Wednesday, August 14, 2013
I know that many of you looking for a second home overseas want your property to work for you. You’ll use as it for vacations or to escape the cold winter months back home. But the rest of the year, you plan on renting it out, to help cover its running costs and perhaps even generate a profit.
There are three key points to consider when sizing up a location’s rental potential.
The first is your rental yield. Your rental yield is the total rental income you get in a year, divided by the price you paid for the property. That gives you a gross yield. To get the net, just deduct all your running costs – maintenance fees, utility bills, taxes, management fees – from the annual rental income.
A big factor in your rental yield is how much you pay for the property. Pay a lower purchase price, and you’ll get a higher yield.
That’s why it’s often worthwhile to look to up-and-coming destinations rather than more established ones.
If we take a specific location: Tulum, Mexico. Purchase prices are generally lower in this little beach town than in nearby Cancun or Playa del Carmen. But rental rates and occupancy figures are strong in Tulum. And there’s less competition. That should give you higher rental yields.
The second point to consider is occupancy levels. The best way to get a handle on the market is to look first at hotel occupancy rates. The higher they are, the better. Check to see if you’re buying in a very seasonal market, one with high occupancy levels for only two to three months of the year. It’s harder to make a profit or break even if your season only lasts a few months.
Ask local property management companies about the occupancy rates in condos and houses they handle. Again, find out if there is year-round demand or a very short season. Check what kind of rate per night their properties command. Give them the details of the property you’d like to buy and find out how much they’d rent it for. Ask if there is a marked difference between high season rental rates and low season rates.
It’s always good to have multiple sources of renters. Some markets rely heavily on locals, others on overseas tourists from a couple of countries. It’s better to buy in a place that attracts visitors from a variety of locations. That way, you’re cushioned if one market slows down, and you should see good occupancy year-round.
Going back to Tulum…Mexico’s Riviera Maya, an 80-mile coast that runs from Cancun to Tulum, attracts visitors from Mexico, Europe, North America and Latin America. It’s expected to hit 90% occupancy in summer 2013 (it already averages 80%).
The last consideration is competition. It’s not too difficult to gauge what it is right now. You can walk around town and drive around the neighborhood. You can look in local newspapers. You can browse Tripadvisor to see the closest hotels and rental homes. Make notes about the hotel star rating and how many rooms they have. Sites like VRBO give you a good idea of how many condos and homes are for rent in the area. You can get a feel for the prices they charge and the amenities they offer. You’ll even pick up ideas on what renters expect and tips on how to make their stay in your property a good one.
Your property management company can give you facts and figures on other rental units in the area, too.
But you also need to look to future competition. It’s easy to jump into a market with high occupancy rates, only to watch them plummet. We’ve seen this happen in Panama City. In 2007, hotel occupancy ran around 84.7%. But in the last few years, thousands more hotel rooms flooded the Panama market. The hotel occupancy rate today is half that of 2007, and it’s had a knock-on effect on the local rental market.
In Tulum, the Caribbean Sea lies on one side and more than two million acres of protected land on the other. There are strict rules on building height and density. That limits the amount of land available for residential and resort development. It’s the perfect storm – supply constraints in a location that’s increasingly popular with upscale vacationers and second-home buyers.
You should run this three-step checklist against any property if you plan on renting it out. It will help you choose the one with the strongest potential – instead of the one with the nicest kitchen or the prettiest pool.
P.S. Many of your fellow readers have already bought a second home in the Tulum area. Some will rent their Caribbean bolt hole out. Others want to keep their place in the sun all to themselves. Either way, this location stacks up. It’s got strong rental potential, excellent infrastructure and the most amazing beaches. Go here to get the lowdown on an exciting real estate opportunity here…and how you can enjoy a luxury four-day stay for only $180.