Three Ways to Net Real Estate Profits

Date: 05/25/2007

Saturday, May 26, 2007

Dear International Living Reader,

A recent Money magazine article discussing the state of the U.S. real estate market quotes Robert Shiller as saying that, "from 1890 to 1990, the return on residential real estate was just about zero after inflation."

On the one hand, Shiller is right. If your great-great-grandfather left you a house as an investment property, it probably would be worth about the same today, adjusted for inflation, as what he paid for it (ignoring the potential for rental income along the way).

On the other hand, 100-year averages aren't really the way for a real estate investor to look at the market. Real estate is a long-term investment, yes, but you don't want to figure your returns century by century, do you?

No, as a property investor, you want to look at the type of real estate investment and your specific exit strategy, case by case.

Don't expect 10,000% in three days. If that's what you're looking for, you should be reading an options letter. International real estate investing isn't quick or liquid, and returns typically can be in the three- to four-digit range, not five. However, remember that global property investing doesn't come with the potential for catastrophic loss that can accompany the pursuit of those five-digit returns either.

What can you reasonably expect?

Buying an apartment and renting it out short-term, you should look for a net cash return (if your rental manager is doing his job) of 5% to 8% per year. Occasionally, you'll find a market where you could expect to make more than that. For example, in recent years, Punta del Este, Uruguay, rentals have yielded returns as high as 12% net per year. But that's extraordinary (and less and less true in Punta del Este, as supply and competition are increasing).

A rental investment should also bring you capital appreciation. Depending on the location, this could amount to an additional 3% to 15% or more per year over the short term. But remember that price appreciation eventually will come back to the mean, just as it does with stocks.

That is where your exit strategy comes into play. Buying early in a changing market, you could pick up rental income while your property is appreciating rapidly over, say, the first three to five years you own it. After those initial surge years, sell, take your profits, and move on to the next market. While it isn't that simple, you certainly can get average returns better than inflation if you get in and get out at the right times.

Moving up the risk scale, you could buy land in the path of progress and wait for it to appreciate. Doing this you could see returns of 100% or more in three to five years. That works out to an annualized return on investment (ROI) of about 15% to 25%. You take your chances with an investment in undeveloped land banking on infrastructure improvements to increase its value. However, the downside isn't zero (unless you leverage your investment), as the land isn't likely to be worth less than you paid for it (as long as you paid the going local rate).

Farther along the risk scale is investing directly with a developer. You could do this in two ways--through a "hard money" loan or through an equity stake in the development project. I know development groups who offer up to 25% a year for funds to help them move more quickly through their development cycles. The investment is backed by the land, and the returns are agreed up front--that is, you know going in what your return should be. In fact, you could receive interest payments from the start.

On the equity side, in my experience, developers project from 35% to 80% annualized ROI and more, depending on the development and market risk factors. This is high-risk investing, though. You have to recognize that the project may not complete for various reasons.

However, as long as the investment is backed by the land, again, your downside should never be zero. You'll want to do serious due diligence, though. Analyzing developments and developers takes experience, and I wouldn't recommend an inexperienced investor consider this as one of his first forays into the world of global property investing.

My point, though, is that international real estate certainly offers the potential for returns that can do much more than keep up with inflation.

Lief Simon
For International Living

P.S. Finding the deals in foreign countries requires ground work…traveling, meeting with the right people, visiting properties… I've been doing this kind of ground work in dozens of countries for more than nine years. In that time, I've gotten to know many others also focused on and experienced at making money this way. I've asked them all to join me in October in Monte Carlo for a private international real estate investment conference. By way of full disclosure, this is not an International Living Conference. And it's not for everyone. We'll have one agenda: Opportunities for making money investing in the world's key property markets right now. You can read details of the program here. If you have questions, contact me directly at lief@liefsimon.com. Looking forward to a profitable three days in Monte Carlo.