What’s better: yields or holidays? It seems so simple written like this, but most overseas property buyers would choose the latter, probably because it’s much easier to see how you could enjoy a holiday than an excel spreadsheet. The truth is holiday homes are expensive assets that spend your money, but commercial property generates profits, maintains the value of your capital and finances your future — a much better long term solution, right?
Our clients definitely didn’t want to buy commercial property when we launched Tranio, an overseas property brokerage, in 2010. Instead we sold overseas holiday homes to Russians in Europe, the U.S. and Asia.
When we would suggest commercial property, most buyers would automatically refuse because yields were so much lower than in Russia (5% on average) and even a Russian savings account generated twice as much. The majority of clients would only assess the yields, not the risks, and ended up choosing ruble-denominated investments instead.
That all came crashing down when the price of oil went down and the ruble tanked against the dollar. Since then, it has been a tough new era for our buyers and our business: interest in overseas holiday homes has been halved and yet
buy-to-letproperty has gained a lot more interest.
For buyers from rising economies, overseas commercial property is the best way to diversify risks, maintain capital value, grow it over time and create a lasting financial heritage for your children. In fact, it now makes up 50% of our revenue and these real yields (
What is a “yield” or “cap rate”? It’s actually quite simple, it’s the annual rental income divided by the property value. For example, if the property’s worth €100,000 and the rent is €800 per month, the rental yield will be 9.6% per annum.
Profits are also calculated according to the Internal Rate of Return. “IRR” encompasses all money flows during the project period. If you put this money in the bank, the IRR would be the interest rate on your savings. Put simply, it’s the total income you earned over the period of ownership. Let’s say a property costs €10M and its average rental yield had been €750,000 every year for 10 years, and then the investor sold it for €20M, the IRR would be 12% per annum.
Property investment strategies can be divided into two main types: added value and rental income.
“Added value” is a managerial approach to increasing the property operation yields — primarily achieved by seasoned industry experts through construction, redevelopment, renovation and rental income optimisation via tenant rotation or
Moreover, overseas added value projects take up the whole time, requiring strong and reliable local management, if the investor isn’t present
full-timeat property's location, in order to control the project's costs and ensure they are optimized. Ineffective management runs the risk of reducing the project's yield.
The “rental income strategy” is the simplest and safest strategy for overseas property. It could be in residential property, holiday property (e.g., resort apartments) or commercial property (e.g., retail premises, offices, warehousing, etc.) depending on your budget. Our market experience, particularly in Europe, has given us unique insight when it comes to advising our clients.
How to choose:
Tip! If your budget allows it, Germany’s “Big Seven” cities (e.g., Berlin, Hamburg, Düsseldorf, Cologne, Munich, Frankfurt and Stuttgart) as well as Vienna, London and New York are safe bets.
Yields depend directly on the balance between location, tenant reliability and liquidity. Unfortunately, most investors want high yields without the risk, but it doesn’t work that way. You can’t buy a property with a “risk level” of 3% and expect it to earn 7% yields per annum.
The safest choice to guarantee your revenue is a central district of a big European city with a reliable tenant and
From my experience, the maximum yield with acceptable risk is
At the moment European mortgages have
So before you invest, just remember you need a sound investment and financing strategy that includes potential risks and how to deal with them. When it comes to overseas property, don't risk too much as you won’t be there to manage it most of the time. Instead, think of it as a way to maintain and grow your capital as real estate prices rise faster than inflation on average. Be conservative and only take on acceptable and controlled risk. You may not be earning profits like Richard Branson but you will be securing a comfortable life for you and your children.
George Kachmazov, founder and managing partner at Tranio
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