Welcome to Offshore Living Letter, Your #1 Resource for Offshore Diversification

The 3 Real Estate Investment Lessons I Learned The Hard Way

03 Mar
Tree-lined Street in the Recoleta Neighborhood of Buenos Aires, Argentina

The 3 Real Estate Investment Lessons I Learned The Hard Way

The 3 Most Important Lessons I’ve Learned Buying And Selling Property Overseas Over The Past 25 Years

One big loss can wipe out a lot of gains. After more than two-and-a-half decades of property investing experience across 24 countries, I have learned that the hard way several times over.

Here are the stories of three of my biggest failures, the investments that stand out in memory as having both cost me and taught me most.

I share them so you can learn these lessons before putting any of your own money at risk.

Lesson #1: Be Sure Of Your Exit Market

When investing in a residential rental property in the United States, you have a good idea who your future buyer will be. You’ll sell, when the time comes, to someone looking to live in that neighborhood or to another investor shopping for a rental property in that area. Either way, the buyer likely will be someone living within a couple dozen miles.

When buying for cash flow in another country, especially a short-term rental unit, the location and the type of property play big roles in determining who your potential future buyer will be. Typically, your potential future buyer pool will include other foreign investors. However, the more you can expand that pool, the greater your chances for maximum return.

The Spanish costas are a good example of a market that has relied on foreign buyers and investors entirely. In 2008, when real estate markets across the globe collapsed, those along Spain’s Mediterranean coast fell faster and harder than any others. This was for three reasons—the amount of leverage in play, over-building, and the fact that the majority of buyers on this coast were foreign.

Prices fell, too, at the time, in Barcelona, but not nearly as far nor for as long as they did along the costas. The three factors that spelled disaster on the coast helped to insulate values in Barcelona. The percentage of leveraged investment properties was lower, the volume of over-construction was less, and the real estate market didn’t rely on foreign money.

Even along the costas, owners of well-positioned properties of interest saw their values recover quicker than owners of cookie-cutter units in the massive oceanside complexes

where dozens and hundreds of identical properties came onto the market from distressed sellers overnight.

We remembered stories we’d heard about the collapse of Spain’s coastal markets when shopping for an investment in Portugal in 2015. Local real estate agents convinced us to consider apartments in resort complexes. The rental returns on these spreadsheeted well. Projections showed that we could have netted 8% on most every unit we viewed. We reminded ourselves, though, that the rental return was just one criterion to consider. What about when we wanted to use the property ourselves… and what about when the time came to sell?

Kathleen and I worried we’d never be able to find our apartment in one of these complexes of hundreds of look-alike units. Of greater concern to me was the thought of competing with hundreds of other sellers of exactly the same product should another market downfall mean many owners become sellers at once. Even in a good market, how would we compete for a sale with whatever other units were available at the same time other than on price?

Touring several resort complexes reminded us we’re not resort complex types. We focused instead on the center of the coastal town of Lagos, where we found a one-of-a-kind townhouse on a winding pedestrian-only cobblestoned street with a rooftop terrace with a view of the ocean. Standing on that roof we knew we’d look forward to every chance to return to stay in the property ourselves and with our children. And we also knew that, when we decided to sell, we’d have something with intrinsic value to offer that would compete handily with anything else available at the time, boom market or bust.

That nature of the property meant that of an expanded future resale market. The townhouse was ideal for a short-term rental but comfortable for full-time living, too. It would be attractive to another foreign investor but also to an expat wanting to retire on this coast or a local living and working in the city. Four years after the purchase, we decided to cash out of what we perceived to be a market at a top. Our buyer was a retired couple from Sweden that planned to use the property part of the year and rent it out otherwise.

In some markets, you’ll have no choice but to resell to a foreigner. Ambergris Caye, Belize, is a good example.

Most of the construction on this island is geared toward the tourist and expat retiree markets. Beachfront condos aren’t in the budget for a typical Belizean local. The economies you need to pay attention to if you invest in a cash flow property on Ambergris are in North America.

When the U.S. falls into recession, fewer properties are sold on Ambergris Caye. When U.S. markets are booming, more real estate is sold on this little Isla Bonita. The local Belize economy is irrelevant. Same goes for rental returns. Most rentals are to North Americans and some European tourists.

Buy right in a market like Ambergris, and you can see good rental yields until the economy slows in the countries where your tourist renters hail from. And, when your occupancy stats fall, so will your ability to sell the asset quickly or at a decent price.

Paris, on the other hand, is a market where you’re lucky to earn better than a 5% net rental yield from a rental, but you’ll always be able to resell your property. Prices move up and down in Paris. Like anywhere, the market cycles. Still, you’ll always find a buyer. The potential future buyer pool in this city is as wide as it gets and includes other investors, foreigners wanting their own pied-à-terres in the City of Light, and local French buyers.

The point is that it’s critical to size up your future potential buyer pool in advance of a purchase. However, some opportunities are predicated on an expectation that that pool is going to expand for some specific reason.

In the early 2000s, a developer we knew in Canada subdivided a rural oceanfront parcel into large estate lots and offered them for sale to investor buyers based on a path-of-progress pitch. He postulated that, because country properties in the far northeastern United States, in Vermont and Maine, known for attracting wealthy weekend-home buyers out of Boston, Connecticut, and New York, had become too expensive, those buyers would begin looking at Nova Scotia, Canada, to satisfy their country estate appetites once the ferry route between Bay Harbor, Maine, and Yarmouth, Nova Scotia, reopened.

But the path-of-progress play didn’t play out. The ferry did not reopen as expected, the United States went into recession, and Nova Scotia has a lot of raw coastal land. Even as we write, that ferry isn’t operating due to renovation work at the Bar Harbor terminal.

The non-functioning ferry left investors in this development with the local market as the only viable potential buyer pool. Nova Scotia has a population density comparable to that of Maine, and Maine has the lowest population density of any state in the United States. In other words, not a big potential buyer pool for estate parcels to build vacation homes.

Lesson Learned:

Think through the future potential buyer pool when making any cash flow investment and choose properties that expand that pool as much as possible.

Lesson #2: Manage Your Rental Manager

I’ve owned rental properties in eight countries. The property is important. You need to buy right—right location, right size, right number of bedrooms and bathrooms, right furnishings, etc. However, at least as important as the rental you purchase is the person you hire to manage it. A good rental manager can squeeze a good or great return from a so-so property, but, if your manager is no good, you will not make money, no matter how ideal your property.

Finding a good rental manager isn’t easy. In some markets, it’s not possible. If the rental market is thin, no serious management industry develops. Whoever you find, even if they are experienced and professional, you’ll need to invest time launching them and then you’ll need to pay attention over time. Leave a rental manager on their own without checking in with them regularly (I recommend at least once a month) can lead to depressed returns.

Our first experiences engaging a rental manager were in Paris. We invested in an apartment with friends and were responsible for getting it rented. The agent who’d sold us the apartment told us she knew the best rental manager in the city. We didn’t know any rental managers in this city, so we went with the agent’s recommendation. We furnished the place, decorated according to the advice of the manager woman, and then turned the apartment over to her.

A month later, I noticed an unexpected transfer into our bank account. The money had come from the rental manager in Paris. It was the net from our first month’s income. Exciting surprise to have money show up out of the blue like that, but what did the amount represent? We contacted the manager woman and asked for a report. We explained that we wanted to see rental dates, gross amounts paid, and expenses deducted. The typical data points any rental property owner should want to review and that you need to calculate occupancy rates, to track your yield, and to control your expenses.

We didn’t receive a report, but more money appeared in our account about four weeks later.

This continued for months. Finally, we reached out to the agent who’d sold us the apartment. She was friends with the manager woman. Would she, we asked, please request a report for us. She did, but what we received wasn’t much better than no information at all. Meanwhile, money continued posting to our account monthly.

After 12 months, we totaled our annual net income and calculated the annual net yield for the property. It was 5.3%, which is good for Paris. Still, we had no idea about the occupancy rate, what the manager woman was charging on a nightly basis, or what costs were being backed out. Was the agent reporting all the income? Was she charging market rates? Was she padding expenses?

After about a year-and-a-half of this uncomfortably murky situation, we were introduced to another rental manager in Paris who was looking to add to his rental portfolio. We interviewed him and explained our concerns about our current manager. He assured us that he’d send monthly reports showing all the details we were looking for, so we switched to the new guy.

He sent reports as promised, in the format we’d requested, but our cash flow plunged. Occupancy rates were easy to calculate some months because they were zero. This new manager was much more organized than the old one had been. He just couldn’t rent the apartment.

If you have to choose, which would you rather have? Reliable reporting or cash in the bank? You hope you never have to ask yourself that question. We learned, though, from this early experience, that, if a rental manager is producing healthy cash flow, think long and hard before making any changes. If the situation isn’t broken in the one way that really matters (the amounts of net cash flow being earned), don’t try to fix it.

We ask for (insist on) reports from every rental manager we work with, and you should, too, but, if the agent is keeping the place rented, we’re willing to work with them to improve their administrative skills.

The second place we invested in a rental property was Buenos Aires, Argentina, where, in 2002, about six months after the decoupling of the Argentine peso from the U.S. dollar and the resulting collapse of the peso, we purchased three apartments with friends. It was a case-book crisis investing window, and we were able to buy three classic-style BA properties at prime addresses for pennies on the peso.

The real estate agency we bought through told us they were starting an in-house rental management company to service the growing number of international clients investing at the time. As in Paris, we didn’t know any rental managers in Buenos Aires, so this agency option seemed a good turn-key solution.

The woman put in charge of the business set up marketing, administration, and reporting infrastructure quickly and was filling the apartments with renters within a month. Reports came regularly, as did deposits into the bank account. The investment was a success at every level… for the first two years. The woman running the management division of the agency’s operations was also the wife of the agency owner. After she’d established the rental management business, she reverted to working with her husband in the (bigger and more lucrative) sales division. The couple hired a young woman to take over rental management. This woman was competent enough but didn’t have the same personal commitment to making things work.

Reporting became less regular, and communication waned. A year after the transition, after having requested an updated rental report for months, we received one only to find that one of the three apartments hadn’t been rented for two months. Not a single night. When we responded to ask why the apartment was suddenly empty for two full months, the woman replied to say, “Well, I can’t rent it with all that water damage in the master bedroom.”

This was the first time we’d heard about the leak that, by this time, had nearly collapsed the bedroom ceiling. The manager told me she was waiting for the ceiling to be repaired before placing renters in the apartment again. But how, we wondered, was the ceiling going to get repaired if she never told us about the damage? We started looking for a new rental manager.

How do you find a good rental manager? Interview more than one. Lay out your expectations directly. You want to receive monthly reporting showing the number of nights rented, the amount of gross revenue, itemized expenses (including utilities, cleaning, repairs, maintenance, and building fees), the management fee, and the resulting net cash flow to you. You want to receive immediate notification of property damage or a tenant problem or complaint. You want to receive your net cash flow deposited into your bank account monthly or quarterly. Then ask the rental manager candidate for references. Contact at least two other current clients. If the manager candidate won’t give you references, find another candidate to consider.

Lesson Learned:

Choosing a rental manager is as important as choosing the rental property.

Lesson #3: Remember The Fundamentals

When we arrived in IrelandLINK TO IRELAND HUB PAGE in 1998, the standard net return from a rental property was 2% or less. The country was a decade into its Celtic Tiger economic boom, which had been fueled by two things. The first was American businesses setting up shop in Ireland to take advantage of low corporate tax rates and hiring incentives being offered by the government. The second was real estate.

We were in Ireland for the first reason. We’d made the move to open an office for a U.S. publishing company wanting in on the Irish Investment and Development Agency’s 10% tax.

All the foreign business activity created an employment boom. For the first time in the country’s history, young Irish were able to leave their parents’ houses before they got married. They could afford to live on their own or with roommates. This phenomenon created an unprecedented housing demand. Developers bought land from farmers to build housing estates, and the farmers gave some of those windfall land profits to their kids so they could buy houses. A lending industry emerged. Mortgage broker offices popped up on the street corners of every town and village across the country.

All Ireland was buying and selling property, either for their own use or, eventually, as an investment. The whole of the country watched prices rise dramatically year after year and felt compelled to get in on the game. No one imagined an end to the cycle.

It was a house of cards that eventually collapsed completely. One Irish friend who jumped in at the late stages of the boom and bought a house in 2006 to live in with his family has been upside down in the mortgage for that house for more than a decade. At least he’s been able to keep up with the mortgage payments. Many pre-2008 Irish buyers have not been so fortunate.

Hardest hit were those who’d bought for investment. So many of these properties were taken back by banks, which had lent as much as 110% of the purchase price, the extra 10% to cover closing costs.

Every Irish investor at the time bought with the expectation that they’d make their return from appreciation. They ignored the fundamentals of property investing and abandoned common sense, buying into the going belief that property prices would continue up indefinitely.

It wasn’t only the Irish infected by this disease pre-2008. We met an American property investor back then who bragged to me that he “controlled” US$2 million worth of property. He had made initial payments of US$5,000 on eight US$250,000 condos. His plan was to resell one or two condos at a time to come up with the next payment due on the rest. He’d created a leveraged ladder that he believed would turn his US$40,000 into a small fortune.

Then came the crash of 2008. The guy couldn’t sell his condos for a reasonable price or at all. He lost all eight properties, along with his US$40,000. Like all those Irish investors, he’d counted on perpetually appreciating market values.

The key fundamental that too many property investors ignore or maybe aren’t aware of, both pre-2008 and today, is that a rental property should generate enough rental income to give you positive cash flow and a decent net yield. Those are the two critical requirements for any successful rental investment. Do not buy a rental property for any reason other than you are confident both of those things are going to play out.

We look for a net yield from a rental investment of 5% to 8%. We do not make a purchase unless we believe, based on reliable market data, that we can realistically expect a net return of at least 5%. If a property produces less than a net of 5% a year, we reevaluate to understand what has shifted in the market and, depending on the value of the asset, can consider cashing out so we can put that capital to work elsewhere. If a property produces more than 8% net a year, we count ourselves lucky but understand that the situation won’t last. You net more than 8% from a rental only as a result of some market distortion that sooner rather than later will return to the mean.

If you’re earning net cash flow of 5% to 8% a year from a rental, that investment is solid. Maybe you’re realizing capital appreciation, as well, but trying to predict value growth is speculation. Buying for positive cash flow is building wealth.

Lesson Learned:

The projected net return from cash flow should be the primary determining factor when making any property investment overseas.