Wednesday, September 30, 2009
A luxurious apartment in Recoleta
The first time I looked for a short-term rental apartment in Buenos Aires, I was surprised for a number of reasons.
The first was the large quantity of apartments available—195 on one website alone.
The second surprise was the rental prices—from as little as $515 a month for a studio. The 1-bedroom apartment I chose was $900 a month. These prices are remarkably low for a short-term rental in a “branded??? world capital…that is, a city with “brand name recognition???, like London, Paris, or New York.
The third surprise—and the most significant for the property investor—is that long-term rental properties are now out-performing short-term rentals in Buenos Aires.
Buenos Aires is a world-class capital. It boasts a wealth of cultural activities, fine dining, and countless shopping options. And my apartment was in a prime area of the city. So why was it only costing $900 a month? This price is significantly lower than similar short-term rentals I’d found in Brazil, Panama, or Uruguay.
I initially thought that the apartment had some hideous flaw I didn’t know about. But it didn’t. It turned out to be pretty much perfect. And my $900 rent included all utilities, and the rental management fee. But this whole experience got me thinking about rental yields in Buenos Aires. If I buy an apartment in this city, will it generate a healthy rental income—or pay for itself? I decided to investigate the rental market more closely.
I compared three apartments in different locations that I would happily live in, asking a local property management expert for potential monthly rental figures.
As it turns out, my initial intuition was correct.
The double whammy of the global economic slowdown and swine flu have impacted tourism in Buenos Aires badly this year. So with the current reduced occupancy rates—now hovering at around 50%—the projected gross yearly rent from all three apartments is now the same for long-term or short-term lets.
But there’s even more to consider in favor of the long-term lease.
There’s increased demand for long-term lets in Buenos Aires. Long-term lets here average two years. And during this time, the long-term lessee would pay for utilities, and there would be no monthly property management fee or cleaning costs. The apartments would rent unfurnished, also cutting overheads. All of this boosts the rental yield significantly.
Let’s take a look at my three sample properties.
The first apartment was in Palermo, a trendy, upscale location, with many leafy parks. Palermo’s locals hang out in the parks, exercising, socializing and relaxing. They people-watch, sipping coffee in fashionable sidewalk cafes. The 111-square meter, 3-bedroom, 2-bath apartment had a list price of $290,000, reflecting the area’s chic status. It would rent for $1700 a month, long-term. That gives a gross rental yield of 7.03%.
The second apartment was roughly the same size, 2-bedroom and 2-bath, furnished, at $325,000. The apartment was beautiful, French-style, 110 years old, and situated in Recoleta. There’s a luxurious feel to Recoleta. It’s traditionally been the prestigious home to Buenos Aires’s sophisticated, well-heeled residents. Tourists also come here, mainly to Recoleta Cemetery…the final resting place of Evita (Eva Peron), arguably the most famous Argentine.
This apartment could rent short-term or long-term. The monthly rental income would be $2100 in either case. Renting it long-term would give a yield of 7.75%...and you wouldn’t have the additional cleaning and utility costs associated with short-term rentals, or the worry of variable occupancy rates.
The third apartment was the largest, with 289 square meters, in Montserrat—and the lowest-priced, at $185,000. This district houses some of the most important buildings in the city, but retains a bohemian feel. Rented long-term, unfurnished, the rent would be $1500 a month. That equates to a respectable 9.72% gross yield.
The results indicate that the traditional investment play of buying an apartment purely for short-term rental income in Buenos Aires does not make financial sense in today’s market. Long-term rentals are a more attractive option.
Buenos Aires will always have an appeal for visitors, and I expect the current downturn in tourist numbers to pick up eventually. If I owned a short-term rental apartment here, I would switch to a long-term rental for twelve months. The apartment would generate a decent return…and if short-term rental demand increased significantly, I could go back to short-term rental as soon as the lease expired.
PS: I’m still waiting to see which way Argentina’s economy swings before committing to an investment property purchase, though. At the end of this year, we should have a much clearer idea of that.
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