Eight Tips for Renting an Overseas Property

Dear Reader,

An ever-increasing number of readers are buying a second home overseas that they don't plan to live in full time. Maybe you're buying now for retirement 5 years down the line and you'd like to rent your place out when you're not there. Perhaps you just want rental income, and won't use the property personally. But, if you're going to rent your property out, you want it to be productive.

Here are our Top Eight Tips for Maximizing your Property's Rental Potential:

1) Price vs. Rent: The price you pay for your home determines your rental yield (gross yield is simply the annual rent, divided by the property price). You factor in running costs (maintenance, monthly fees, taxes) to get the net yield. The less you pay for your property, the higher the yield. It's that simple. This is where fire sales and distressed properties come into their own. You'll pay less for these properties than your neighbor and command similar rent levels.

Compare short-term versus long-term rentals too. For short-term, you'll have higher running costs, from utilities to cleaning costs to management fees. In addition, you'll have to fully furnish and equip the property. Conversely, in many markets, long-term rentals come unfurnished, and the renter usually covers utilities and cleaning costs.

If you plan to use your home as a vacation or retirement property, rental yield is not top of your list of priorities, but it's crucial to get this right if you're an investor. Remember though that a low property price isn't everything. The other side of the equation is rental income. In a market with an over-supply of rental properties, you'll face competition, and likely get a lower rental income. A $100,000 property can achieve very different yields, depending on location.

In general though, you should consider the rental income to be somewhat fixed, for your property type, in your location. Whether it's better to rent short-term or long-term is usually a decision based on what's in demand in your market and whether you plan to use the property part of the year. So the best way to make sure your yield is high, is to pay the lowest purchase price you can.

2) Location: I always stress the importance of having a property in the right location, and with a rental property, you need to pay even more attention. You need to have the right property in the right location for either the short-term or long-term market and the location that's best for those markets may be different.

Here in Panama City, there are 4 prime short-term rental locations, where you'll do better with a 1 or 2-bed condo. Suburban areas, where you'll rent long-term, favor larger condos, or houses. Ask property management companies what they rent, where, for what time periods, and for how much and which units achieve the highest rent and highest occupancy.

Sometimes a property's best rental potential is not one you'd think of yourself-professional offices and small businesses will rent large centrally located residential apartments in Montevideo, for example. Speaking with real estate agents and property management companies and checking the local newspapers and online rental ads will give you a good market overview.

3) Competition: Of course, you need a market with strong demand, and (ideally) little competition. For short-term rentals, that means a lack of hotel rooms and short-term rental condos. For long-term rentals, look for a shortage of rental condos or houses in an expanding area or a gap in the market (a 3-bed home close to a good school or financial center, for example). Your short-term rental won't do so well if it faces competition from 21,000 hotel rooms in the same city with hoteliers slashing prices in the lean years and throwing in free nights, free meals, or free drinks

Check not just the current number of hotel rooms and rental units in a market, but planned supply. In a slow market where owners can't sell, many switch to renting. If that slow market has thousands of condos due for completion or thousands of hotel beds in the pipeline your rental yield will suffer. A good way of checking out what kind of demand you'll get for short-term lets is through hotel occupancy rates.

4) Occupancy: Don't rely entirely on tourist numbers for this. Tourist numbers include locals returning home cruise ship passengers people visiting family and friends. These groups will never rent a property, but can make up half the tourist numbers in many countries. A better reflection is hotel occupancy rates. Produced by local tourism authorities and some global hospitality groups, the figures give you a feel for the market. These figures will change though, as the market evolves. Panama City hit a hotel occupancy rate of 84.7% in 2007. Today, it's around 50%, due to the economic slowdown in the US, and an increased number of hotel rooms.

5) Market: Widening your market of potential renters helps keep your rental yield up. If you focus on one particular segment, you'll be vulnerable in a slowdown of that segment. Locations that attract a combination of tourists and business travelers or those that bring domestic and foreign tourists will give you a more consistent short-term yield. For long-term rental, look to destinations where snowbirds stay for 3-6 months of the year-or where companies bring in business executives or embassy staff, for longer periods.

6) Property Management: Unless you plan on living close to your overseas property (and by close, I mean within a couple of hours drive, tops), don't attempt to do this yourself. Find a good, bilingual, local property manager. Find out what their rates are. For short-term, expect to pay anything from 15%-40% in fees. Check what that covers-whether they will find tenants, do check-in and check-out, pay utilities, or deal with 3am plumbing emergencies. (And yes, it is worth paying more for that unless you like the phone waking you at 3am to sort out a problem thousands of miles away). Long-term, management fees usually run to 50% of the first month's rent, and then a low monthly charge thereafter (5%-15%, on average).  

A good management company makes all the difference to your occupancy, and rental income. Ask how many units they currently manage how many staff they have what systems they have for handling reservations, queries, and reporting problems. Do they have a large client base already-or are they a start-up with no track record?

Some managers are much better than others with marketing and advertising their properties, online and in print. Ask their occupancy rates for your type of property, in your area, and the rental income.

That gives you an indication of what you can achieve. Ask for referrals from owners using the company, and get feedback from them. Make sure the manager uses legally – binding rental contracts-have your attorney check that out.

Many managers have separate fee structures for “rental management” (the finding of tenants) and “property management”, including the services above. This arrangement works to your advantage if you are finding the renters, or if the renters are coming from multiple sources. If a company only finds you a tenant, they normally charge the equivalent of one month's rent for their services.

7) Can you Rent?: Have your attorney check if you can actually rent your property out. Some countries (Colombia, for example) restrict short-term rentals of 30 days or less in residential buildings, by law.

If you're in a condo building, or a private community, check out the bylaws-they may not allow you to rent your property out. In Brazil, many condo blocks are set up for rental-with social areas, restaurant space, and a reception area in the lobby but it's up to the owners as a group to decide if they want to allow rentals in the block and the majority decision rules.

8) Taxes: Investigate your tax liabilities. Tax on rental income varies widely in Latin America, from zero in some Caribbean tax havens, to 30% in Costa Rica. Find out if you can offset some overhead against that tax in the form of deductions. Ask your attorney about property tax rates (again, they vary from zero to 3% on average of the official value of the property). Find out if there are any other taxes-wealth tax, or luxury tax, or school tax-that apply to you.

If you plan on sending the rental income back to your home country, ask if you'll incur any extra retention or withholding taxes associated with those transfers.

Remember, you may still have tax obligations in your home country. This isn't an exhaustive run-down of everything you need to check before renting a property out-but it gives you a good starting point. Investigate a market carefully before deciding on the best type of property for rental yield, and the best location.

Investors: First find the market that's producing the best returns then find the right property to give you the best performance in that market.

Retirees, or those who want to rent pending retirement or relocation: Decide where you want to live in retirement and the property you want to own then pick the rental market that will perform best for your property type.

Get an attorney to analyze the fine print of contracts, local legal requirements, and taxes. Hire the best property manager you can afford. Most importantly, don't rely on rental income to cover a mortgage on the property or your own daily living costs-that's a surefire recipe for stress. Instead, think of rental income as a bonus a way to cover your costs of ownership or help to fund your overseas dreams.