Editor’s Note: This story originally appeared on Live and Invest Overseas.
Whether you’re buying from a distance or going out into the field, there are certain things you need to be aware of as you consider any investment. Things that can make or break it.
To protect yourself as you size up potential property investments, avoid falling into these common (but easily avoidable) traps.
Mistake No. 1: Making Capital Appreciation Your Ultimate Goal
Capital appreciation is a beautiful thing when it happens — as it can in many of the markets we talk about here at LIOS. But “buying to flip” for some projected profit shouldn’t be the only motivation for going after an investment.
Understand the potential for future growth, of course, but remember that trying to predict value growth is speculation. As you weigh an investment, look at what it can do for you over the time you hold it. In our ever-changing world, focusing on cash flow — and building wealth steadily, year after year — is a safer move.
In researching potential markets, look for a net yield from a rental investment of 5% to 8%. Don’t make a purchase unless you believe, based on reliable market data, that you can realistically expect a net return of at least 5%.
If a property produces more than 8% net a year, count yourself lucky, but understand that the situation won’t last. You net more than 8% from a rental only as a result of some market distortion that sooner rather than later will return to the mean.
If you’re earning net cash flow of 5% to 8% a year from a rental, that investment is solid. If it falls below 5%, it’s time to consider your options.
Mistake No. 2: Underestimating the Importance of Location
In seeking higher rental yields, many property investors go after the short-term rental market.
Before you commit to buying any rental property, be sure to research the location.
It can be helpful to speak with property managers in the area to help identify which neighborhoods receive the highest occupancy. You’re looking for a minimum of 70% to 80%.
If possible, spend time in the area. Walk around to see who is renting … and what they’re renting.
Pay attention to the areas that are most appealing to tourists, but don’t ignore those up-and-coming areas that are within reach of amenities. A lower entry price in an area of strong rental opportunity may result in a greater return on investment.
For short-term rentals, walkability is vital. Foreign visitors in big cities typically don’t want to drive. They want to stroll to shops, cafes, and restaurants. In major cities, proximity to public transport (especially a metro or tramline) is an advantage.
Ultimately remember that, in this digital age, no matter how attractive your property is inside, you can’t hide a poor location. If you’re far from amenities, some disgruntled visitor (or 10) will call you out on TripAdvisor.
Mistake No. 3: Over-Relying on Future Plans
Buying a pre-construction property can be financially rewarding, but you need to go in with your eyes wide open … and, as always, be prepared to do thorough due diligence.
If you’re buying one of the first lots in a new development, what happens if nobody else buys or builds there? Although you’ll pay more coming in later, it’s usually best to wait until some community exists.
In pre-construction, remember that the future value of your property is based on a community and amenities developing around it.
You can minimize your risk here by ensuring that you work with a trusted developer with a strong track record.
Mistake No. 4: Taking Property Title for Granted
One of the trickiest aspects of property investing overseas is verifying that you’ve got a clean title. In North America, this is something you may take for granted. But overseas, ownership laws vary from one country to the next and can even vary between regions of the same country.
Senior Real Estate Correspondent Lee Harrison cites titling issues as the biggest mistake he’s made in two decades of buying overseas property.
A couple of years after buying a beautiful riverfront property in Vilcabamba, Ecuador, Lee got around to reading the title document in detail. It was only at that point that he discovered that he hadn’t bought the property outright, but rather had bought shares of an inheritance from four descendants of the original owner.
Lee worked it out in the end, but it could just as easily have gone the wrong way.
A freehold title, sometimes called “fee simple,” is the highest form of property title. This is the one you want. A freehold title provides the only absolute form of property ownership, and, generally, it’s the only form of land title that we recommend.
When buying property in Latin America, it’s critical that you have a comprehensive title review performed in accordance with the laws of the country you’re buying in.
You’ve got to engage a qualified local attorney. A local real estate attorney will be experienced in finding liens and judgments and will know the types of local problems to look for.
Mistake No. 5: Overlooking Round-Trip Costs
It goes without saying that you’ll take time to research the local market and ensure that you’re buying in at a competitive price. But when investing with a profit in mind, you need to look beyond the purchase price and factor in the costs of acquisition and disposal.
We like to call these the round-trip costs of making an investment, and they go beyond agent commissions and vary dramatically country to country.
The investor-buyer who underestimates or under-plans for the costs of acquisition and of eventually reselling can undermine his investment before he makes it.
Depending on the market, the costs of purchasing a piece of real estate in another country can include — in addition to agent commissions — legal fees, notary fees, registration fees, title insurance, and transfer taxes (sometimes called “stamp duty”).
Exiting comes at a cost, too. When selling, you may have another agent commission to pay, and you’ll likely have additional attorney fees. These are usually minimal, even negligible. The more significant cost associated with exiting a foreign property investment can be the tax hit.
Bottom line: In today’s world, there’s no excuse for buying sight unseen. The seeing may be with the help of technology. But the necessary research is all within your power.
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