April 6, 2015
by Bobby Casey
A couple of weeks ago I was chatting with a client of mine, Frank, about his travels. Frank is a good friend and a hugely successful entrepreneur. He runs a company with an 8 figure net profit margin, but remains very down to earth.
Frank was recently in the US Virgin Islands doing a bit of business as well as some leisure travel and had an invitation to join a small group on Necker Island for a little get together.
If you don’t know, Necker Island is Richard Branson’s private island that is also available for rent – either in whole or just a villa.
Many consider Branson to be eccentric yet brilliant. I would say he is heavily leaning toward the brilliant side. You see Branson owns several of these luxury properties around the world.
Except he is not just some free spending flamboyant billionaire. He is a brilliant investor.
Necker Island is a great example. You can rent a villa there for thousands per night. Or you can rent the entire island for large groups, events and corporate retreats.
The place is a goldmine.
As for Branson, it gives him a very cool playground to spend time while people like my buddy Frank pay all the bills.
And not only pay the bills, but Branson gets to live there for free and make a great return on investment while doing so. In addition, he keeps a very lucrative hard asset for his future generations.
Well, what does that mean for you and I?
Let me explain…
You and I may be doing fairly well financially, but most of us are not at the same income or net worth level of Branson.
But that doesn’t mean we cannot duplicate this on a smaller scale.
I will use my friend Janice as an example. I gave a presentation a few weeks ago at an event in Scottsdale, Arizona. In the evening at the hotel bar, Janice and I had a conversation over wine about her personal situation.
Janice is a successful businesswoman and earns a significant income in the mid six figure range. She does contract consulting as her primary business and has an ecommerce business selling women’s fashion.
She is on the road a lot traveling for her consulting business working on site around the US and overseas. Janice also visits France frequently for her fashion business as she imports most of her goods from one manufacturer there.
She owns a large house in Florida living alone. However, Janice is only at this home 5-7 days per month. She has several hundred thousand dollars in equity as well as another few hundred thousand in cash lying around burning a hole in her investment pocket.
My suggestion to Janice was to;
- Sell the house in Florida and pocket several hundred thousand in cash saving her large upkeep costs as well as a mid five figure monthly mortgage payment
- Pick 2-3 cities where she frequently travels and look to buy small, center city apartments that are easily rented for short term stays
- List the apartments on airbnb(dot)com and booking(dot)com to rent for short term stays
- Hire a local property manager or cleaning service to deal with tenants
- Block off days for your personal visits to those cities, making your vacant days available for tenants
- Voila, live rent free and collect 7-10% annualized returns on your investment
Of course there are a lot of details to attend to like;
- Where to buy?
- How to analyze the investment?
- How to pick a property manager?
- Do I even need a property manager?
- Pay cash or finance?
- And so on…
In Janice’s case, I suggested her to buy a small apartment in the town where she visits frequently in France. This is a smaller town, but very nice and the cost was not that high. Based on preliminary search results, we found she could buy a very nice 2 bedroom apartment in the center of the city for around $130,000.
This apartment could easily be rented out for around $100 per night. Based on our searches on airbnb(dot)com, similar properties were renting out 15-20 nights per month on average, year round.
That equates to a 13% – 18% gross cap rate. Clearly there are expenses to be considered, but considering worst case scenario, cut that in half and you get a 6.5% – 9% net cash yield……plus you can live there yourself while you are in town.
The next place we looked was in Colorado. We checked a few of the ski towns (Janice loves to ski), but most of the properties there were out of her price range and not a good investment. Based on the initial cost and upkeep, you could not generate a reasonable return.
So we looked at downtown Denver. Now this was a completely different story. While not ideal for a ski holiday, you are actually less than a 1 hour drive from a few very nice resorts.
Again, based on the cost of the properties and the average rental rates we found, Janice could expect a 7-10% net cash yield, plus have a free place to stay while in Colorado.
Lastly we looked at Budapest, Hungary. One of my all-time favorite cities and one that gets a ton of tourist traffic year round. The local currency, Forint, has fallen off a cliff alongside the Euro and has exposed tremendous real estate opportunities.
We could easily buy a center city 2 bedroom apartment for less than $100,000, some as low as $50,000. The first 20 apartments I viewed there were renting an average of 22 nights per month, year round at a rate of $50 – 80 per night.
If you go on the low side of $50 per night at 20 nights per month, that is $12,000 per year in gross income. Based on the most expensive apartments at $100,000, that is a 12% gross cap rate. If you even cut that in half, you are left with a 6% net cash yield. And you get a free place to stay while in one of the coolest cities in the world.
Janice can easily afford to pay cash for one apartment in France, one in Hungary, and one in Colorado with a max (conservative) investment of $500,000. Not bad for 3 dwelling places in 3 amazing locations.
Top that off with a $30,000 – $50,000 (very conservative estimates) cashflow from these 3 apartments AND free rent, I’d say that is a pretty good deal for someone like Janice who likes to bounce from place to place every couple of weeks.
From an investment perspective, you have diversified your portfolio multiple ways;
- You have added hard assets to your portfolio – real estate
- You have diversified outside the USD – Euro, US Dollar, Forint
- You have diversified geographically – France, Hungary, Colorado
- You are getting a very nice yield – 6-10% annualized (very conservative estimates)
For our GWP Insiders members, we will be hosting a live webinar in May discussing this very topic, “Become an Offshore Real Estate Mogul….and Live for FREE”. In this webinar will we go over every detail, places where we have identified tremendous opportunity and why, how to set up your rental agreements, how to work with your property managers and even a way you can eliminate property management altogether, the spreadsheets we use to analyze a deal, and much, much more. If you are not a member and want to get in on this webinar plus the many other benefits, click here to join today.
Until next time, live well.
If you use self-directed IRA money (via an LLC) to purchase foreign real estate, are you able to stay there personally, or solely rent it out to others so that you’re not getting “personal benefit “?
Thanks,
Kevin
Hi Kevin,
Good question. The answer is that you are not allowed to live there as that would be taking personal benefit of your retirement account without a distribution. That becomes a taxable event if you are ever audited and it is found that you have been using the property. Once you reach the age to take distributions, you can take full distribution of the property if you are making it a primary residence, or you can “piece it out” in distributions based on your equitable time in the property.