Investing in International Real Estate For Dummies book cover

Investing in International Real Estate For Dummies

Author:
Nicholas Wallwork
Published: March 26, 2019

Overview

Aspiring international real estate investors—expand your portfolio today! 

The real estate world can be a particularly difficult place to do business, and this book helps aspiring international investors of all skill levels avoid some of the pitfalls first-timers often make. Expert author Nicholas Wallwork opens your eyes to how accessible international real estate can be and provides an excellent introduction to some of the main strategies and nuances when investing at home or away.   

Investing in International Real Estate For Dummies covers expert strategies for investing in international real estate, going beyond the more obvious tactics like buy-to-lease and flipping houses. It gives you a solid roadmap for successful property investing that actually works in any market. It lays out checklists of tasks and offers step-by-step guidance and advice based on over a decade of in-the-trenches experience working in the international real estate investment sector.

  • Learn previously unseen expert strategies
  • Find out how to choose which countries to invest in
  • Easily navigate your way around lease options
  • Build an in-country network of reliable contacts
  • Manage your new assets with ease
  • How to build the mindset of a top real estate investor

Looking to start or expand your international real estate portfolio? Everything you need is at your fingertips!

Aspiring international real estate investors—expand your portfolio today! 

The real estate world can be a particularly difficult place to do business, and this book helps aspiring international investors of all skill levels avoid some of the pitfalls first-timers often make. Expert author Nicholas Wallwork opens your eyes to how accessible international real estate can be and provides an excellent introduction to some of the main strategies and nuances when investing at home or away.   

Investing in International Real Estate For Dummies covers expert strategies for investing in international real estate, going beyond the more obvious tactics like buy-to-lease and flipping houses. It

gives you a solid roadmap for successful property investing that actually works in any market. It lays out checklists of tasks and offers step-by-step guidance and advice based on over a decade of in-the-trenches experience working in the international real estate investment sector.

  • Learn previously unseen expert strategies
  • Find out how to choose which countries to invest in
  • Easily navigate your way around lease options
  • Build an in-country network of reliable contacts
  • Manage your new assets with ease
  • How to build the mindset of a top real estate investor

Looking to start or expand your international real estate portfolio? Everything you need is at your fingertips!

Investing in International Real Estate For Dummies Cheat Sheet

Investing in real estate can be lucrative, but it isn’t risk-free. One key to weathering the ups and downs of the real estate market is diversification. Other strategies for making the most of your real estate investment is owning a house in multiple occupation or a service accommodation. Finally, don’t close the door on rent-to-rent and lease options. This Cheat Sheet has all these bases covered.

Articles From The Book

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Real Estate Articles

What is Passive Income?

Passive income is the key to building real wealth. Think of passive income as another name for yield (the money you make on an investment). What makes it passive is that, after it’s up and running, the investment requires minimal input from you for the income, or yield, to keep coming in, month after month. In other words, you invest some of your time and money upfront, and you get money back in return on a regular basis. Your money starts working for you, not the other way around. Sounds good, right? When people think of making money through real estate, their first thought is often capital growth (for example, buying a property for $200,000 and selling it six months later for $270,000). That’s a solid approach to making money, and capital growth projects certainly can make up part of any portfolio.

If you’re going to treat your property portfolio as a business, you need to think about income, as well as capital growth. Investing for income tends to be less risky and more reliable than capital growth — because money in the bank this month, and next month, and the month after that is safer than relying on future growth.

That’s not to say you won’t achieve capital growth alongside income. If you own a collection of rental and serviced accommodation properties, for instance, those properties will likely grow in value over time. In this way, capital growth is like a cherry on top of a delicious income sundae. Generating income from real estate is so exciting because it’s relatively hands-off compared to, say, working 9 to 5 for a paycheck. In that way, it can be described as passive income. The great Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.” So, if you like the idea of making money while you slumber (and, honestly, who doesn’t?), then the passive income mindset is for you. It’s important to note that passive income isn’t just about making more money (although that is, of course, a big attraction). It’s not about greed. It’s about rethinking the fundamental nature of work and developing the means to live life your way. For you, it may mean putting in a few hours in the morning and having the rest of the day off, or having a four-day weekend, or never wearing a suit again! In short, passive income gives you more freedom — to do whatever you want.

Passive income isn’t a get-rich-quick scheme. It takes time to build up a good level of passive income. So, if you’re looking to quit your job and devote yourself to real estate full time, it may be a while before you’re comfortable giving up the security of your existing income.

Examples of passive income

Anything that generates money and isn’t directly tied to your effort or output (in the way of a regular job) is considered passive income. So, investing in the stock market can be considered passive income. So, too, can real estate. What’s great about real estate investing is that there are so many exciting sub-strategies for generating a regular income, including the following:
  • Property development
  • Rent-to-rent
  • Houses in multiple occupations
  • Student and vacation rentals
If you think passive income ventures like these require a lot of upfront capital, think again. Rent-to-rent, for instance, requires nothing more than the first month’s rent and deposit to get started — and sometimes less than that! In this way, property can offer a fairly low-capital route to passive income. This is why I believe real estate is probably the most achievable path to passive income for the average person on the street. It can create serious wealth, too, if done right.

Pros and cons of passive income

Here are the pros and cons of passive income, as this author sees them. On the plus side passive income gives you:
  • More time and freedom: Assuming you build up to a level of passive income where you no longer have to work 9 to 5, you have much more choice in how you live your life and more time for the things you love.
  • Better work-life balance: You can be there to take the kids to school and pick them up at the end of the day, and manage your real estate investments when it works for you.
  • The ability to indulge your passion — and your talents: Concentrating on passive income has allowed me to invest in projects that genuinely interest and excite me. You can spend time on the parts of the business you find most interesting or are the best use of your time. The rest you can outsource to people who are better qualified.
Passive income gives you the means to reach your full potential. What could be more satisfying than that? On the downside, with passive income:
  • You have to take a longer-term view. Passive income isn’t about getting rich overnight. It’s about rethinking the way you work and earn money for the long haul.
  • There’s a cost to being more hands-off. As your portfolio grows, you’ll probably have to outsource some of your workload to other people and/or invest in technology to take care of certain tasks for you. This means sacrificing some of your income to cover these costs. For me, the additional cost is well worth it because it frees me up to focus on new opportunities and profit-enhancing activities.
  • You can’t get away with putting in zero effort. “Low” or “minimal” effort, sure. But not zero effort. You need to invest some time in your investments, both in terms of establishing your new projects and checking in on them regularly.

When you’ve got a property up and running nicely, and you’re generating a regular income from it, don’t make the same mistake as a lot of investors and ignore the property. If things go wrong because you’ve stepped off the gas, you’ll have to devote lots of time and energy to get things back on track.

To keep your investments on track, you’re far better off spending a little time often than spending a lot of time only occasionally.

Real Estate Articles

What Is Real Estate Value and Valuation

Value is easy, right? It’s the price you pay for a property? Well, it’s not quite that simple — price and value aren’t always the same thing.

Real estate appraisal or property valuation is the process of determining what a property is actually worth. This may or may not be the same as its price.

Appraisers go under different names depending on where you are in the world; real estate appraiser, property valuer, and chartered surveyor are the most common names. The terms appraiser, valuer, and surveyor are used interchangeably.

Compare price to value in more detail

A property’s price (how much the property costs to purchase) can be very different from its value (what the property is worth). For example, a property may actually be worth in the region of $300,000 but the seller may have an inflated idea of its value and insist on putting it on the market at $350,000 — or he may have been guided to set the price high by an especially greedy agent who wants a higher commission. A buyer with a firm grip on valuation will understand that $350,000 isn’t a fair market comparison for that property, and refuse to cough up. But an unsuspecting and inexperienced investor could fall into the trap and end up overpaying. There are a number of reasons why a buyer may gladly pay a price that’s lower than the property’s value. The buyer could, for example, be buying a property from a family member, who is cutting her a favorable deal and pricing lower than the market value. Or it could be a distressed sale where the property is priced lower than it’s worth for a quick sale, or perhaps it’s being sold at auction and the bidding doesn’t reach the expected levels. A buyer may also be willing to pay more than a property’s market value in order to secure a particularly attractive investment in a highly competitive market. That’s right, sometimes an investor may have arrived at her own valuation that’s higher than the comparative market value, maybe because she plans on changing the use for a niche high-income strategy (like short-term rentals, for example).

If, when you’re valuing a property, you’re using a different valuation method from the person doing the appraisal, you may well arrive at a different value. That’s not necessarily a cause for concern, as long as you’re sure of your own numbers.

The purpose of appraisals

In general, appraisals or valuations are used in a number of contexts, from dividing up assets during a divorce to taxation. But for the real estate investor, valuation is used to determine
  • How much you can borrow to purchase a property (because appraisals inform mortgage loans)
  • How much you should reasonably expect to pay for a property
  • How much a property could generate in ongoing income (where income is the investment goal)
  • How much you could sell the property for after adding value (where capital growth is the investment goal)
Valuation is particularly important in real estate because each property is different. As an asset class, property is unique. When you buy two shares of stock on the same day, both shares are identical. But that’s not the case with real estate.

Even two properties on the same street can be very different. In fact, even two houses next to each other, even if they’re both identical in size and layout, will vary a great deal in terms of condition, fixtures, and fittings and presentation. Their value will differ accordingly.

Valuation is also necessary because most people fund their investments through some sort of financing, like a mortgage. And when you’re borrowing the money to buy a property, the lender will want to know that the property is worth what it’s loaning you. If you default on the loan, forcing the lender to foreclose on the property and sell it, the lender wants to know that there’s enough equity in the property to get its money back. In this way, real estate valuation protects the bank, as well as you.

Factors that influence property value

So, what kinds of factors impact a property’s value? The key factors are
  • The size of the property: For example, it makes sense that a four-bedroom, three-bathroom house will be worth more than a two-bedroom, one-bathroom house in the same town.
  • The condition of the property: This is key because it’s how so many investors add value to a property. By renovating and improving a property, even if you’re not doing major structural remodeling, you can increase its value in a relatively short amount of time.
  • How the property is (or can be) used: For one thing, a commercial property will be valued differently from a residential property. What’s more, various usage restrictions may also impact the value. For example, if zoning restrictions mean it’s impossible to turn a commercial property into a luxury block of apartments, then that restriction may impact how much buyers are willing to pay.
  • The property’s location: Compare a four-bedroom, three-bathroom house with a smaller house in the same town and it makes sense that the bigger house is worth more. But things get foggier when you bring different locations into the mix. Compare that generous family home in Des Moines, Iowa, with a studio apartment in Midtown Manhattan and the smaller property is likely to be worth more. That’s because different locations are more desirable and valuable than others. Additional local factors like a nearby, highly rated public school or great transportation links can also drive up a property’s value.
  • Supply of property: A few years ago, there was a lot in the real estate news about Bulgarian apartments. Investors were piling into the country in droves, and new apartment buildings were being thrown up left, right, and center in coastal and ski resort towns. The result? A market that ended up with way more supply (new-build apartments) than demand (actual buyers) and apartment blocks sitting empty and unsold. Compare that with, say, a sought-after coastal village location in Cornwall, in England’s beautiful West Country, where supply of properties is relatively low. Because few properties come onto the market, their value is higher than if there was a deluge of available property.
  • Demand for property: Think back to the tiny studio apartment in Midtown Manhattan, and you can see how being in a buoyant real estate market, like New York, can impact a property’s value. In a market where there’s a wealth (pardon the pun) of motivated buyers keen to purchase property, combined with plenty of money to buy, demand goes up — and with it, market value.

Who values real estate?

So, who has a hand in deciding a property’s value? Depending on the circumstances, the following people may all be involved in the process at some point:
  • Sellers: Plenty of sellers do their own homework on what their properties may be worth before they put them on the market. And, at the end of the day, it’s the seller who weighs the agent’s recommendation and agrees on the final price.
  • Buyers: Informed buyers do their own research and analysis, and reach their own conclusions on the fair price for properties.
  • Real estate brokers and agents: Any good real estate broker or agent knows her market inside and out, and she’ll have a really good handle on the likely value of a property. That said, it’s not uncommon for an agent to quote a higher valuation to get a seller’s business (and a juicier commission), even though this can result in an overpriced property languishing on the market for longer than it needs to. So, when an agent gives you a valuation, do your own homework to determine whether that’s a correct and fair price for your market.
  • Professional appraisers, valuers, or surveyors: Whenever you’re seeking funding to buy a property, the lender will send a professional appraiser to value the property. (By “professional,” I mean that many countries require appraisers to be qualified and certified.) Depending on the lender and type of funding, you may have some flexibility to appoint the appraiser yourself, or choose from a shortlist of the lender’s appraisers (this is not unusual on a commercial mortgage in the United Kingdom). Many times, though, the lender will simply appoint its own appraiser, and you’ll have no say in the matter. Either way, you’ll ideally have the option of being present at the valuation.

Be aware that a lender-appointed appraiser may not have a ton of experience in your type of investment; for example, he may specialize in standard residential properties rather than income-generating rentals.

Real Estate Articles

3 Main Real Estate Valuation Methods

There are several different methods used to value property, but here are the three most common methods:

  • Market comparison approach: Compares the property being valued with other similar properties that have recently been sold in that area
  • Income or investment approach: Looks at how much income the property being valued is already generating or could potentially generate
  • Cost approach: Looks at how much it would cost to build an equivalent property
Each valuation method is independent of the others, meaning an appraiser will mainly use only one approach rather than a combination of all three approaches to determine the value of any one property. The method used may be dictated by the lender in question. And, each approach can arrive at quite different valuations, so it’s important to know which valuation method your chosen lender is using. Different valuation methods are used for different situations. Sometimes more than one valuation figure is quoted in reports, particularly for commercial mortgages where the market comparison (or bricks-and-mortar) valuation is used as a fallback if the investment valuation use of the building changes (for example, a paying tenant leaves and the income reduces to zero until a new one is found).

That’s not to say that one approach is better than the others — only that one approach will be more applicable or appropriate for a certain property than the others. You need to understand the differences between each approach, and know which approach the appraiser is using for your investment.

Market comparison approach

If a total novice wanted to roughly work out the value of his home before putting it on the market, what would he do? He’d go online and look at how much similar properties nearby (ideally on the same street) sold for. “Well, honey, the Jeffersons at number 59 sold their home six months ago for $280,000, and they only had a single garage, not a double like ours. So, our house is bound to be worth a bit more.” That, in a pretty crude nutshell, is how the market comparison valuation method works.

Also known as market value approach or bricks-and-mortar valuation, market comparison is a valuation method that’s based on local comparables — in other words, how much similar, nearby properties have sold for recently. It’s the most common valuation method and the one typically used by mortgage lenders to assess residential properties.

Common considerations for market comparison valuations

Your average market comparison valuation will define a property’s value by looking at prices of properties on the same street or prices of other properties of a similar size and condition from the local area. The value will be adjusted according to variances like the size, specification, and condition of the property being valued. Other variables may also be factored in, such as supply and demand in the local real estate market at that time or the availability of financing.

In addition, appraisers who are appointed by a lender may also be constricted by the lender’s valuation criteria, which may lean toward the lower end of comparables in order to reduce their risks as much as possible. Therefore, the inherently cautious nature of lenders and appraisers means you won’t necessarily get the valuation you hoped for. Just because the house down the street sold for $280,000 doesn’t mean you’ll get the same valuation.

Of course, no two properties are exactly alike. Properties A and B may be the same size and on the same street, but Property A may have a beautiful view of rolling hills, while Property B may have a rather uninspiring view of other houses. But maybe Property B has been stylishly renovated, while Property A is straight out of the 1970s, complete with peach satin drapes and brown shag carpets. That’s why appraisers try to find a few comparable properties to help them determine a fair market value, not just one or two.

The limitations of market comparisons

If there’s one sticking point with the market comparison approach it’s this: To get an accurate valuation, you do a good number of comparable properties. That’s fine for a standard residential property, like a single-family home or an apartment, where there are lots of similar properties to look at. But when you start to get into bigger, unique properties, finding enough accurate comparable market data is challenging.

Although it’s a straightforward valuation method to understand, the market comparison method isn’t always the best judge of value. Imagine a huge nine-bedroom rental property. Although it is a residential property, the market comparison approach just isn’t reliable because there aren’t any similar nine-bedroom rental properties nearby.

In that example, the first two valuers, who were using the market comparison approach, had to look at larger properties elsewhere in the town. But that wasn’t a fair comparison because the location of my investment property was far more desirable. Essentially, the property was unique in that market, meaning the market comparison approach just wasn’t a reliable indicator of value, so these valuers took a cautious approach. For that investment, the income approach was much more appropriate.

Income or investment approach

Instead of looking at the bricks-and-mortar value of a property, this valuation method treats the property as an income-producing business.

Focus on income not comparables

The income approach or investment value approach to valuation assesses the value of a property as an investment. Also known as commercial investment valuation, this method is commonly applied to commercial properties like offices, but it may also be used for income-producing residential properties, such as rentals or blocks of apartments.

At its heart, the income approach is based on the understanding that the higher the income potential of a property, the more an investor is willing to pay for it. A property’s income or investment valuation can be higher or lower than its market comparison value — in my experience, it’s often (but not always) higher.

How the income approach works

The best way to describe how this valuation method works in practice is with an example. The example is based on a UK investment: a small block of four apartments. Let’s say each of the apartments is rented out for £750 per month. That’s a gross annual rental income of £36,000. Now, based on her appraisal of the property, the UK valuer will apply two concepts to arrive at an income-based valuation of that property:
  • Discount: A discount that’s applied to the gross income in order to establish a realistic picture of the net income. A discount of 15 percent to 25 percent is typical on a UK income valuation, but it depends on a number of factors, such as the quality of the property, how strong the rental market is right now, location, costs, and how likely it is that one or all the units can stand empty without tenants for a period of time (the void period). Basically, the lower the discount, the better the property. But let’s say the discount applied to our £36,000 annual gross rental income is 20 percent. So, our estimated net income is then £28,800.
  • Yield: The return on investment the investor can expect to receive, expressed as a percentage. To determine the yield, the valuer will look at comparable properties, local rental incomes for similar apartments, demand in the local market, and so on. In a busy town with lots of renters, the yield will be better than in a rural setting, with lower demand from renters. Let’s say the yield on our example investment is 7 percent.
To calculate the income valuation, the valuer will take the discounted net rental income (£28,800) and divide it by the yield (7 percent). The income-based value of that block of apartments is therefore £411,429. Valuers will usually round the figure down as well.

Don’t be shy about calling a couple of local surveyors and asking what sort of yield they’re currently applying to your type of investment property in your area. It’s part of my process when I’m evaluating the potential of an investment deal because the end value is so important.

Although this example gives a useful overview of the concept of valuing based on income. The nuances of the income-based approach will depend on which country the investment property is located in. For example, in the United States, a revenue multiplier or capitalization rate (rather than yield) is applied to net income. Always research the income valuation method that’s used in your particular market.

Cost approach

The third approach to be aware of looks at neither income generated by a property nor local comparable properties.

The cost approach is used to establish the cost of replacing the building being valued. It’s widely used for insurance replacement purposes (so, if the building burned down, how much would it cost to replace the building on that spot?), but it can also be a useful method for brand-new buildings, proposed constructions, and unique properties that don’t have local comparables and don’t generate an income.

When using the cost approach, an appraiser will look at the estimated value of the land, as well as the cost to replace the building as new (minus depreciation, such as wear and tear).