Foreign Real Estate
Q. We are Canadians living in Switzerland and are looking for a long term investment, hopefully to keep indefinitely. Have you heard of some of the leaseback opportunities in France? Are there advantages to buying some kind of property in Switzerland? I thought maybe it would be a good investment as there is limited supply and restrictions on foreigners, but I suppose it could work in reverse if you do need to sell. Deborah G., Switzerland
A. Buying good real estate is tough enough without adding in property in a far away land, with different property rights and laws, and significant potential challenges and legal fees to resolve issues if something goes wrong.
I am not saying that you cannot make money on far away real estate. However, real estate seems to work out best for people who are in close contact with their tenants and the properties. This will help you more easily resolve issues when they occur; and they will occur. For this reason I suggest you stay near your home base in your property endeavors.
A leaseback real estate transaction could be a fair deal, but what if the party leasing back fails to pay you, damages the property or terminates the lease? These are all the same issues with normal rental properties, but sometimes people think they don’t apply when a fancy name like “leaseback” is added. Take my word for it, they do!
So if you do a leaseback in Switzerland, you still need to do the same careful and prudent due diligence, analysis, credit and legal checks and financials. Good luck.
Appreciation in Value in Beach Properties
Q. I know you are not a fan of prize properties due to negative cash flows and I fully understand that. However, don’t properties near the beach go up more in value than other properties, making their investment returns pretty good due to that added appreciation in value? Mary Sue H., Orange County, Calif.
A. Let’s say it was true that beach properties went up more in value over other properties. Could they just continue to go up indefinitely until those prize properties were tens of millions of dollars while other properties stagnated and values just increased at the rate of inflation? Probably not. It just wouldn’t be sustainable over time. At some point people would start avoiding the expensive properties while other people would chase the undervalued non-beach properties. And then prices would ease on the expensive ones and rise on the non-beach ones to an equilibrium of sorts.
Now, depending on where you look on the historical property price changes chart, sometimes beach properties did appreciate more. But sometimes non-beach properties would appreciate more. It’s all about how you slice the data.
Regardless, no one can predict the future on pricing, and even if you believe beach properties appreciated more in the past, that doesn’t mean they will in the future.
On the other hand, cash flows in the short term are pretty predictable. On a beach property you buy for $800,000, you’ll probably be negative on rental income minus expenses of $30,000 to $40,000 per year. Over 10 years, your property may appreciate, but you will have contributed another $300,000 in cash to cover the negative cash flows. And that’s just no way to invest.
Buy cash flow positive properties.
So, you are right. I don’t like negative cash flow prize properties. Buy the moderately priced boring ones that pay the bills and really add to your wealth!
Leonard Baron, MBA, is America’s Real Estate ProfessorŽ and is a real estate investment columnist for Zillow. Find more of his answers to property questions at Mint.com. Email your questions to: Leonard@ProfessorBaron.com