Risk Vs. Reward And Reward Vs. Hassle—How To Manage Your Rental Investment Overseas
I own an apartment in Panama City that was rented to the same tenant for five-and-a-half years. The nice Brazilian banker lady moved out last week.
I hadn’t been inside the apartment since replacing one of the air-conditioners a couple of years ago, so I didn’t know what to expect when I went to take a look this week.
What I found was normal wear-and-tear, nothing more. Scratch marks on some of the furniture and cracks in some of the walls. Nothing my local handyman-painter can’t take care of in a few days. Then I’ll replace towels, bed linens, and broken kitchenware…and be ready for the next renter.
The question now is: What kind of renter do I want next? That is, do I want to continue renting long-term or switch to short-term? Each approach has its pluses and its minuses.
I’ve had it easy. One tenant for more than five years who paid her rent through an automatic transfer from her bank to mine each month. I didn’t have to think about the apartment beyond remembering to pay the monthly HOA fee. Finding another tenant like that one, if I can, sure seems appealing.
Renters don’t typically stay put for more than five years, but Panama City is one market where this isn’t uncommon. Lots of expat executives in this town who renew their leases along with their employment contracts. Again, these make for super low-maintenance tenants. Plus, having one in place year after year means consistent cash flow.
On the other hand, net yields are generally lower for long-term than for short-term rentals.
Taking my apartment in Panama as an example:
Breakdown of short-term versus long-term cash flow
Short-Term
Monthly Income
Nightly Rental Rate – US$150
Average Occupancy – 65%
Gross Income – US$2,925
Monthly Expenses
HOA – US$170
Rental Management Fee – US$585
Utilities – US$300
Cable/Internet – US$50
Total Expenses – US$1,105
Monthly Net Cash Flow from Short-Term – US$1,820
Long-Term
Monthly Income
Rent – US$1,500
Monthly Expenses
HOA – US$170
Agency Fee For Finding Tenant (amortizing the one-time fee over 12 months) – US$125
Monthly Net Cash Flow from Long-Term – US$1,205
Bottom line, short-term can yield 50% more cash flow each month. Going by the numbers, short-term seems like a no-brainer. However, again, short-term occupancy isn’t stable.
In my scenario here, you could achieve the same monthly net cash flow renting short-term as you would have renting long-term with an occupancy rate of 48%. And you could end up with greater cash flow short-term versus long-term if your occupancy rate were better than that. Fifty percent occupancy (give or take) could be considered conservative in the current Panama City rental market. On the other hand, short-term is never guaranteed. You can go months without a tenant.
Risk versus reward.
Though for me more important is reward versus hassle factor. Short-term rentals require more effort…not necessarily on your part but definitely on the part of your rental manager.
That’s why, without a good rental manager, renting short-term can be a financial disaster rather than the fantastic cash cow my example numbers show.
In this case, for this apartment, I’m going with less hassle. I’m calling a real estate agent now to get the place listed as a long-term rental.
Lief Simon
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