Any global real estate investment portfolio should include at least one rental property.
A rental investment won’t make you rich, but it can provide solid, reliable returns. Your target for a net yield from a rental property investment should be 5% to 8% net per year. This is a reasonable expectation in a “normal” market, and, in the current investment climate, it’s nothing to sneeze at.
Identify a market where some distortion (because of undersupply, faster than historically typical demand, seriously undervalued purchase prices, or rising rents) is at work, and you can do better.
How do you get started building a portfolio of rental investments? Where should you be looking now to expand an existing portfolio? The surest bet is to target markets with proven tourist track records, places that attract visitors even when times are tough. Paris is the best example.
Second, consider inventory supply and demand. The Costa del Sol, for example, is ridiculously oversupplied.
Third, as with any real estate investment overseas, think through your exit strategy from the start. Even if your intention is to hold the rental long-term, understand who your eventual buyer might be. You won’t likely hold forever, and, regardless of your intended timeline until exit, it’s a good idea to have an idea going into any investment who you might sell to when you’re ready to cash out.
The key consideration, though, when looking to buy to rent overseas, more important, I would argue, than what you buy is the system for managing what you buy.
You can act as your own rental manager, but I don’t advise it. If you’re not residing physically in the same place as the rental unit, I say definitely don’t do it. I’ve had 25 years of investor-landlord experience in nearly two-dozen countries. This isn’t something you want to take on yourself, unless you’re prepared to make it your full-time occupation. Rather, you want to engage someone who knows the market, who has marketing infrastructure in place, who has developed a client list you can leverage, and who can show you proven management systems (for reservations, for inventory control, for reporting, etc.).
My first apartment investment in Paris rented extraordinarily well the first year. However, the French rental manager spoke no English and was perpetually late with reporting. So I switched to another manager, an American. Yes, he spoke English, but he, too, was perpetually late with reporting.
More to the point, he achieved less than half the occupancy I’d enjoyed the year before, even though the market was stronger and tourism was up.
This is why I say that, when you make a rental investment, you’re choosing, first, a market; next, a rental manager; and, finally, a property. Before you make a particular purchase decision, seek advice from the rental management agency you’re planning to work with. What’s more rentable? Two bedrooms… or one? What matters most to would-be renters? Location, of course, but other, less obvious things can be critical. In Paris, you’ll struggle to make a decent return off a fifth-floor rental in an apartment building with no elevator.
Specifically, what expertise are you looking for in a rental manager?
The best ones Kathleen and I have 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 we (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 termed discrimination. We saw them as risk management, and managing risk is a critical part of being a long-distance landlord for overseas rental investment properties, because 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 will:
#1: 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.
#2: Meet and greet every renter. A representative from the management company should meet each renter, deliver the keys, explain systems (how to access the internet… 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.
#3: Perform a post-renter check to look for damages, to verify inventory, and to confirm cleaning.
#4: Keep a detailed and current inventory of everything in the unit from wine glasses to pillowcases.
#5: Contact you immediately if he notices anything damaged or broken. I owned a rental apartment in Buenos Aires a few years ago. Our rental manager there neglected to inform me for two months of a leak in the master bedroom. In fact, she never did inform me. I got in touch with her when I noticed in her reports that the place hadn’t been rented for weeks. Nada. “Que pasa?” I emailed to ask her. “Oh, well, I can’t rent the place with all that water damage in the bedroom…”
#6: Solicit estimates for necessary repairs, oversee the repairs, and update you in real time as to the associated costs.
#7: Send you regular reports (say, monthly) on occupancy, nightly rental rates, expenses, fees, taxes, and (with luck) profits.
#8: Respond to your emails. You’d be surprised how many times this final point becomes the most challenging.
One agency I worked with in Paris regularly left renters standing alone and confused outside the front door to the apartment building awaiting someone to show up with the key to let them inside.
Another agency I worked with in Paris never thought to keep an inventory of the apartment contents. I’d visit now and then to check on things to discover that there was a single drinking glass in the cabinet or but two lonely forks in the cutlery drawer.
It’s the exceptional agency anywhere that remembers to factor in all related expenses, fees, taxes, etc., in projections and, even, in reporting. In Paris, for example, don’t forget the building fee (it’s called the syndic fee) or the local property taxes that you, the owner, are liable for (called the taxe d’habitation and the taxe foncière). And don’t forget to plan for the things that can’t be planned for—leaks in the bedroom ceiling, exploding water heaters, lost keys (it costs US$150+ per to have a key made in France), etc.