Eran came to our office for a consultation after, as he said, reading some of our stories over the past year. Eran, together with his brother, bought a 2-room apartment from an Israeli developer who builds residential projects in Europe, in one of his new projects that were aggressively marketed to the Israeli investor audience.
“We received the apartment with a small delay compared with the promised delivery date,” Eran opened the meeting. “Along the way various additional costs came to light, because the contractor's presentation and also the agreement were not so clear to us. We didn't understand that we were getting, for example, the apartment without kitchen cabinets, and there were all sorts of other additions like that which in the end made the apartment much more expensive than what they presented in their advertisements.”
“OK, but that sounds reasonable. Where is the problem?” I asked innocently.
“In all the presentations and in every contact with them they promised a yield and income of at least 600 euros a month, and now even the management company they connected us with can't find us tenants at more than 500 euros a month.”
“And was this commitment a contractual commitment or only a marketing promise?” I asked.
“As far as I remember it doesn't appear in my contract with them, and the management company was not willing to commit to the level of rent it would collect,” he replied.
“I see,” I said, “and how many investors' apartments are there in your building?”
The truth is, I know the answer to this question since I am familiar with the project in question. About half of the apartments in phase A of the project were sold to Israeli investors, on the order of about 80 apartments.
Eran's story is not an exceptional case. I come across quite a few investors who relied on impressive yield promises from marketers or developers, without carrying out thorough due diligence.
Many investors tend to forget, or prefer to ignore, because they rely on data from digital real estate boards such as Yad2 (in Israel), imobiliare (in Romania) or spitogatos (in Greece), which display data about apartments for rent but reflect the prices that apartment owners are asking for, and not necessarily the prices at which the apartments are actually rented. As a result, a significant gap arises between real market prices and investors' expectations, which leads to wrong financial decisions.
In addition, people tend to ignore several critical parameters that must be taken into account when setting the rent:
- The level of demand in the area and the supply of competing apartments. In Eran's case this is a critical parameter, because 80 apartments came onto the market at the same time, which caused a large supply and pressure from landlord-investors to rent out their apartments, and in such cases it is first come, first served, and the larger the supply, the more competition there is among those offering on price.
- The physical condition of the property and its perceived value in the eyes of potential tenants. An apartment perceived as higher quality can achieve higher rents.
- Actual transaction data and not only advertised prices. In Eran's case, had he checked and studied the area and the growing inventory of apartments in the area before the purchase, I assume he too would have understood that it would be hard to rent at the price promised during the project's marketing. After all, it is a well-known rule that apartments priced above market value are harder to find tenants for and remain empty for long periods.
- Proximity to transport hubs, educational institutions and public services.
- The average time it takes for similar apartments in the area to be rented. As noted, apartments marketed at a price above the average may stay empty longer.
- Seasonality. In the real estate market too there are peak and low seasons, and it is important to know when we put the apartment up for rent, because in the area where Eran's apartment is located, a neighborhood in demand among young couples, demand for apartments rises in the summer months toward the start of the school year, which may shorten the time needed to rent.
I explained to Eran that I have no tools to help him. It is important to understand that relying on marketing presentations alone is not enough; you must check the purchase contract thoroughly and make sure that the marketing promises are reflected in the contract. The company, during the marketing of the project and during the sale, presented various representations, but did not take upon itself any commitment to a yield in the set of agreements Eran signed. The company even went a step further and included in the agreement a clause under which all representations and promises by marketing and sales personnel made before the agreement are not valid and that what binds it is the agreement signed by the parties and what is stated in it alone. The management company Eran hired also did not commit to a yield.
I suggested that Eran consider various upgrades to the apartment, which would cost more money, but might cause potential tenants to agree to pay higher rent for those upgrades. The other option is to carry out a “route recalculation,” and understand that for now he will have to settle for rent of 500 euros/month (which means his current yield is lower than expected), in the hope that over time he will be able to raise the rent, and with the understanding that at the same time the value of the apartment is also rising, since apartment prices in the area where he bought the apartment keep rising all the time.
Investing in real estate abroad may be profitable, but requires caution and thorough checking:
1. Don't rely on yield promises alone - make sure every commitment is anchored in the contract.
2. Carry out thorough legal and financial checks - don't rely only on marketing presentations.
3. Understand the local rental market - check actual transaction data and not only asking prices.
4. Take the level of supply into account - large projects with a large number of investors may create an oversupply.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית