Hi @Avi Levi (and everyone),
I was in the same situation a few years ago when I started investing in real estate so it might help you out if I tell you a little bit about my story.
Firstly though, I always listen to others but I eventually make my own opinion based on facts. When it comes to a bubble, there are some clear signs, like when the price to rent ratio is way too high or when the average buyer cannot afford the average home or only can afford it at ultra low interest rates. If you look at it this way, you'll see that huge parts of North America and Europe are in the midst of a huge bubble of epic proportions. It is fuelled by ultra cheap credit most of the time and it explodes when interest rates significantly increase or when there is a recession that closes banks to significantly restrict credit. However, as you'll see in my story, you don't need to know for sure whether there is a bubble or not as you can just use your common sense.
I was living in Montreal, Canada, when I decided to start investing in real estate (and I still am) and the easiest place to invest is obviously your own backyard. Montreal is considered a stable market and so the CAP rate has been traditionally low, at around 5% (it's actually closer to 4.5 as the market gets hotter and hotter). I don't know about you but I don't wan to make a return of just 5% on my money. Especially since I could get a higher return at a click of a mouse by investing in a stock market index fund and without having to find a property, deal with tenants,.... Make a higher return in real estate at a constant 5% would be possible provided that rents would go up to generate more income and prices would go up to generate capital gains. In order for rents to go up, you need income and salaries to go up. In order for the value of multifamily real estate to go up, you need rents to go up and so you need again incomes and salaries to go up. And, in order for residential real estate value to go up, you need buyers to be able to afford a higher mortgage and, therefore, incomes and salaries need to go higher again. So, generally speaking, you need a continuous rise in income and salaries to have a sustainable growth in the value of properties and the income they generate. As you might now, incomes and salaries have been stagnating over the last decades in developed countries and there are no prospects of that changing any time soon, given the state of the economy. So you might ask why the value of properties has increased so much during that same period. The answer is simple: ultra low interest rates. They have allowed buyers to afford a higher mortgage without having to earn more money and renters to pay higher rents by going an a borrowing binge to finance their lifestyle. The problem is that we might be getting to the end of this game as interest rates can hardly get any lower and buyers and renters reach the top of their borrowing capacity. I therefore concluded that, on the one hand, the upside is limited, at least in the short to medium term. On the other hand, the downside is potentially big. Indeed, should interest rates increase significantly or should the banks restrict borrowing as a result of a(long overdue) recession, the market could drop and drop hugely. So we have here an investment with limited upside and a potentially big downside, which is exactly the opposite of what a great investment is: a potentially big upside and limited downside.
So I thought about ways to increase the profitability beyond the 5% cap rate. Of course, I cannot control the market-driven prices but I could try to get (significantly) more rents. Yes, rents are market-driven as well but I could get significantly higher income by doing short-term rentals. The problem is that, like more and more cities, Montreal has pretty much banned short-term rentals. And, even aside from that, the competition is getting cut-throat and it becomes less and less profitable. Cut-throat competition is the main problem in Montreal, as more and more buyers and investors are competing over and overbidding on a shrinking supply of properties (owners aren’t motivated to sell since prices are going up, which creates a bubblicious spiral in prices).
That is when I decided that I needed to go overseas to make some more serious money. Granted, you can make money in Montreal by buying unrenovated properties, raising the rents and refinance but you have to find a deal, it works in 1 building out of 200 and everybody wants to do the same so there is huge competition. This is definitely not good for passive investors.
I wanted to escape the markets with cheap money and cut-throat competition and I decided to do short-term rentals in locations where tourism is booming to get high rental income and where there is a path of progress for high capital gains. We are talking here about places like Mexico, Central America, the Carribean, South America and certain parts of Southern Europe. In these places, there are mostly no turnkey operators like those you have identified so I had no choice than doing it on my own. Thankfully, during my previous career as an international banker, I had been covering those regions and I got precious contacts with developers. After leaving that career, I traveled the world to identify the best markets and opportunities and using my existing network to create a unique network of real estate developers, agents, lawyers, builders, … for future use.
I had great connections on the Riviera Maya in Mexico, which was in the midst of an incredible economic and tourism boom, with a hotel occupancy rate of between 80% and 90% all year. I figured out that I could buy brand new luxury condos in pre-construction in an ideal location and make rental returns above 20%. That's more than 5 times Montreal's CAP rate. Granted, that's Montreal's CAP rate is for long-term rentals. If you compare short-term rentals between, Playa del Carmen and Montreal, the rental rates are much higher, the occupancy is much higher given that the season is much longer, the property prices are much lower and. While it's mostly illegal in Montreal, there's no chance of it becoming illegal in Playa del Carmen. Doing short-term rentals in Playa del Carmen sounded therefore like a no-brainer.
Montreal has one big advantage though: the availability of leverage through cheap mortgages, which Playa del Carmen doesn’t have so this reduces the advantage of Playa del Carmen. I thought that it didn’t make sense to go through the complications of investing overseas if I wasn’t gonna make a significantly enough higher return. So, I looked for a way to get leverage in Playa del Carmen as well. This is where my personal relationships with the best developers in the area can in handy, as they gave me deals that are only available to their close network. I could buy into new pre-construction condo projects before the project is launched at a big discount to the launch price and I could pay 50% of that discounted purchase price over a few years after the delivery of the condos. Given the very strong short-term rental market, I’d be strongly cash-flow positive even after debt service and so I was able to put much less than 50% down in a 100% cash market. I get access to private deals like that in several tourist hotspots across the world but there was a limit to what I could do with my own money.
Investors asked me if they could invest with me. I arrange the deals and do everything. They come up with the down payment and we own the property 50/50. They could wait for the launch of the project and buy a similar property and own 100% but they make a much higher return by investing with me rather than by themselves as they benefit from the combination of leverage and a lower purchase price. What is even better is that they are getting this much higher return by taking a much lower risk. Indeed, investing in overseas and in those countries, while potentially very profitable, can be very risky if you don’t have the right knowledge and connections. By investing with me, the investors benefit from my knowledge and connections, which significantly reduces their risk. I’m very risk averse and I’d never handed over any money to a Mexican developer if I didn’t know him personally or at least have somebody I trust who did. So that is my USP or unique selling proposition: my investors make more money, do less (nothing) and take less risks than if they were investing by themselves.
So there you have an example of both situations: me investing by myself and investors investing with me. Generally, you will make less money if you invest by yourself than through a turnkey provider but you will have nothing to do and you won’t need to acquire the knowledge if you invest with them. So, it’s a trade off. However, if, like me, these companies can give you a higher return and reduce your risk compared to you investing by yourself, it’d be a no-brainer to work with them. Their only drawback is if you want to be actively involved unless they take on active partners like me.
Finally, while this kind of investment is very profitable to my investors and myself, the developers in this type of country are making the most money and in a much shorter time frame. This is why I’m now working on two condo development deals, one in Puerto Vallarta and the other beachfront in the Dominican Republic. I can do this only because I have the necessary connections. As an ex-banker, I will do the finance part and deal with the future investors and my local partners will bring the experienced contractors and builders to carry the project. This is very profitable because we’ll sell in US dollars to foreigners or wealthy locals and our costs will be very low and incurred in the heavily depreciated local currency. Moreover, if we pre-sell a lot, we’ll be able to finance most of the project with our buyers’ prepayments, which is basically 0% financing. This means that our future investors will have to invest will be relatively limited and the combination of limited investment amount, big profit and 0% financing means big returns for our investors. We’re confident we’ll pre-sell a lot because we’re going to offer request a 50% down payment while the competition requires 100% so we’ll have a unique and better product. So, we should do very well with sales, especially if we find the right people to do our marketing. Even though the pre-sales should considerably reduce the risks of our investors, some of them might still prefer to not go into development. In that case, they’ll have the opportunity to be buyers and get a high investment return on their purchase given that they’ll only have to put 50% down. Basically, we’ll give them the same kind of deals as I got from my developer in Playa del Carmen and so I’ll have come full circle.
You can’t do this kind of development deals in Canada or in similar countries because all the buyer has to put down before the delivery of the condo is 5% of the purchase price. These are awesome deals but having the right knowledge and connections is an absolute necessary in order to be successful.
To conclude, I hope that this will help and inspire you. Don’t hesitate to contact me if you think I can help you further.
