Editor’s note: This story was originally published here Live and invest abroad.
Whether you’re buying from afar or visiting out in the field, there are a few things you need to keep in mind when considering any investment. Things that can make or break it.
To protect yourself when looking at a potential property investment, avoid falling into these common (but easily avoidable) traps.
Mistake No. 1: Making capital appreciation your ultimate goal
When this happens, capital appreciation is a beautiful thing – as it can be in many of the markets we talk about here at LIOS. But for some “shopping to flip”. Estimated Profit This should not be the only motivation behind an investment.
Of course, understand the potential for future growth, but remember that trying to predict price growth is speculation. When you evaluate an investment, look at what it can do for you over the time you hold it. In our constantly changing world, focusing on cash flow – and building consistent wealth year after year – is a safe move.
When researching potential markets, look for a rental investment net yield of 5% to 8%. Do not buy unless you believe you can realistically expect a net return of at least 5% based on reliable market data.
If an asset produces more than 8% net per year, consider yourself lucky, but understand that situation won’t last long. You gain more than 8% from rentals only as a result of some market distortion that will sooner or later return to the average.
If you’re earning a net cash flow of 5% to 8% per year from rentals, that investment is solid. If it falls below 5%, it’s time to consider your options.
Mistake No. 2: Underestimating the importance of location
looking for higher rental yieldMany property investors follow the short-term rental market.
Before you commit to purchasing a rental property, be sure to research the location.
It may be helpful to talk to property managers in the area to help identify which neighborhoods receive the highest occupancy. You are looking for a minimum of 70% to 80%.
Spend time in the area if possible. Take a tour to see who’s renting… and what they’re renting.
Focus on the areas that are most attractive to tourists, but don’t overlook emerging areas that are within reach of amenities. A lower entry price in an area with strong rental opportunities may result in a higher return on investment.
For short-term rentals, walkability is important. Foreign tourists in big cities generally do not want to drive. They want to walk to shops, cafes and restaurants. In major cities, proximity to public transport (especially the metro or tramlines) is an advantage.
Finally, remember that, in this digital age, no matter how attractive your property is on the inside, you can’t hide bad space. If you shy away from amenities, some disgruntled visitor (or 10) will call you out on TripAdvisor.
Mistake No. 3: Relying too much on future plans
Buying pre-construction property can be financially beneficial, but you have to go in with your eyes open… and, as always, be prepared to do due diligence.
If you’re buying one of the first lots in a new development, what happens if no one else buys or builds there? Although you may have to pay more later, it’s usually best to wait until a community exists.
In pre-construction, remember that the future value of your property is based on the community and the amenities that develop around it.
You can reduce your risk by ensuring that you work with a trusted developer with a strong track record.
Mistake No. 4: Taking property ownership for granted
One of the most difficult aspects of property investment abroad is verifying that you have a clean title. In North America, this is something you can take for granted. But overseas, ownership laws vary from country to country and may even differ between regions of the same country.
Senior real estate correspondent Lee Harrison describes title issues as the biggest mistake he has made in two decades of buying overseas property.
A few years after buying a beautiful property along the river in Vilcabamba, EcuadorLee read the title document in detail. Only at that point did he discover that he had not purchased the property outright, but had purchased inheritance shares from four descendants of the original owner.
In the end Lee worked on it, but it could have easily gone in the wrong direction.
Freehold title, sometimes called “fee simple”, is the highest form of property title. This is what you want. Freehold ownership provides the only full form of property ownership, and, generally, it is the only form of land ownership we recommend.
When purchasing property in Latin America, it is important that you have a comprehensive title review according to the laws of the country you are purchasing.
You must hire 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.
Mistake No. 5: Ignoring round-trip costs
It goes without saying that you’ll take the time to research the local market and make sure you’re buying at a competitive price. But when investing with profits in mind, you need to look beyond the purchase price and take into account the costs of acquisition and disposal.
We like to call these the round-trip costs of investing, and they go beyond agent commissions and vary dramatically from country to country.
The investor-buyer who underestimates or under-plans the costs of acquisition and eventual resale may end up diluting his investment before it even makes it.
Depending on the market, the cost of purchasing a piece of real estate in another country may include – in addition to agent commissions – legal fees, notary fees, registration fees, title insurance and transfer taxes (sometimes called “stamp duty”).
There is a price to be paid even for going out. When selling, you may have another agent commission to pay, and you’ll likely have additional attorney fees. These are generally minimal, even negligible. A more significant cost associated with exiting a foreign property investment may be the tax hit.
The bottom line: In today’s world, there’s no excuse for shopping blind. This can be seen with the help of technology. But the necessary research is within your power.