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Investing • Real Estate

Buying Foreign Real Estate to Get Airbnb Rent Yields

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Reporting from: Kuala Lumpur, Malaysia

A few months ago, I met with several expat entrepreneurs in Ho Chi Minh City, Vietnam. Among all of the business talk, they threw out one local investment idea: sign a long-term lease on a Western-friendly apartment.

The reason was that rents on expat-friendly apartments in Vietnam has been going up. A lot. Vietnamese property owners, who buy real estate for the sense of security it brings them, feel good knowing they have a long-term tenant, even if they miss out on some upside. One guy we discussed at this meeting even PREPAID a several-year lease for a HUGE discount (almost 40%, although I believe that was off the inflated “westerner price”).

Today, I read an article on Gizmodo about buying an apartment just to rent on Airbnb. In case you don’t know, Airbnb is a site that connects property owners and renters with travelers interested in renting a room or the whole house for one night or a month.

There are some nice places on there, and I actually used it myself once.

The concept of the article is that because real estate in some US cities is cheap, it’s easy to buy a small condo – the perfect size for a short-term guest who wants a hotel alternative – and rent it out daily, weekly, or monthly on sites like Airbnb.

The idea is straightforward, and a good one. But, like so many things, I believe it’s better when applied overseas, rather than in The Land of the Free.

You may have read that local governments in places like New York City and parts of California are trying to shut down Airbnb. They claim that these homeowners and tenants are acting as hoteliers and should be regulated – and, of course, taxed – just like a hotel. It’s basically a way for crony capitalism to rear its ugly head in the “freest country on earth”.

While sites like Airbnb might be able to handle the regulatory burden of doing business under such circumstances, no guy renting out his second bedroom to travelers is. And that’s exactly what the government knows.

Despite all of the nonsense claims from the US government about “competition” and “innovation”, the US government is actually anathema to those things. In this case, the author bought an apartment in Las Vegas, a more laissez-faire jurisdiction. He put $50,000 into buying and fixing the place up. While it seems his plan is working well, here’s how I’d run the same plan: Find a condo for sale in a tourist-friendly city outside of your home country. The fewer regulations, the better.

Despite what you might think, the city doesn’t even have to be that developed; less developed cities often have fewer hotel options and the decent hotels charge a substantial premium. Just look at all the $200-a-night Motel 6 knock-offs in Africa.

While it would be hard to find anything decent in another country for less than the author’s $40,000 purchase price, you could find studio and one-bedroom apartments at that price in countries from Ireland to Cambodia. Just as the author did, you’d be wise to put a few grand into spiffing the place up and providing amenities people want. Adding a $100 Apple TV or MP3 dock may not sound like much, but in a place like Vietnam or Ecuador or Ukraine, those things are near impossible to find in any budget-friendly or even mid-priced hotel. Heck, even my suite at the Ritz-Carlton here doesn’t have those things. And that point underlies the main reason I’m more bullish on renting real estate to tourists outside of the United States: less competition.

I’ve written a lot before on the idea that emerging and frontier markets have much less competition than developed markets like the United States.

Two weeks ago, for instance, I shared that the capital city of Laos doesn’t have a metered taxi service.

Imagine being the first to that market.

Do you think anyone would complain that you didn’t have the nicest fleet or the best-dressed drivers if you could save them 50% over the price of a tourist tuk-tuk? In the same way, renting an overseas apartment to tourists is the ultimate form of arbitrage. Most Cambodians have never heard of Airbnb, and because they’re not as comfortable with Web 2.0 applications like Airbnb, they are very unlikely to rent their spare room out to Chris from Topeka. But western tourists with money are familiar with Airbnb, and the concept has been proven successful. You can buy low-price foreign real estate in foreign countries – where growing fundamentals suggest it’s more likely to appreciate than in the stagnant United States – and rent it to westerners who don’t know the local market.

Of course, there’s a ceiling on what a market will bear. But just as an example, I looked at a $33,000 one-bedroom apartment in Phnom Penh, Cambodia two months ago. It was livable, and the current tenant was paying $350 a month. However, for about $5,000, you could have fixed it up to be much more appealing to a westerner.

At that point, you could have flipped it for a decent profit or rented it out for closer to $400 a month (not much more). Or you could have rented it out on Airbnb. Small hotel rooms in the area fetch about $20 a night (more in high season) and offer few amenities. For a couple or small family, you could easily charge a decent premium. Plus, you’d benefit from the cheaper cost of labor to refurbish the property, as well as insanely low property taxes. And in Cambodia, I’d have no worries about the government coming in and shutting me down because I was “competing” with hotels. They don’t care. I doubt few in the Cambodian government have even heard of Airbnb. The issue of management does come up.

The author who bought a condo in Las Vegas found a good cleaning lady who handled his emails for the unit. Personally, I think you could easily handle the emails and calls from other westerners, who would be happy just to talk to someone who speaks their language. As to on-the-ground management, I suspect you could easily find someone local to do your running around for a tiny sum. In a city where (moderately) English-speaking waiters work 45-hour weeks for as little as $75 a month plus tips, help isn’t hard to find.

Granted, you’d have to find the right person, but that’s true anywhere – Las Vegas or Kathmandu. Fortunately, there is plenty of technology to help you with things like keys, air conditioning, etc. While the money isn’t huge on a whole dollar basis, I see this as a nice cash-on-cash yield play for someone who wants to dip their toe into a foreign market.

While rental income from foreign real estate is taxable in your home country, the property itself isn’t reportable to the IRS. And if the government ever wanted to get really nasty, it’s a lot harder to seize a house bolted to the ground than it is money in an offshore bank account.

The idea of taking ideas that work in the developed world and applying them in countries where you can hire labor to implement them for ten cents of the dollar is a trend that I believe will be HUGE. Tourism is growing in countries like China, and western tourists are looking further off the beaten path to countries they wouldn’t have thought of even ten years ago. Use these trends to your advantage and you could create an excellent opportunity that marries low regulation, low property costs, and appreciating markets. As to those entrepreneurs in Vietnam: their goal was to rent properties to westerners without even buying them.

They believed there were enough landlords in Vietnam who would let them sublet their properties out to westerners either at higher long-term monthly rates, like under a lease, or on Airbnb.

If you can find the right deal, you may be able to rent out a property you don’t even own.


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