A few months ago I took part in a real estate conference held in one of the countries where we operate. The conference took place in a convention hall on the outskirts of the city, and so did the hotel where the participants who had come from abroad were staying. On the last evening, after the booths had been dismantled, together with a few colleagues I had met during the conference we decided to head to the city center, to a trendy bar recommended by the local partner. Then it turned out that the trip to the city center takes about an hour, since we had to take a taxi to the nearest subway station, about a 10-minute ride away, and from there to the center.
A drag, but during the subway ride I remembered a conversation about locations that I had with a longtime client of the office, Yossi, who had recently sold the first apartment he bought in a European capital.
Even during the sale Yossi complained that he was not getting the price he thought he would get for the apartment, and that the profit he expected from the sale was much lower than he had hoped. After the transaction was completed Yossi was disappointed, and in a meeting we held we analyzed the deal in order to draw lessons (although, as you already surely understand, Yossi has since bought several properties abroad, and did so far more professionally than with the first purchase).
The apartment in question, the first, as noted, that he bought abroad, was located in a most central spot. There is no doubt that the location was excellent. The problem was that the price at which the apartment was bought was high compared with the prices customary for identical apartments in the area at the time of purchase. The apartment was renovated, and the seller charged a “premium” for the renovation at the time of sale. When the day came, since the apartment had been bought at a price that was the market price (and perhaps slightly above), when Yossi sold it, it sold at the market price, but the appreciation was partly “swallowed” because, as noted, the purchase price had already priced in part of the expected appreciation.
At every turn you will be told, or read, that “location, location, location” is the most important thing in a deal.
You may be surprised, but it is not the only thing. To generate profit, several things matter:
- A neglected, “broken” property that you turn into a “bonbonniere.” Do not look for the ultimate property from your point of view, but for the property you can buy below the market price because it needs a serious renovation, refurbishment or refresh.
- A smart renovation. You are not going to live in the apartment, so do not turn it into your “dream apartment,” and do not fulfill in it all your fantasies or those of the designer you hired. The apartment needs to be comfortable, appealing and equipped so that you can increase the yield without increasing the risk through expensive renovation and furnishing.
- Financing. The more you can structure a deal in which you use low equity, the more you can earn on every shekel (just make sure that financing costs do not eat too much into the profit, especially today, when the interest-rate environment is unstable).
- Tax planning. Tax laws vary from country to country, and must be taken into account, otherwise you may lose a not insignificant part of the profit to the state treasury.
- Location. Do not give up on location, but take it into account in relation to the purpose of the purchase (an apartment intended for short-term rental, where it matters that it be in a central area or near tourist attractions, is not the same as an apartment intended for long-term rental, where it matters that it be located in the areas that locals look for when renting).
So how do you maximize the profit from your apartments?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית