Many investors who put their capital into foreign property aim for high yields, but not all of them understand that greater initial yields imply greater risk and maybe even
At Tranio, we recommend our clients assessing the risks in advance and developing an investment strategy with an optimal balance of yields, sustainability, labour costs and other capital efficiency factors. For example, a simple property rental business in a stable location with
Tranio's typical investment clients come from Russia, Brazil, Iran or China and are already operating successful businesses that generate their main profits at home. They prefer to gain passive income from their overseas property and take the least possible part in its management. They tend to invest in order to maintain their capital and protect it from political and economic risks in their countries rather than for income.
Most clients do not plan on selling their commercial property in the near future, instead they consider it a contribution to their personal wealth and a guarantee of their children’s future financial
Rental property is the best vehicle for
The problem with
A successful investment starts with a budget of at least €200,000 because, excluding some minor exceptions, it is extremely difficult to buy good quality and
If the budget is over €2.5 million, it's worth considering commercial property like retail premises or retirement homes straight away.
% per annum
||From 1 day||Easy to sell, above average yields, no issues related to evicting tenants, greater rental rate growth potential (compared to
||Management and vacancy risks, faster deterioration (compared to
||From 1 year||Easy to sell, high demand, stable revenue even during crises||Management and vacancy risks, eviction issues|
|Student accommodation||From 6 months||High tenant demand||Harder to sell (compared to flats), difficult to repurpose|
|From 1 year||Easy to sell, good capitalisation potential (growth in value)||Low yields, many tenants to manage, eviction issues, needs a management company|
|High street retail||Easy to sell, good capitalisation potential||Low yields|
||The closer the contract expiry date, the harder to sell|
|Retirement homes||Growing number of pensioners,
||Difficult to repurpose|
|Shopping centres||High yields||Management risks when there are a lot of tenants|
|Hotels||High yields||Difficult to repurpose|
Risks and yields depend directly on the property location, which is why we recommend investing in countries with
Germany is a preferred location for Middle Eastern, Asian and Russian investors because it is easy to access and delivers slightly higher yields. It also has better lending terms and somewhat lower taxes compared to some of the other popular countries. However, some fear that the German economy will be weakened by recent political events and choose the USA, expecting higher capitalisation there.
What currency will you be using in 10 years?
We also recommend taking into account what currency your personal expenses will be denominated in within five to ten years. For instance, if you own residential property in the UK and your children are studying there too, it is worth investing in property that earns rental yields in British pounds rather than, say, US dollars.
In terms of location, it is better to opt for either metropolitan cities and their
The choice of district depends on the property type. For instance, it is better to buy shops in central streets with lots of foot traffic and warehousing facilities on the outskirts of big cities near major transport routes like motorways.
When renting out residential property, the best tenants are middle class representatives with good credit records and stable income. In terms of commercial property, it is better to choose real estate that has major corporate tenants that have been present on the market for decades. Such tenants are less likely to go bankrupt compared to small private companies. You can get the tenant’s financial data from lawyers during the due diligence stage before an agreement is signed.
A property with many tenants (i.e., apartment buildings or shopping centres) is not adapted to the needs and requirements of
How the maintenance costs are shared with the tenant is the key to a successful rental contract as it determines who shoulders the taxes, repairs, utility bills, etc. We suggest mitigating the risks by choosing properties where tenants are liable for the maintenance costs. These contracts are called NN Lease (Double Net Lease) or NNN Lease (Triple Net Lease). The following table shows the different types of rental contracts.
|Contract type||Owner's expenses|
|Gross Rent Lease||✓||✓||✓||✓|
(Single Net Lease)
(Double Net Lease)
(Triple Net Lease,
German equivalent: Dach & Fach)
|Absolute NNN Lease||·||·||·||·|
Property that comes with
When to choose
More importantly, property prices on low risk and low yield markets (generally located in upmarket districts of big cities) grow faster than in areas characterised by high initial yields and high associated risks. In fact, research by Tranio shows that, between 2001 and 2015, the price of property with an initial yield of 3% gained 5% in value per year on average. On the other hand, those with
As a general rule, property with low yields is the least likely to lose value during the investment term, while property with higher initial yields is more likely to lose value (taking into account the probability of potential risks materialising). As a result, property with
Gentrification and price growth
It is important to consider how the area will develop when making price growth forecasts. Property prices grow the fastest where there is gentrification. Gentrification is the process of turning industrial districts into upmarket residential areas. As the neighbourhood develops,
Optimal yields depend both on the risks and the investment term. The shorter the term, the higher initial yield (i.e.,
You can increase yields by getting a bank to finance your investment because the funds attracted are cheaper than the tenant’s rent. For example, an investor in Germany can borrow up 60% of the property value at
In general, the cheapest loans come with floating rates and no early repayment option — the most expensive ones with fixed rates and an early repayment option.
Refinancing property and borrowing too much is not advisable. However, you shouldn't borrow too little either, as it would be strange not to use an opportunity to take out a loan that is cheaper than what the tenants are paying you.
Individuals in Europe and the USA pay taxes in proportion to their income, making it easier to register properties worth up to €1M to individuals. However, it is preferable to register more expensive properties to companies because legal entities usually have flat and lower profit tax rates. Also, companies are allowed to write off loans against their declared earnings, thus improving their tax situation.
It’s best to organise the transaction in a way that allows the investor to pay taxes only in the country where the properties are located — but this option depends on things like where the investor is a tax resident, international agreements on double taxation, the form of ownership, etc. At Tranio, our clients work with tax advisors so as to choose the best transaction structure and take out loans under optimal conditions.
Investors usually own commercial property for
The ability to sell the property at a profit many years later is one of the key investment risks that clients interested in high yields often forget. They are attracted by projects with 8% initial yields or more, such as car parks or student accommodation in remote suburbs, but these properties are hard to sell and have lower demand. Often, to sell them on, you have to drop the prices considerably, which levels out the high initial yields as a result.
With a timeframe of
However, if you are going to sell the property in
If you don’t plan on selling but transferring the ownership to your heirs, it is important to choose the right ownership structure to optimise inheritance taxes. For instance, France does not charge inheritance or gift taxes if the property is registered to a property investment company (SCI). The UK does not impose inheritance tax on the properties registered to offshore companies.
|Residential property||Commercial property|
|Property types||Flats, student accommodation||Retail property in busy streets, supermarkets, retirement homes|
|Countries||Austria, the UK, Germany, the USA, France, Switzerland|
|Cities||Large, with good demographics and potential for economic growth|
|Districts||Areas with favourable living conditions and
||Close to traffic arteries and public transport, conglomerate of properties of the same type|
|Investment term||From 10 years|
|Optimal initial yields||
(can be leveraged with financing)
|Financing||Choose a loan that allows you to reimburse interest first and then pay the principal.|
|Tenants||Middle class, families with children, students, office employees, seniors||Major brands and services companies present on the market for several decades and in good financial standing|
|Lease type||NN or NNN (tenants liable for most maintenance costs),
|Rental term||1 day
Yulia Kozhevnikova, Tranio
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