Pre construction condos - Airbnb strategy anyone else?

Question

New at BP just red the book on rental property investing (awesome!); i bought my first pre construction condo at Guadalajara Mexico, didn't really know what i was doing but end up by being a great investment; in Mexico a mortgage rate is above 10% so it wasn't an option; by buying on pre construction i paid 30% and the rest on 18 monthly payments; starved my family to death (i'm not recommend it doing like this!) but after 18 months we had our unit paid; i rented on airbnb with pretty good returns (7% ) and now just 20 months after i got the unit i'm selling it (gained 65%); buy another two with the same vendors, put a little bit of my own cash (not starving at all this time), let it grow, repeat, mantain an awesome pyramid investment uthopy sort of thing. Anyone else that can share their experience by buying pre construction condos? just listened at a few Canadian podcast and helped me tons.

John Farkas · Answer

@Mike Lambert

Good post and points.

You are right about the low ROI due to cash market in developing countries. I was able to get developer financing on one project, but the downside is the 9% interest rate which is pretty standard in Mexico from what I have seen.

Where in Uruguay are you suggesting is a good STR market?

Julieta Osuna · Answer

@Benjamin A Ersing Thank you so much on sharing your experience; i've learned several things by the answers i got on this post! but one of them is thata apparently a beach condo on a place like PDC may give great returns thru Airbnb but, it may stay vacant some months of the year; while where i live (Guadalajara) i don't have that high returns on any month but is pretty average during the whole year.

John Farkas · Answer

@Julieta Osuna Hi Julieta,

I only have one condo operational in PDC, all others are under construction. I am getting a very modest 4% ROI, but I am OK with that because it is a passive investment. As stated previously I Did have some great months using airBNB during high season, but that also came with 2 months of no bookings during low season. So I opted to lease out yearly to ensure a positive cashflow. The developer was the Kaua Group and the development is Solea. They did meet my expectations overall. The unit is lovely and well constructed however I have learned that it is unrealistic to expect no issues. I had an AC unit go out in one instance and also there was a plumbing problem as well. Both of these incidents lead to me having to payout my Airbnb guests. I did have my real estate agent request reimbursement from the developer and I did get my money back, but it took a couple of months so overall I am happy. There are a lot of good developers and developments in PDC & Tulum. My other condo in PDC is Ipana by Simca Desarrollos which is still under construction.

John Farkas · Answer

Hi Julieta,

I am also an international pre construction condo investor as well. So far I have done alright, but I have a unique strategy specifically for my situation. I am planning on retiring in 2030 so I am acquiring various condos around the world. I have no US properties. My first condo in Playa Del Carmen is operational and I am clearing $535 per month on a long term rental contract. I did do the AirBNB STR for a while and some months I made $1500 after expenses and other months I made nothing and actually had to send money to my property manager so I went to long term contract for now.  I have other condos under construction in Playa, Tulum, Pattaya Thailand and Phnom Penh Cambodia. I like the pre construction because it gives me time to come up with the money on a schedule. I know that my returns are not great and most others would suggest a different strategy for better returns, but I like my properties and I will be able to use them on occasion for vacation and/or retirement. Part of my retirement strategy involves travelling a lot, especially in SouthEast Asia (Vietnam, Cambodia, Thailand, Malaysia) as the cost of living is much cheaper than the US and I enjoy the food & culture. Sorry to hear that you are not happy with your condo, it can be hard to get out of it at times. I really love my condos and their locations. I look at it like this: I paid $177K for a beautiful large 1 bedroom condo 5 minutes walk to the beach, How much would that cost here in California? To me it is a great deal. I paid my property taxes a few months ago, it was $94 for the year. I am done collecting condos in Mexico, but my new focus is Cambodia. I just bought a nice 2 bedroom (converted to 1 bedroom) for $74K in a mixed use building (residential, office space, ground floor retail). Think of Phnom Penh Cambodia like Bangkok Thailand was 30 years ago. I think it is a great place to invest and so does the Nomad Capitalist. My advise for what its worth would be to diversify a bit. I am not sure what attracted you to Guadalajara, I am mostly attracted to beach front tourist destinations (who doesn't like the beach?). My only condo that is not by the beach is my Phnom Penh which is the capital city of Cambodia. I bought that one because it was a great investment and I liked the building schedule due to be complete in 2023.

Julieta Osuna · Answer

Mike thank you so much on the insight, i have absolute no one besides real state salespeople who sugarcoat everything that gives me feed back so i appreciate reading from you tons. I actually don't love the idea of the 7% return on rent so that's why i want to sell it, while i have it on sale i'm still renting in on airbnb so is not a complete lost (really slow these days for obvious reasons), i do believe i'll keep it for a few more months since people is not buying much real state these days but i'm in not hurry since i don't have a mortgage to pay and airbn can cover at least my expenses. THank you so much!!

Julieta Osuna · Answer

HI John! Awesome how international! I invest in Guadalajara because I live in Gdl, but i'm chasing higher ROI with minimum invested so I can keep UP with my strategy, would you mind sharing what ROI did you get with your pre construction condos ar PDC and Tulum? Would you mind sharing the developer if they measured your expectations? Thank you!

Mike Lambert · Answer

@John Farkas

Like you, I've been investing internationally but more as an investment than for my own use. Although I love the fact that I could use some of the properties for my holidays if I want. I bought in Playa Del Carmen but not in Asia.

I don't understand why you don't make more money in Playa Del Carmen. Obviously you need to have the right property at the right location and that might well be the case. But you need to do the right marketing. I'd never use a property manager for short-term rentals. They're very expensive and most will do an average job. They have plenty of properties to take care of so yours are not your priority. It's become so easy to self-manage with platforms like Airbnb I don't understand why people still use them and get mediocre returns as a result.

I answer to plenty of posts about Playa Del Carmen in this forum that my aim in responding to yours was more to comment about Asia.

As a general rule,  I'd never invest in real estate in Asia for two main reasons:

1. It doesn't make any sense financially. In Latin America, it'd be much more expensive to rent than to buy so it makes sense to buy. In Asia, it's the opposite. It's much cheaper to rent. You can rent a luxury furnished condo in downtown Bangkok for $600 so it makes no sense as an investment property.

2. While in Latin America or Europe you're generally treated as as equal to the locals as an investors (some countries guarantee it by law), you're considered a second class property owner as a foreigner in many Asian countries. As a result, you cannot own land as a foreigner. Therefore, you can only buy a condo and, even then, you can't own the ground that's under. Good luck if you have to go through the local court system and win against a local. I know that Cambodia actually has laws that has somewhat less unfavourable to foreigners. But it might be useful to remember that it used to be a communist country. Comparing prices in Phnom Penh to California makes absolutely no sense. If you ask people where they'd want to live between the two places and you probably get 99% California.

Of course, you're rightfully telling us that your situation is different to most here as those properties are primarily for your own use rather than as an investment vehicle. Even if I was in your situation, it makes absolutely no sense financially and I will illustrate this with a simple calculation.

I don't know your age but I assume you are between 20 and 80, so 50 on average. Given the average life expectancy, let's assume that you have 30 years left to live (I wish you more) and that you're still capable of traveling between Playa Del Carmen, Pattaya and Phnom Penh until you're 80. Let's assume that your Phnom Penh condo is delivered today. Let's assume that you can rent a condo at least as luxurious as yours for $500 a month.

Let's compare it with the rent option. The good news is that your rent payments are future payments and money tomorrow is worth less than today. So I'm calculating the net present value of a monthly $500 payment over a period of 30 years. I'll use 10% as the discount rate because that's what I can get on average in the stock market at the click of a mouse. If your alternative would be to buy real estate in the US, you could easily make 10% as well, especially if you borrow.

The NPV of the rental payments over 30 years is only $56,975, so already much less than the $74,000 you paid for the property. However, the comparison doesn't stop there. Let's make the assumption that you won't buy properties in other locations and so you'll spend your time equally between Playa Del Carmen, Pattaya and Phnom Penh.

If you buy, you'll spend $74,000 but you'll rent two thirds of the time, which will make you $56,975 * 2 / 3 = $37,983. So, buy renting over 30 years, you'll only get back half of the purchase price of your condo!! The conclusion here is that you'll be out of pocket for $74,000 - $37,983 = $36,017.

If you rent, you'll pay rent only one third of the time or $56,975 / 3 = $18,992 or half the cost of buying.

The difference between buying and renting is so large that it'll remain in favor of renting even if you change my assumptions.

While the property might increase in value over time (or not) you'll never be able to enjoy the increase in equity since you'll keep the condo to live in it and you can't refinance.

Of course, it's always nice to own your own property so that you can arrange and decorate it as you want and it might have a more homely feel. But there is a very high price to be paid for that. It will cost you two times less to rent than to buy. And then, when you rent, you don't have all the risk and hassle associate with owning a property, you'll probably will be able to rent a more luxurious place and you'll have variety because you can rent a different place every year. Also, the rental decision is much easier and less onerous to reverse if you decide at any time that you don't want toi live in Phnom Penh anymore for whatever reason.

If you do the same calculation in the right places in Latin America, you'll see that the result of the calculation will be completely reversed.

Of course, forget all that I wrote if you absolutely want to own or $74,000 is pocket money from you but this is an investment forum so I took it from that perspective.

In any case enjoy your nomadic multi-country life. It's awesome.

John Farkas · Answer

@Mike Lambert

Financing deal is 30% down

70% financing after delivery 36 months at 9%

Mike Lambert · Answer

@John Farkas

Thank you

What was the term (length) of your financing? Was it before or after construction/delivery? And what was the LTV?

Regarding Uruguay, I was referring to the coast East of Punta del Este towards the Brazilian border. I wasn't necessarily suggesting it's a good short term market, as it is subjective, depending on the investor's objective and return expectations.

Mike Lambert · Answer

@Julieta Osuna

@John Farkas

Pretty much everywhere, property prices have increased much quicker than long-term rents. So, if you have to pay cash for a property, your ROI will be low.

In developed countries like the US or Canada, investing in long term rentals can be profitable because you can get a mortgage at a very low interest rate and your tenants will pay for your mortgage. Moreover, you can get your invested money back by refinancing. You can do that in Europe as well (although not necessarily the refinancing part) but I wouldn't want to be a foreign investor in a country that are laws favorable for the tenants.

In developing countries, while property prices are lower, long term rents are generally extremely low and the demand is low because of the lack of a large enough middle classes; the wealthy own their own property so they won't rent.

If I want to invest in short-term rentals however, I'll do it outside of the US and Canada. Why? To illustrate this, let's compare a short-term rental in Mexico vs the US:

1. An equivalent property is much cheaper in Mexico than in the US.

2. Yet, the potential rental income will be much higher in Mexico for the following reasons.

3. The nightly rate will be higher in Mexico as people are willing to pay more for a holiday in the sun.

4. The season will be much longer in Mexico, which will translate in a much higher occupancy.

5. The competition in Mexico is much less because there is less offer and more demand. There is less offer in Mexico because only the properties that have a western level of luxury can be rented will there is a massive influx of tourists in Mexico every year.

6. While Mexico encourages short-term rentals, they are (strictly) regulated if not outright banned in the most popular US destinations (that is when they are not already banned by the HOA).

To partly compensate for that, the US has the advantage of the mortgage. However, if, like me, you manage to get financing in places like Mexico, there is no contest!

Finally, long-term rentals have the advantage of full or almost full occupancy. However, in most places, short-term rents are so much higher than long-term rents that you'll almost always make more Monet if you choose the right property in the right place and execute the right marketing strategy.

For example, in Uruguay, there is an area where you can make a double-digit rental return by renting your beach house during only two months of the year (in high season obviously). So, you'd make more money renting over just two months than most long-term renters make over a whole year.

Pre construction condos - Airbnb strategy anyone else?

Most Popular Reply