To Rent, To Buy, Or To Rehab?
Should you rent or buy when you move overseas? And, if you decide to buy, should you invest in something new or a fixer-upper?
An important part of the American Dream is owning your own home. I read an article recently that described what it is to be middle-class in America, and owning your own home was included among the requirements. That makes for a narrow definition that probably doesn’t make sense, but it shows how engrained home ownership is in the minds of Americans.
The typical cycle in the States is to buy a starter home as soon as you can afford one and then to trade up as soon as you can afford something bigger. This trading up continues until the kids move out…and then typically reverses itself, with downsizing steps until retirement.
In France, as a point of comparison, people tend to save until they can afford the house or apartment that they believe will suit their needs long term, and then they typically live in that house until they die. Part of the reason for this is the high cost of buying in this country. Transaction costs are not negligible. Part of the reason is cultural. The French would rather keep their housing costs modest and spend their money on other things (like travel, for example).
Most Americans retiring overseas bring their cultural need to own their own home with them. But that isn’t always the best idea. There are reasons we say often in these dispatches: Rent before you buy.
One is obvious. You want to make sure you end up in the neighborhood that suits you best. We’ve lived in three neighborhoods since moving to Panama City. We chose the first for convenience, recognizing that it wouldn’t be right long term. We chose the second because we thought it was where we really wanted to live, but our experience there wasn’t what we expected. Our current neighborhood, by contrast, has felt like home since the day we moved in. Here in Panama City, for us, third time seems to be the charm.
Renting allows you to try on not only different neighborhoods for size, but the city and country, as well. We know people who moved to Panama City and then decided it wasn’t for them within six months. From Panama, they moved to Mexico…and love it.
We’ve known others who have started out in Panama City but end up in the mountains near the city. And we know one couple who has moved to three different cities in Mexico. They like the Mexican culture, but they can’t seem to find the place within the country that fits all their needs. In this case, the couple bought in two of the three cities. In each case, they were able to sell and even made money on the transactions. Still, it made the moving around more complicated than it would have been had they rented along the way instead.
The real benefit of renting is that it leaves you flexible. You can try out different neighborhoods, different regions of a country, or even different countries without tying up large amounts of capital and without having your movements dictated by your ability to find a buyer when you want one.
Once you’re sure of where you want to be, then you face the question again. Should you buy? And, if you do, should you choose new or a fixer-upper for renovation? That’s a personal decision. The variables to consider include how much effort you want to put into a renovation project, how much initial capital you have, and, to some extent, how handy you are with a tool box. Also note that your local language skills become more important if you undertake a renovation.
That said, buying a fixer-upper with the intention to improve and flip can be a solid serial investment strategy, if you’re up for the challenges involved.
One market where I’m considering this strategy personally right now is Medellin. During my visit last month, I met with an American who had bought a small building in an up-and-coming neighborhood to rehab into three separate apartments.
The project, start to finish (from scouting for the building to finishing the renovation work), took him a year. He has sold one of the apartments for as much as he has invested in the entire undertaking. Meantime, he’s living in the second, and he has the third currently for sale.
When he sells the third unit, he’ll have more than doubled his money. And he’ll still own the one he’s occupying.
He’s begun scouting for his next project. And, as I said, I’m looking, as well, with the same strategy in mind. I’ll report in full for my Global Property Investor’s Marketwatch members.