Having Another Home Overseas
Before you’re ready to retire, you’re likely to notice places around the world where you’d like to be able to spend time. Not just once every several years or so in a hotel, but more regularly, as often as possible, in the company of your family and friends, and in a place of your own.
When you identify a destination that meets this description, I recommend you take stock of it bigger-picture, considering, first, whether that destination is also a place where you think you might like to spend time in retirement and, second, if the real estate market there presents potential for capital appreciation or cash flow. If the answer to either of those questions is yes (and certainly if the answer to both of those questions is yes), then you’ve found your ideal second home overseas.
Over the years, Lief and I have come to this conclusion about not one but several destinations around the world. Our plan for retirement, therefore, when the time comes, is to be able to move around among these spots 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 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 lifestyle 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 plan, that we’ve been working for the past 16+ 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 retirement base. From Paris, we’ll enjoy regular extended trips to Istria, to stay in the farmhouse there; to Medellin, Colombia, to enjoy life in that sophisticated mountain city; and to the Pacific coast of Panama, where we’re building a beach house. This is an ambitious plan, I admit (some might say ridiculously so), but we’ve had time to evolve it.
Whatever your plan, I encourage you to start developing it as soon as possible. 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 appreciating asset on your balance sheet.
That’s the ideal situation–when the holiday home-cum-retirement plan you buy also qualifies as an investment. This is what has tipped the scales for us with many of the property purchases we’ve made over the years.
What’s important, thinking practically, when sizing up a potential second home overseas? You’re buying primarily for personal use, so the 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, because one important objective for any holiday home is that you’re able to rent it out when you’re not using it, generating enough cash flow to cover associated carrying costs and, ideally, leaving something left over each year (positive cash flow), to boot.
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. 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.
- 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…
- 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…
- 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.
Continue reading: Tax Benefits Of Investing In Property Overseas