Recently, I was asked the following question by a Real Estate Investor:
“Hey Ronan, I'm looking for a nice place to hang out for a few months in the winter. Somewhere I can rent out when I'm not there. I read your scouting reports all the time and I like the sound of the Joao Pessoa area you wrote about on Monday. But is that condo better than one near Tulum in Mexico or how about one in Costa Rica?”
Yikes! Not the type of question you want to get at 7am in an elevator en route to the morning's first coffee. My friend (who I see frequently when our local coffee house opens its doors) asked me this question.
Standing outside a coffee house in the dark on a dreary winter's morning makes him dream of a sunny overseas escape. Thing is, only my friend can decide how much risk he's comfortable with, and how hard he wants to work for his overseas rental venture. What I can give him is the framework to help him make a decision. But I know he's on to something.
Because in the right places, you can have that escape and not only will it pay for itself, it can even make you money. You just need to find a place where you love to spend time, and then see how it measures up against these steps for finding a good rental opportunity.
So, the coffee's on him this morning and the guidance is on me. Below is my response to – “Here's what I'd do if I were you looking to buy overseas vacation rental property”.
3 Important Steps When Choosing Overseas Rental Property
Follow these steps:
#1 Pick a Type of Rental – short-term, long-term, or commercial. You need to match a property to demand in that area and to the level of involvement (work) you want to take on.
#2 Pick a Market – a specific place where you can make money from rentals. But you will need to be very specific. Even small countries or regions have big divergences in rentability.
#3 Run the Numbers – as with any business venture, create a business plan
Pick a Type of Overseas Rental
There are many ways you could buy real estate and generate an income stream. You could buy a condo in a city and make it available for short-term rental (by the night or the week) to vacationers or visiting executives. Or you could rent that same condo long-term on a one or two year lease.
You could buy in a resort, or in a city that rarely sees tourists. You could buy office space or maybe a retail unit and rent it for five years. You could even buy agricultural land and rent it out to a farmer.
You have lots of options. It's likely most of them aren't for you.
One of your fellow investors for example has multiple short-term rentals scattered across several countries. She does extremely well generating strong yields. But she works her rentals, almost full time.
She has a website, which she optimizes for search traffic. She lists her rentals on other websites. She buys classified advertising space in publications like International Living. She works her leads. She places her rentals with outside agencies. Staying on top of, and in the mind of, your rental managers is one of the major critical success factors in this business.
My point is: she does very well because the way she manages her rentals is more like running a business than holding an investment. In one of the markets where she is active there is a very limited infrastructure in terms of rental management companies. If she didn't do the work herself, the unit wouldn't get rented.
So, when picking the type of rental property you want to buy the first and most important question you need to ask is how much work you want to take on. This is the starting point and you go from here.
For most of us the answer is somewhere between no work at all, or as little as possible.
That means we need to match the rental property and its location to the amount of work we want to take on. And we need to make sure that we can find the help we need locally to implement our strategy.
Below are two different real life scenarios of owning overseas rental property:
- In Fortaleza, on Brazil's northeast coast, I bought pre-construction condos that I plan to make available for rental once they are complete. I can go with short- or long-term rental. I have a choice of rental management companies. These companies manage hundreds of condos. They know this business and their prices are competitive. I won't have to go from store to store buying furnishings, either. There are companies that will sell me a furniture pack, which they then assemble. I'll pay a bit more than I'd like to pay but the convenience is worth it.
- I own a penthouse in Cotacachi, Ecuador. The situation there is different. There isn't an infrastructure of service providers. You can buy beautiful handcrafted furnishings cheaply, but not from your armchair. There's a rental market of expats, snowbirds and people giving Ecuador a test drive before deciding to relocate. In fact, because real estate is so inexpensive here, the yields can be pretty strong. But there isn't a strong infrastructure of rental managers and marketers. Friends are doing well renting in this market but they are very hands-on and spend a lot of time in the area.
I don't get to visit often. And my travel schedule makes it difficult to contact me much of the time. So, I haven't rented my condo in Cotacachi, and I don't think I will unless I find myself with a lot more time on my hands.
Before you even start to make a shortlist of potential places for your rental property, be very clear with yourself about how much work you are willing to invest in this venture.
Next, you need to decide how much risk you are willing to take on. The only rental market I see for my penthouse in Cotacachi is boomer gringos. If they stopped coming (and I was relying on rental income to cover costs) I'd be out of luck. In Fortaleza, I can rent to tourists, oil executives, young professionals, retirees from southern Brazil, downsizers from Fortaleza and so on. You need to factor this into choosing a market. A broad source of potential renters will reduce your risk.
I'll bring you more about this and conclude next month in, “How to Make Your Overseas Property Pay for Itself, P2”, when I guide my friend on what to look for when choosing a rental market.