“Always buy what you see, not what a developer promises…always visit the country and piece of land before you buy.” These are two of the golden rules of international real estate investing…rules that should NEVER be broken if you are looking for a second home. An investor, however, armed with the right experience and ability to analyze opportunities, can sometimes make real estate investments from his armchair.
If you read my previous report, you will know the French leaseback program is one such opportunity. To recap, here's how it works:
When you buy (an apartment, house, ski lodge, or student accommodation) through this program, you get a full refund from the French government of the 19.6% VAT levied on new build in France. That's like getting $1.20 worth of real estate for every dollar you invest…straightaway. The government does this to encourage supply of tourist beds. You then hand your unit over to a management company-typically for nine years-and agree a rental yield (usually 4% to 5%, although it can be higher or lower), which is guaranteed for the nine-year term. The management company takes care of everything and you get a check or the cash wired to your account, the amount of which is guaranteed. Plus, this rental return is indexed in such a way that it may increase, but it will never decrease.
As you are effectively buying an income stream by participating in this program, you can run the numbers from the comfort of your home and buy without getting on a plane. There's another type of guaranteed return deal that gets my attention. Before I tell you what it is, I must give you a word of warning:
Outside of this French leaseback program, whenever a developer talks about guaranteed rental returns, I hear alarm bells. From Dubai to the Dominican Republic, real estate developers “guarantee” rental returns for periods of up to four years. In the industry, it's no secret how this works: You effectively pay upfront for the rent you will receive during the period of the rental guarantee. If you buy a unit expecting-or relying-on the same level of rental returns to continue at the end of the guarantee period, you will be sorely disappointed. The rental market for your unit will be limited, or, in some instances, practically nonexistent.
True rental guarantees–that accurately reflect the market–are rare. So rare, that I think of them as a unique type of program for savvy investors–it's a type of resort rental, but I call them “Gilt Resort Programs” because of the guaranteed fixed payments. I know of a few programs like this in France and one in Mexico.
Here's how Gilt Resort Program deals work:
The developer makes plans to build a condo building or a hotel. He pitches the location, the building and the resort to a hotel or travel operator. If the operator likes what he sees he signs an agreement to lease all the units in the project or hotel from the owners for a fixed period of time. The operator and the developer agree a standard unit fit-out. The rent to be paid by the operator is agreed in advance. The operator takes on the entire risk of selling the rooms. The operator is confident he can make a margin on the difference between what he rents the units for and the net revenue he can generate from selling the unit by the night or week to vacationers.
You could also invest in a development company or real estate fund. I am aware of one investment offering that promises more than 10% annual interest payment, a share of profits, and discounts on the end product, should you decide you want to buy a unit there. Frequently, developers also look for construction funding for projects where they own the land and have presold units. Remember, conventional bank funding isn't available in many markets.
Finally, and as a more conventional route, you could use publically traded stocks to play the real estate market. In markets where the real estate prospects look promising, look for stocks that will profit from the construction boom. Look for the companies that make the cement…import the steel or lend to developers or companies whose land valuation may not reflect what's happening in the real estate market.
It goes without saying that when making any real estate investment, especially from your armchair, you need to invest in experienced professional advice and not rely on “promises”. It can be done…but from your armchair you're missing out on the fun part: traveling, experiencing, finding and doing deals.
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