My Lucrative Long-term Investment Plan

Saturday, Nov. 1, 2008

Read more about investing in overseas real estate in International Living Postcards—Saturday Edition

Dear International Living Reader,

This week I have already written about why, despite market turmoil, I’m still bullish on Fortaleza, and what I consider to be the best way to maximize your return on investment in this market (pre-construction with as little as 0.75% down).

Today, I’m going to tell you about my strategy for the units I have purchased here. As an investor, you need a clearly planned exit strategy and a clear view of whom the ultimate end user for your property will be.

My strategy is as follows. I have taken profits from pre-construction investments in Panama and ring fenced them to use for pre-construction investments in Fortaleza. I’m only interested in low-money-down deals that are competitively priced and with at least a three-year build period.

My goal is to have accumulated a portfolio of income-generating rental properties in the city of Fortaleza in three to four years. I will continue to buy more units than I expect to ultimately hold. This means that I expect to do some flipping along the way to help fund other purchases or the payment of outstanding debt on purchased units. However, at no point will I have to flip to make payments. I’ll have a cushion at all times. Flipping is for replenishing the pot, not paying the bills.

The best time to flip units will be in the months coming up to completion or when you get the keys. I’ve made sure I’ll have the resources to carry units I buy to this point. Given current interest rates (1% per month) where developers offer financing I will keep my debt levels as low as possible. If I enjoy the levels of capital appreciation I expect, my units will be debt-free, as debt payments will be made from profits on sold units.

While this developer financing is expensive, the high cost of capital is one of the reasons that rental yields can be high. I expect to net 15% yields on completion of the city units I have purchased. A great yield if your unit is debt-free...not so exciting if you are paying 1% per month on the outstanding balance on your condo while also repaying the principal.

The units I have purchased are in prime locations and will have broad rental appeal to businesspeople visiting the city, oil executives, young professionals, vacationers, and retirees from southern Brazil, Europe, or North America. While choosing a location with broad appeal, I also have to bear in mind that although lots of people would like to rent a 250-square-meter condo right on the ocean, the market will be extremely limited and yields much lower than you can command on smaller units.

The units that I have bought and recommended to Real Estate Trend Alert members also offer the prospect of capital appreciation. We got in early at pre-release pricing, allowing us to pick the best units while paying less than other buyers. They are located in prime areas and the developers have an established track record.

I expect to see a strong resale market for these units...the same groups that will rent here will also be interested in buying. The same logic applies...you need to aim to appeal to as many market segments as possible.

Ronan McMahon

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