Dateline: Tivat, Montenegro
Back in December, we discussed the best countries for property rental yields. It’s no secret at Nomad Capitalist that foreign real estate is one of the best offshore assets to hold. Not only is it one of the few non-reportable offshore asset classes, but you can also get higher yields on your foreign rental properties.
That doesn’t mean that investing in foreign real estate and renting out your properties is a walk in the park.
In response to the December article, one reader pointed out that no one ever talks about the administrative work that goes into operating a rental property. And they’re right. No one really does.
But that’s all about to change.
As I mentioned just the other day, when looking to do anything offshore, you need to find a guinea pig who’s tried the very waters you’re thinking of swimming. Administrating rental properties overseas is no exception. And, in that case, I am your guinea pig.
Now, if you’re reading this, chances are very high that you want to invest in property that you can rent. But beyond that obvious assumption and the basics of buying and renting, there are a number of other things to take into account. So let’s look at your options.
You could invest at home
Before you even consider going overseas, let’s take a look at your options back home. You want to make sure you aren’t leaving green pastures before venturing offshore in search of new ones.
If you invest where I’m from in Cleveland, Ohio, you can actually get decent yields. Cleveland — as we talked about in our last Passport to Freedom conference with online businessman John Tarr — is a linear market. What is a linear market? It means that the price never goes up in value. And he’s right. I remember looking at home prices in the suburbs of Cleveland, Ohio in 1996 and, guess what, the prices haven’t changed since.
In fact, I was looking at a house the other day on some investment income property site and it was only $39,900. If your money is limited, you want high return, and you just don’t care about capital appreciation and think the US market is fantastic, maybe Cleveland, Ohio is your place.
Of course, you always need to do your due diligence, but it is an option.
Just accept small yields
Still, not every city in the US is going to have a housing market like Cleveland. In most places, you’re going to get a tiny yield. And — if you’re not interested in dealing with the administrative work of an overseas rental — maybe you should just accept it.
I talked to a guy the other day who has a $400,000 property that’s making somewhere around $1,600 a month. After paying property taxes and other fees he’s making about 3.5%. People think that you’re always going to make huge returns with rentals, but you’re not.
And that’s the same in places like Singapore where property prices are out of control. In such places you’ll quickly discover that not all investors are in it for the yield. If a jurisdiction seems stable, Asian investors especially are going to invest for the safety factor, not the yield. Consequently, the high levels of investment will drive up prices and substantially decrease yield.
This is what you’re going to get in a lot of US cities. Asians view the US as a safe place to keep their money, and property is their go-to investment. So, if you’re going to invest in the US or other developed markets, know who you’re up against.
Invest in rental properties overseas
If you’re not willing to accept low yields and you’re not a fan of the US market, your final option is to invest overseas. You’ll get better yields most everywhere you go. But how do you manage it?
Your challenges could begin as early as the purchase and could continue with finding and screening good tenants, dealing with tradespeople when something breaks, and contracting property management services without the expenses eating into your yields.
Let’s look at each issue one by one.
Finding the right property
The first rule to increase your yields is to make sure you’re buying at the right price. Throughout the process of buying and renting your overseas property, networking is key; and it all begins when you buy.
I’ve told stories before of saving 20%, even 30%, on deals because of networking. In some cases, like in Georgia, I’ve even gotten deals with a couple banks that wouldn’t sell to a foreigner by knowing the right people. So the network starts when you buy.
The value of networking is one of the big reasons I work with lawyers who know the killer real estate agents. In some of the countries I deal in, there aren’t that many killer agents. This only increases the importance of knowing the right people who can get you the right connections.
Networking has been key to my success. It has taken years to establish the networks that I have. That’s why the transfer of my knowledge and connections to the people who work with me is one of the greatest services I offer.
Finding and screening good tenants
Not too long ago we talked about conducting the perfect overseas apartment search. One of my big suggestions was that you actually GO to the place where you are interested in living. The same goes for buying a property, and can even apply to finding the right tenant.
If you don’t want to spend the time finding a tenant yourself, however, you do have other options. For instance, in some cases my lawyer might offer to have his assistant handle tenant selection for me. All I’d have to do is write up the ad and his assistant would take the calls. That’s one way to go.
Another option, especially if you have a lot of properties, is to hire an assistant full time. To be honest, that’s probably what I would do in a foreign country. For $500 a month in some of these countries you can get someone pretty decent. I recently hired one assistant for $300 a month — and that was a fair income in their country, especially considering that it wasn’t an eight hour workday.
You can hire someone even part-time just to be on call to do something like run an ad, find tenants, drop off a key or check up on odd requests. It worked for me.
Dealing with tradespeople when something breaks
Once you have tenants, you’ll need to have a way to handle things from a distance when things break. Once again, networking is incredibly useful in this regard. When dealing with tradesmen, like anywhere, some are good and some are bad. Networking can help you find good tradesman you can stick with and who will stick with you.
For example, when I bought new construction at my house, I went through some developers until I found a great one. Since then, he has helped me vet other developers and contractors. I’ve even been able to refer clients to him and his connections.
So, if you find the right person, they’ll stick around and help you. In my case, my developer has been very helpful. They’re not all like that, so it’s about knowing the right ones. Network. Network. Network.
Besides having contractors who are typically more handy, tenants in a lot of these countries are used to fixing things themselves. People outside the US tend to think that it’s their fault when something breaks. They’re not going to call you to fix a lightbulb. Much of the property management is simply done by the tenants themselves.
On top of that, you’ve got less liabilities. No one is going to sue you because a banana peel fell in front of the house and you didn’t clean it up. Things like that just aren’t an issue.
Reducing the probability something will break
Here’s some of the best news for overseas property investors: construction quality is often better outside of the US. Properties in the US are some of the flimsiest in the world.
People look at Texas and see that $100,000 can get them a house and wonder why they would want to buy an apartment in Belgrade for $100,000. Let’s look at that reasoning. First of all, Small Town, Texas is not the national, or even state capital. Belgrade is. Second of all, look at all the houses that have been built in the last 20 years in the US, they’re garbage.
Yes, there are other places in the world where new construction is garbage too: see Thailand. Not every property in the US or Thailand will be complete trash, but you have to know where to buy in these places to get good quality.
In a lot of the places where I’m going — Georgia, Turkey, Eastern Europe, etc. — the construction is concrete. Consequently, stuff just isn’t breaking. You can reduce how much you’re going to have to manage down the road by getting good construction to start with.
And it doesn’t have to cost you all that much. I just bought new construction for $700 a meter where I had to put in the finishes. I wanted to find the perfect balance between affordable finishes and products that wouldn’t break, so I went for Turkish and Italian brands. It was neither high quality German, nor flimsy Chinese.
Each purchase fit my end goal: quality construction and sturdy finishes. If you do the same, you’ll find that things won’t fall apart and you’ll have less to manage from a distance.
Hiring a professional property management company
As one reader pointed out, hiring a professional property management company will eat into your profits. There are a couple reasons not to worry much about this. First, having a professional management company is not as important in many overseas markets. As we’ve discussed, you won’t have many of the same issues that you encounter in the US.
Yes, you will need someone to manage your properties on the ground, but not necessarily an expensive management company. In fact, in many markets you’ll be hard pressed to find such a company. Property management simply isn’t as common. Real estate markets aren’t as built up and operate on more loose arrangements.
What a lot of people will do instead is hire an assistant. As mentioned, you can hire someone part- or full-time, depending on the number of properties and amount of work you’ll need done. Between your killer real estate agent, dependable tradesman and affordable assistant, you’ll have built yourself the management team you need.
It all goes back to networking.
For people who know real estate investing, you could even look at starting a property management company. It’s a business opportunity that I frequently tell people about. Just look for countries where there are enough foreign investors looking for that service.
The other reason why you shouldn’t worry too much about property management eating into your yields is that you may well pay less for such services offshore. I see fees in the US creeping up but, since there aren’t as many services to manage overseas, the fees are much lower. People in Poland complain about having to pay 1% for a manager to put a property up on MLS. In the US, you’ll pay 6% and many companies don’t do much more than that.
How do you operate an offshore property as a portfolio?
The fact of the matter is that there just aren’t as many services overseas. It’s not as developed in the sense that there’s no Zillow or Trulia, etc. That can sometimes work in your favor, especially in cities where there are lots of expats, but you have to know how to manage it.
If you’re looking at creating an offshore property portfolio, I would suggest you hire someone to manage your portfolio. In that case, you could then do Airbnb and increase your yield even more. You wouldn’t even need someone full time, just whatever is necessary for them to manage the check-ins and ads.
While it comes with its own set of challenges, overseas rental property manageable is doable. If you network and set things up right from the beginning, you can enjoy the higher yields with little extra stress. If you want my help and connections to set up your overseas rental properties, apply for a Strategy Call.
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