IL Postcard

Hot Tips for Armchair Real Estate Investors

Date: 07/25/2008 Author: Ronan McMahon

Saturday, July 26, 2008

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

“Always buy what you see, not what a developer promises...always visit the country and piece of land before you buy.” These are two of the golden rules of international real estate investing...rules that should NEVER be broken if you are looking for a second home. An investor, however, armed with the right experience and ability to analyze opportunities, can sometimes make real estate investments from his armchair.

If you tuned in last Saturday, you will know the French leaseback program is one such opportunity. To recap, here’s how it works: When you buy (an apartment, house, ski lodge, or student accommodation) through this program, you get a full refund from the French government of the 19.6% VAT levied on new build in France. That’s like getting $1.20 worth of real estate for every dollar you invest...straightaway. The government does this to encourage supply of tourist beds. You then hand your unit over to a management company—typically for nine years—and agree a rental yield (usually 4% to 5%, although it can be higher or lower), which is guaranteed for the nine-year term. The management company takes care of everything…and you get a check or the cash wired to your account, the amount of which is guaranteed. Plus, this rental return is indexed in such a way that it may increase, but it will never decrease.

As you are effectively buying an income stream by participating in this program, you can run the numbers from the comfort of your home and buy without getting on a plane.

There’s another type of guaranteed return deal that gets my attention. Before I tell you what it is, I must give you a word of warning:

Outside of this French leaseback program, whenever a developer talks about guaranteed rental returns, I hear alarm bells. From Dubai to the Dominican Republic, real estate developers “guarantee” rental returns for periods of up to four years. In the industry, it’s no secret how this works: You effectively pay upfront for the rent you will receive during the period of the rental guarantee. If you buy a unit expecting—or relying—on the same level of rental returns to continue at the end of the guarantee period, you will be sorely disappointed. The rental market for your unit will be limited, or, in some instances, practically nonexistent.

However, there are instances where genuine guaranteed rental returns are available. I came across one such deal while attending a real estate exhibition in my hometown of Cork, Ireland. The developer of a project on Isla Margarita, Venezuela, did a deal with a resort operator whereby the operator would rent all the units for an agreed eight years. The unit owner got an 8% rental yield. Both the development and the rental yield were bank guaranteed...if something goes wrong, the bank will honor the commitments of the developer. I didn’t do any due diligence on the deal, but it seemed to tick all the boxes for an armchair investment.

You could also invest in a development company or real estate fund. I am aware of one investment offering that promises more than 10% annual interest payment, a share of profits, and discounts on the end product, should you decide you want to buy a unit there. Frequently, developers also look for construction funding for projects where they own the land and have presold units. Remember, conventional bank funding isn’t available in many markets.

Finally, and as a more conventional route, you could use publically traded stocks to play the real estate market. In markets where the real estate prospects look promising, look for stocks that will profit from the construction boom. Look for the companies that make the cement...import the steel…or lend to developers or companies whose land valuation may not reflect what’s happening in the real estate market. In Brazil, for example, maybe there’s a coconut company that owns huge amounts of land that may have development potential!

It goes without saying that when making any real estate investment, especially from your armchair, you need to invest in experienced professional advice and not rely on “promises.” It can be done...but from your armchair you’re missing out on the fun part: traveling, experiencing, finding and doing deals.

Ronan McMahon

Editor’s note: Ronan loves to travel the world in search of real estate that will earn him money in both the long and short term, but he is a professional and knows the business well. If you would like to get one foot safely on the property ladder, this is one program that is risk free…just sit back and watch the profits roll in. Find out more here.

Read related IL Postcards:

- Turn Every Dollar You Invest Into $1.20...Instantly

- Where to Find the World’s Best Rental Yields

- Diversify Your Way to Wealth