable and also good for rental are the 4th and the 9th arrondissements, meaning an investment in these areas could generate better cash flow.
Take a similar approach when shopping for a rental in any city. Rather than focusing on the heart of the most rentable district, look around the fringes of the main tourist area and work your numbers to determine if the lower acquisition costs could result in a better cash flow, even with slightly lower expectations for rental price and occupancy.
When shopping for a rental in a beach location, the closer to the beach the better for occupancy. However, again, prices will be higher right at the beach so something slightly back with an ocean view might be a better buy.
Question #2: What size rentals are in demand in your target market?
Again, generally speaking, one- and two-bedroom apartments are the rental sweet spot. However, a market can be overrun with rentals of this size, creating opportunities for either smaller (studios, for example) or bigger (three-bedroom) places.
In Medellín, investors are buying two- and three-bedroom apartments, even if that’s more apartment than they need, because the prices are so low it’s hard not to be tempted to buy bigger and, right now, rental returns for these apartments are high. That said, a one-bedroom apartment in this city could generate the same or better cash flow. Again, it’s a matter of balancing investment agenda with personal circumstances and preferences.
Question #3: Is there a high season and what’s the opportunity for occupancy beyond that time?
Also, when considering the rental season, remember your plan (if you have one) for personal use. Would you want to be occupying the place yourself during the season when much of your rental return otherwise might be earned?
Punta del Este, Uruguay, is a good case study in this context. The high season in this coastal resort town is mid-December through February. Over this 10-week window, you can charge outrageous rental rates. In fact, it’s not uncommon to earn as much as 80% or 90% of the annual rental income during this peak-season period alone. The rest of the year, the going rental rates are a fraction of the short-term rents you can ask in January and February.
That’s OK, as you can earn enough during this period to make the investment worthwhile overall. Unless, of course, that’s the time of year you’d want to use the place yourself. In that case, your intended rental investment could default into a holiday home for the family, period.
Question #4: How will you manage the property for rental?
The key consideration, when looking to buy to let overseas, more important, I would argue, than what you buy is the system for managing what you buy.
When you make a rental investment, you’re choosing, first, a market; next, a rental manager; and, finally, a property.
Specifically, what expertise are you looking for in a rental manager? The best ones we’ve hired have impressed us with their discriminating judgment.
One, in Paris, 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”… “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 considered discriminatory and politically incorrect. We saw them as risk management, and managing risk is a critical part of being a long-distance landlord. There are so many ways things can go wrong.
You need systems to manage bookings, renter comings and goings, payments, expenses, cleaning, inventory, repairs, maintenance, renter complaints, keys, and breakage. Plus, you need a system for generating reservations. Where will you advertise? How will you market? That’s perhaps the most important thing a good management company brings to the table—a developed marketing and reservations system.
In addition, a good management company should:
- Be flexible enough to accommodate reservation changes and to fill the gaps. Say you’ve got someone in your place for two weeks then someone arriving three days after Renter #1 departs for another two-week stay. A good management agency (in an active market) will fill a couple of those gap nights.
- Meet and greet every renter. A representative from the management company should meet each renter, deliver the keys, explain systems (how the DVD player works… the trick to using the dishwasher… where to find the air-conditioning controls), suggest restaurants and services in the area, answer questions, etc. Some of these things should also be explained in full in a Renter’s Manual, conspicuously displayed in the property.
- Perform a post-renter check to look for damages, to verify inventory, and to confirm cleaning.
- Keep a detailed and current inventory of everything in the unit from wine glasses to pillowcases.
- Contact you immediately if he notices anything damaged or broken.
- Solicit estimates for necessary repairs, oversee the repairs, and update you in real-time as to the associated costs.
- Send you (by e-mail) regular reports (say, monthly) on occupancy, nightly rental rates, expenses, fees, taxes, and (with luck) profits.
- Respond to your e-mails. You’d be surprised how many times this final point becomes the most challenging.
How do you find a good rental manager?
Ask for references from other landlords who’ve been invested in the market for some time. Interview at least two. Go with a professional. By this, we mean someone who is focused full-time and working to make money.
We’ve made the mistake of engaging folks who managed apartment rentals on the side, as a hobby, or as a part-time occupation in retirement. We wouldn’t make that mistake again. You want someone with established infrastructure and systems and a proven track record. You don’t want to work with the friend of a friend who has been managing his own apartment rental for a couple of years and who is now looking to expand to manage others’ investments, as well.
In most markets, things like commission structure and percentage and what’s included for that fee are standardized, though you want to confirm and clarify this in every case.