Wednesday, October 12, 2011
A reader e-mailed us recently. He informed us that he could buy a home in downtown Detroit for less than the cost of a property we'd just written about. We were deceiving folks, he said, when we told them that our property was great value for money. He could get more for his real estate dollar in Detroit.
Our reader, though, had made a common mistake. He was comparing apples to oranges.
The property we'd written about was a beach house in Ecuador. Brand-new...steps from the sand...and 1800 square feet in size. It cost $120,000. Now, I'm not saying that you won't find cheaper properties in Detroit. But I know that none would match our Ecuador property in terms of location and views.
Comparing apples to apples is an important point to remember when you're buying a property overseas.
It's meaningless to compare an oceanfront condo in a big city in Brazil against a single family home in a quiet town in Ohio. It's also meaningless to compare the Brazil condo to an oceanfront property in rural Ecuador.
Here's how to compare apples to apples:
Compare Similar Locations. If you're buying a beachfront condo on Ecuador's Pacific coast, figure out the cost per square meter or per square foot. (It's the purchase price divided by the number of square meters/feet in the unit.) Then compare it to the price per square meter of other beachfront condos in the same area. On Ecuador's coast, for example, a rough guide is $1000 a square meter for new beachfront condos.
Comparisons with similar properties in the same location will tell you if you're paying fair market value for the property. If you want to see how beachfront condos in Ecuador compare with property in the US, choose similar locations. The rural Pacific coast of California would be a better comp for beachfront Ecuador than downtown Detroit.
Compare Property Types. Compare condos to condos, and single family homes to single family homes. Compare properties of a similar size. Smaller properties generally cost more on a price per square meter basis.
It's pointless to compare a condo with an average kitchen and no pool to a super-luxury penthouse with a full set of extras. You should compare like for like in terms of age: in most markets, new properties command a premium. Compare properties in similar condition: a fixer-upper with a fixer-upper, rather than a fixer-upper with a brand new home. Compare properties with similar views. Beachfront and ocean-view homes will have sharply different price points, so you can't compare the two.
Your comparison properties should match the property you're buying as closely as possible. Otherwise they're not meaningful.
Compare Market Potential. Our reader in Detroit can pick up ultra-cheap properties in Detroit. But with the current downturn in the US, their potential is questionable in terms of price appreciation.
Look at the market you're buying in. Is it in the early stages of the growth cycle, about to boom...or at the other end of the curve in a downturn...or already bust? What potential do you have for price appreciation in the short to medium term? If you want to rent, how much rental income can you earn, and what kind of yield will you get?
Compare Holding Costs. Your property taxes on the $120,000 beach house in Ecuador will run around $180 per year. Capital gains tax in Ecuador is 0.5%. So if you make a $50,000 profit when you sell your property in Ecuador, you'll only pay $250 to the taxman. Taxes vary widely from one country to another. They can also vary widely from one location to another in the same country. Check out what taxes apply to your property, and how they impact your holding costs and potential profit.
Comparing apples to apples is straightforward. It gives you a good idea if the property you're buying is priced fairly. And it's an easy way to see how one property stacks up against others on your shortlist.
You should get into the habit of running comps on every property you consider. It'll become second nature, and help you make the right decision when buying an overseas property.