Warm sun streamed through my office window, drawing stripes of light on the parquet, as Daniel, a new client, sat across from me with a hesitant smile. At 35, Daniel had already established himself as a senior developer at a major cybersecurity company, but his true passion was entrepreneurship and investing. Lately, he felt that his investment portfolio - made up mainly of stocks and mutual funds - needed significant diversification. He came to me after reading my weekly column on international real estate investments.
“So, Daniel,” I opened in an encouraging tone, “tell me a bit about the properties you found.”
“Well,” he began, his fingers leafing through the folder of documents he had brought with him. “There's an apartment in central Lisbon, in the historic Alfama neighborhood. A 65 sq.m. unit, fully renovated, in an old building with local character. It's located in a very touristy area, within walking distance of the city's main points of interest. The yield from short-term rental reaches about 7.5% net per year, and the local bank offers a mortgage at an interest rate of 2.8% to foreign residents.”
I nodded.
According to a 2023 report by PwC and the Urban Land Institute, Lisbon was ranked among the top five cities in Europe in terms of real estate investment viability, with average growth of 4.2% in property values over the past five years.
“And the second option?” I asked, signaling him to continue.
“It's an 85 sq.m. apartment in the Pankow area of Berlin,” Daniel continued, his eyes lighting up with enthusiasm. “The area is undergoing accelerated gentrification, with new development plans for public transportation and employment centers. According to the local agent, real estate prices there rose 15% in the past three years, despite the general slowdown in the German economy. The rental yield is moderate, around 3.8%, and the financing is more complicated, to the point of being impossible.”
According to a study by Germany's IW institute, development areas in Berlin recorded an average appreciation of 12% in three years, although in 2023 there was some moderation. A Deloitte Real Estate report indicated that Berlin is still considered one of the three most attractive cities in Europe for long-term investment, with growing demand expected in the coming decade due to continued internal migration to the city.
“Daniel,” I turned to him after a moment of thought, “let's focus on your priorities. What is the deciding factor for you? Stable cash flow in the immediate term, or building long-term capital?”
Daniel sighed lightly and picked up the cup of coffee I had offered him. “That's exactly the question that bothers me. On the one hand, I want to see a quick return on the investment - the yield in Lisbon is truly tempting. On the other hand, I'm a great believer in the German economy and in Berlin's long-term potential.”
“Let's examine it through data,” I suggested.
According to a 2024 study by the University of Oxford, investors who focused on properties with a high current yield managed to achieve a total return (IRR) 23% higher than those who focused only on appreciation potential, especially in periods of economic uncertainty such as the one we are in.
I opened a chart I had prepared in advance, showing the differences between the two types of investment. “Look, while properties with growth potential can deliver impressive returns, they come with high risk. At the same time, there are studies/reports indicating that about 42% of the areas defined as ‘emerging’ in Europe did not realize their growth potential in the past five years.”
“And the financing?” Daniel asked.
“That's a critical point,” I stressed. “Leverage in Lisbon allows you to achieve a return on equity (ROE) of about 12%, compared with Berlin.
According to a CBRE study, proper leverage can increase the return on equity by an average of 60% in real estate investments.”
I explained to Daniel the concept of “smart money” - how sophisticated investors use leverage to increase returns, but I also took care to emphasize the risks. “It's important to remember that leverage is a double-edged sword - it increases the return, but also the risk.”
A McKinsey study found that about 28% of investors who used leverage above 70% ran into cash flow difficulties in periods of economic slowdown.
We talked further about remote property management, international tax costs, and the specific risks in each country.
“I understand your inclination is toward Lisbon,” I said after an hour of in-depth discussion, “and I think that is an entirely reasonable approach.”
According to a Harvard Business Review study, investors who began their path in international real estate with properties with a high current yield tended to expand their investment portfolios more successfully than those who focused on appreciation.
“Yes, I think I lean more toward Lisbon,” Daniel confirmed. “The immediate yield and the convenient leverage seem to me more suitable for this stage of my life.”
In the following weeks, our partner team of lawyers in Portugal carried out comprehensive due diligence on the property. They examined the building's legal history, made sure there were no debts or attachments, and checked the local rental laws. At our next meeting, I presented Daniel with a detailed document covering all the legal and financial aspects.
Daniel bought the apartment in Lisbon and was very pleased with the decision. A year later, he called me excited. “The actual yield reached 8.1%,” he told me. “That's even more than I expected. I'm thinking of expanding the portfolio and buying another property, maybe in Porto this time.”
“Excellent timing,” I told him. “To the best of my knowledge, Porto is currently at an ideal entry point, with prices still 15% lower than Lisbon, but with a faster growth rate in the past year.”
Daniel's case illustrates an important principle in international real estate investments - the importance of matching the strategy to the investor's profile and goals. While the temptation to invest in “hot” areas with future growth potential is always present, sometimes it is precisely stability, leverage, and immediate yield that form the best basis for building a successful international real estate portfolio.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית