Every investor guide and/or real estate marketer tells you that if you invest in real estate you are guaranteed passive income. You just need to buy the apartment in Dimona or in Lisbon and the money will simply flow into your bank account. Really?... You should read Talia's story.
Talia and her husband, a young couple at the start of their path, wanted, like every young Israeli couple, to have an apartment of their own too. They visited apartment fairs, entered lotteries, but nothing worked out. They did not win the lotteries, and buying an apartment became a dream that drifted further away each month as apartment prices rose, especially after a good friend explained to them “with chapter and verse” one Friday evening how an apartment, even at one and a half million shekels in the periphery, would cost them 2.5 million or more in the end because of the mortgage, and suggested that instead they check the option of buying an apartment abroad.
“A friend connected us with someone who defined himself as an investor guide, and who I later understood was just a broker who was clipping coupons off me. A nice man who took 1,500 euros from us for a process of accompaniment in buying an apartment in Bucharest,” Talia told me at our meeting.
“We bought plane tickets and flew with him for two very, very intensive days in Bucharest,” she continued. “On the first day we saw 5 or 6 apartments, and we made a list of the pluses and minuses we saw in each apartment, but we didn't really understand where it was located in terms of the city's areas. The next day he introduced us to a lawyer and also took us to the bank and we opened an account there.
When we got back to Israel he began to pressure us to make a decision, and we met again one evening at our home and he steered us a bit more. In the end, the apartments he showed us were all at the upper limit of our budget, but we decided to go for a particular apartment and proceeded to check it with the lawyer he introduced us to. We transferred the money, and I traveled with him to sign the agreement for one day. After the signing we did a marathon of meetings with various management companies and/or Israelis living in the city whom he had invited so they would offer to manage the apartment for us.”
“And didn't it seem strange to you that he does all this for 1,500 euros?” I asked.
“We were already inside the process, so it no longer mattered too much,” she replied. “I returned to Israel and after consulting with my husband we decided to go with one of the management companies. I contacted them by phone and after about a week I received a detailed email from them saying that the condition of the apartment required renovation and refurnishing before putting tenants in, and their quote was 25,000 euros. On the phone the manager of the management company explained to me that you really have to scrape the whole apartment and rebuild before furnishing and bringing in a tenant. It sounded strange to me because I didn't remember the apartment being in such a catastrophic state, but after a day of consultations I gave him the green light to start the works and at the same time I bought a plane ticket to Bucharest.”
As you already understand, this was already Talia's third trip to Bucharest, which means the young couple's expenses were only growing and they had not yet begun to see income from what they had been promised would be passive income.
Talia ended the engagement with the management company the day after arriving in Bucharest, when she learned from the foreman she found at the apartment that the renovation ordered from him was far less extensive than what had been described to her in the phone call and far from what was written in the quote sent to her. She had to pay the management company compensation of 3000 euros after exhausting negotiations and to contract directly with a renovation contractor to complete the works, while, in parallel with the works, she bought furniture and fittings for the apartment and looked for a new management company. Talia stayed two weeks in Bucharest for that purpose, but saved, in her words, 10,000 euros compared with what she would have paid the first management company she hired.
With the experience she had gained she decided to hire the services of an Israeli man she knew to handle the apartment's rental and management. “Everything was fine for the first half year. He sent us a lease agreement signed with a Romanian student, he said, who paid 400 euros a month, even though we thought, and so it was presented to us along the way, that such an apartment should be rented for no less than 500 euros a month. But since we were already invested in the matter with much more than we had planned and wanted to see the apartment working already, we compromised,” Talia says.
After half a year the manager she had hired informed her that the student had disappeared from the apartment and also left behind a small debt to the electric company and the building committee. Two months of the summer vacation passed until a replacement tenant was found for the apartment, who signed an agreement for a year, also for 400 euros a month. The new tenant stopped transferring the rent after two months and the manager too cut off contact with Talia, who had to buy a plane ticket to Bucharest again.
“I arrived in Bucharest toward evening and after settling into the hotel I ordered a taxi and asked to go to the apartment. When I gave the front desk clerk the address, so that he would order a taxi for me, he asked me what I had to look for in that area. I didn't understand the question, and then he explained that the address I had given him was in an area where mainly foreign workers live and it's not pleasant to walk around there alone at night, certainly not for a foreign woman. I was in shock. When I arrived at the place it was already getting dark and I understood what the hotel clerk was talking about; there was hardly a living soul on the street, and if I did see people they were mainly foreign workers or homeless people.
I rang the intercom and introduced myself as the owner of the apartment. After a few minutes a young man came down, who did not look like a Romanian student but more like a foreign worker from the East, and introduced himself as someone who lives in the apartment. I went up to the apartment with him, where he lived with 4 other foreign workers from the East. They explained to me in broken English that the guy from whom they rented the apartment would come every month to collect the rent in cash and in the last two months had stopped coming. The next morning I returned to the apartment and received from them the payment for the previous two months, and I also gave them our bank account details so they could deposit the payment each month directly into the account.”
Talia's story is not the only case I have come across, even if it is relatively unusual and included a great many mishaps along the way. At the same time, many investors I have met over the years of accompanying them will attest that there is no such thing as “passive income”; there is “active action” intended to maintain and preserve your investment. Here are a few tips for smart conduct:
- Before the purchase, even if you are assisted by professional support, make sure to carry out comprehensive checks of the property, including a physical check, a legal check of ownership and permits, and a financial check of the rental potential and future value.
- Research in depth the real estate laws, tenancy law and the relevant regulation in the country where you bought the property.
- Be aware of differences in business culture and in local working procedures.
- Use online communication tools (video calls, emails, messaging apps) to keep continuous contact with local partners (the management company, the lawyer, the CPA).
- Even if you are assisted by a management company, it is recommended to visit the property from time to time to get a direct impression of its condition and to stay in touch with the local partners.
- Take advantage of digital platforms for remote property management, which can include tracking payments, maintenance requests and communication with tenants.
- Buy comprehensive property insurance suited to the conditions and the unique risks in the country where the property is located.
“An academic analysis of the performance of cross-border real estate investments indicates that proper remote management of the property, relying on professional local partners and maintaining effective communication, is a key factor in achieving positive yields and minimizing risks.” - Dr. Emily Carter, a real estate researcher at the University of Cambridge.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית