My next post is a long one! In this i will try to explain how you should think when you are going to invest in real estate outside your own country.
1. First of all invest in residential properties in cities , not in tourist projects.You can invest in various types of commercial real estate, retail space, warehouses, offices etc but this requires a completely different skills et than investment in housing. Admittedly , the returns are generally higher in commercial real estate as are the risks. Housing is significantly more stable and the value should increase over time. Therefore, it is undoubtedly best to stick to residential real estate if you are new to the industry and have limited capital.
Large cities have historically proven to be a strong card, especially thanks to the urbanization effect.If you choose toinvest in beach -ski and golf resorts your future is much more uncertain than if you choose to invest in permanent housing. Brokers often presents very enticing incentives such . X % guaranteed return for Y years . 20 days free use of your property each year. A credit card loaded with the equivalent of 10 000 that can be spent locally in shops and restaurants. The problem with these holiday properties is that they often will be vacant most part of the year, which means that your revenue is uncertain. Moreover, the exit strategy is even more uncertain.
2. Buy below market value
Market value refers to the value of the property you are buying. By definition you are paying the market value when you buy a property, but the market is what similar projects in the same area are selling for.
By ensuring that the price is a bit lower than for the corresponding project in the area you ensure avoiding losses if the the market goes down or crashes.
However, one should remember that if the housing market is hot, no construction companies want to sell too much below the market price because they know that they can sell to locals at the market quite quickly. Skilled investment agents succeed nevertheless often to negotiate a discount, in some cases up to 10% to give an undertaking to sell a certain number of houses before a project starts. The advantage for construction companies is that they then early in the project can access capital and rely less on banks for financing.
3. Purchase only in markets that have an expected capital growth of 10 % over 5 years
We live in a very exciting time . Many countries in the world that were formerly communist dictatorships are now converting to markets at a furious pace . The population in these countries are equally interested in a high living standard as we in the western world.
Housing prices in these countries begin at an extremely low level. Country after country is now taking house price momentum and gradually there will be a harmonization of rates in the western world. Here ‘s a great opportunity for us investors to take advantage of capital growth by making the right investments.
4. Base investment decisions on analysis and facts, not personal preferences and feelings
I recently spoke with a senior portfolio manager at the firm Obelisk International. Their mission is to perform analysis over the world and tell the construction company when and were they are suposed to start building and selling properties to investors and ensure that their clients makes a good profit and return. They even call their clients and tell them when it’s time to sell to constantly maximize returns in the portfolio.
He said several times during the call:” I do not care about the property , All I care about is the profit” .
There is a lot to think about in that quote . Obviously, it is much cooler and more fun to invest in a newly built resort in the Caribbean with 30 days personal use per year instead of an apartment building on the outskirts of Bucharest or Sofia in an area that God seems to have forgotten with only fully paneled buildings. But if the opportunities for making money is higher in Romania than in Barbados then the money should go to Romania regardless if you like the area or not.
Another investment broker said:
”Property investment is about cold , hard facts and absolutely zero emotion”
Whether you invest in a place that is ”charming”, ”cozy” or can be described with similar adjectives doesn’t matter. This is not about getting ”a place in the sun” where you can sit with a Pina Colada in your hand on the balcony and watch the sunset. This is purely about profit. How you then choose to take out and consume your increased prosperity is another matter entirely . There is absolutely nothing wrong with buying a holiday home on the French Riviera, but the important thing is that you do not let yourself be fooled into thinking that it is an investment.
5. Invest only in markets that have a functioning mortgage market
Domestic banks are generally not interested in financing housing projects abroad. In order to build a healthy portfolio it’s therefore required that the projects can be funded locally.
A good rule of thumb is that there should be loan products which ones have the worst conditions LTV 70 % were 20 years with 7% interest . Ie . You may borrow up to 70% in value and pay off in 20 years and an interest rate of more than 7% . Higher leverage, longer repayment period ( amortization completely free and lower interest rate is obviously even better)
6 Financing and refinancing
The great potential in real estate investment is that you can fund with the money of others. If your project is funded 80% with borrowed money , this means that an increase of 5 % gives you an increase of 25% on your own invested capital .
Its Important to remember that if you borrow against your property too hard it will generate a negative cash flow (sum of rent minus expenses , taxes, interest and amortization ) . Ideally, the property should generate a positive cash flow within 2 years after completion, with an LTV of 70 % of the value you bought . If you achieve this in an emerging market , you have probably made a decent business .
The real strength of the real estate investment lies in refinancing . Assuming you are buying for 1 million( high number, i know but its just an example) of which 300 thousand are equity. After 3 years, the property has increased it’s value to 1.3 million. If you then refinance up to 70 % of the value again , you will be able to pick out 210 thousand in equity from the property ( 0.3 × 0.7) meaning that you would take home 70% of
the capital you first invested without having to sell the property. In other words, you have money that you do not have to pay taxes on (you have not sold anything yet ) that you can reinvest in new projects.
Of course , you can also lose big on leverage . Historically, it has been shown that properties of virtually all ”real” markets tend to rise in value in the long run. The reason that banks lend money to you for property investments but barely anything else is that real estate is considered to have a more lasting value than other types of investment .
7 Invest only in projects that have a clear exit strategy
Before committing yourself into an investment , you need to be absolutely clear about who eventually will sell to and when this will occur , and that potential buyers are willing to pay a price that allows you to make a healthy profit.
This principle is strongly tied together with the first. Take del Sol in Bulgaria for example, where prices on new developments have soared. The problem is that there is no secondary market , prices are only inflated by international investors. It’s the last thing you want to do. Dubai is another market that I have great doubts about even though the yield is very high.
I see two possible exit strategies :
Buy- to-let (2- 5years )
In the first you invest in an early stage of the project and sell directly when the property is ready for someone to live in. The advantage is that you avoid all the trouble and initial costs of renting out the property .
If you go with the second one, you keep the property and leverage it as much as possible without effecting loan terms and cash flow. And then you lease it for a number of years , preferably 2-5 years and then sell.
In a market that has stagnated or is about to stagnate the first strategy is preferable. If it is problematic for foreign investors to buy and let, it may also be preferable. The second strategy is good for capital growth. Since you are already positioned, you should continue to take advantage of this .
NOTE that you must always be prepared for the second strategy. The real estate is an illiquid market and you can not always sell when you want to.
8 Invest only in projects that require a maximum of 30 % of total investment before completion .
Ideally, only 20 % cash . The advantage of this is in the nature of financing and refinancing. Suppose you invest one million, 20 % of which is your own cash two years before completion . If the capital growth is a total of 20 % in the two years you will have made 100% on your deposit before you have even had to think about financing.
Adding 20% cash then give 5 -fold amplification of the investment.
9 Create a relationship with an investment agent and build a diversified property portfolio .
Diversification ( risk spreading ) is something that is debated a lot. Your banker wants you to spread your risk . Men who Kyiosaki , Buffet , and Trump says that you should focus instead.
I recommend that you focus on international real estate transactions , but diversify your portfolio. Trump seems to follow the same strategy that I am(or if it is the other way around ) because he invests in real estate around the world.
It is also, in my point of view , necessary to team up with one of the investment agents (there are some UK companies , Property Frontiers Property Secrets , obelisk that seems to be the best at this). These companies specialize in looking up attractive projects and to conduct extensive due diligence and negotiate attractive contracts for their investors .
10 Investing only in markets that are driven by ” real ” demand from the locals not only by international investors
The risk of bubbles is present mainly in tourist markets. By following the first principle and only invest in markets that are driven by the need for shelter from the locals , you will create
a big lead against a large portion of the people who invest in property abroad today.
I’ve mentioned Costa del Sol in Bulgaria earlier, also the coast of Marocco is becoming increasingly popular among investors. There are ski resorts in Eastern Europe with a lift system with a total of 13 km of slopes (which is equal to nothing) where prices soared. The problem with these markets is that they simply lack the secondary market , which means that the valuation is not even worth the paper it is written on .
If you follow these principles , I can almost guarantee that you can go from empty hands to financial independence for life within 5-10 years . For example if you go to your bank and ask to borrow 200 thousand that you invest in a project that is looking bright , finances locally , once completed , using the money that you could take out from the first project to reinvest , refinance when available , sells when it is appropriate , then you set the stone rolling and it will continue to roll your way.
The timing is very good for our generation. Internet and globalization makes it possible to act globally, even as a small player. Meanwhile, there is a large portion of the world’s population who now wishes for the same living standards as the rest of us. This opportunity allows you to take advantage.
Hope you find this little guide helping!