How To Spot Profitable Properties

Returning to Spain for the recent Live And Invest In Spain Conference, I was reminded of my first pure real estate investment outside of the United States.

In 2000, a colleague and I took a scouting trip along the coast of Spain… not just one of the Costas, but the entire southern coast of Spain from the French border to the Portuguese border. It was a two-week trip checking out various real estate markets along the way.

I met with developers and real estate agents in each of the various Costas and saw a lot of bad development, from the high rises in Benidorm to boring mid-rises in Torrevieja and cookie cutter box homes in Denia.

Spotting The “Diamond In The Rough”

What I ended up investing in personally was an off-plan (pre-construction) beachfront condo in Estepona. At the time, Estepona was at the edge of the development curve… in the path of progress and, in theory, a bit riskier than some of the other developments that I had seen on the trip.

That particular market was unproven. It was also more affordable and had more upside potential.

Unlike the generic high-rises several rows back from the beach in Benidorm or the mass-produced boxes in Denia that you couldn’t distinguish one from the other (good luck finding your unit coming home late at night a little tipsy), the project I bought in had something you couldn’t easily replicate somewhere else—it was on the beach.

What Gives Certain Properties Intrinsic Value?

Of course, beachfront property is great if you can find it and afford it. It helps when it’s in the path of progress as well. However, it’s not the only possible option as intrinsic value. In fact, many developers strive to create something unique about their project to help create some intrinsic value when it’s not naturally there like it is with a beachfront project.

For example, a development in Murcia that’s among my current recommendations, has a large lake and an impressive set of other amenities. That’s built-in intrinsic value even though the property itself is 10 minutes from the beach rather than beachfront. In fact, the demand for units under construction is so much that a waiting list had to be created.

When I did my search for a property in Algarve, Portugal, I was shown a variety of properties, from historic city center apartments to cookie cutter condos in a complex of 800 units. While the 800-unit complex was closer to the beach and marina and even showed better current net yields, I opted for the city center unit.

The main reason?

More than a dozen units were for sale at the same time in the large complex. While not a big percentage of the overall total number of units, what would happen in a market downturn when hundreds of units could be put on the market at the same time?

In the end, my net rental yield in Portugal edged up and the property price doubled in about four years when I decided to sell. The same couldn’t be said of the cookie cutter condo.

Intrinsic value can come from different features of a property. Start with the number of units. Commodity properties tend to get commodity prices. That can be fine in a strong market where everyone’s unit is getting rented and rental prices are strong. I could have bought the unit in the Algarve that had a slightly higher net yield in the 800-unit complex, but eventually the competition would eat into net yields when the rental market slowed down.

The city center apartment was unique… there was just one of those.

However, uniqueness doesn’t guarantee rentability. Your next feature to look at is location. What is near the property that will make people want to stay there?

In the case of my pre-construction buy in Estepona, Spain, the answer was just outside the door—the beach. For the property in the Algarve, being in the center of the city was attractive for renters… especially those traveling without a car.

No matter the type of tourist destination you’re investing in, people want to be able to easily access basic amenities, like grocery stores and restaurants.

When looking for a rental in France for Christmas, the options near the lake we wanted to be near were limited. Some properties had better features than the one we ultimately rented, but the winner was chosen because it was close to a town with markets and restaurants that we could walk to even though we had a car. The other ‘‘nicer’’ properties were too remote, even though some were right on the lake.

That gets you to the actual property amenities. Independent houses like villas can have tremendous intrinsic value both for location and features. Lake front would be a plus, but if you’re a 30-minute drive to anything else someone wants to do while renting, the property may not end up being the number one choice for investment depending on what other options are available.

Buying in a development with lots of units can overcome the commodity concern if the community has something special going on… like the project in Murcia, Spain, with the special man-made lake.

Spain has a lot of golf courses, so a unit on a golf course in Spain is, on the one hand, effectively a commodity property. Therefore, if you want a golf property,

look for other features that give it intrinsic value. Maybe that’s location of the course itself… near to a beach or closer to town. Maybe it’s the type or style of the unit as well as the number of units.

For example, if the best golf course in the area has hundreds of 3-bedroom villas around it but only one small set of 1-bedroom apartments, that could be a selling and renting advantage for the smaller units.

An Eye For Winners

At my most recent Global Property Summit, an attendee asked why a project in Northern Cyprus that I’ve been talking about for years wouldn’t be considered cookie cutter. On the surface, the overall development has the makings of being a commodity property with thousands of apartments in dozens of high-rise buildings. My response was quick and easy, as I had visited in person the previous year.

The developer was creating intrinsic value in a multitude of ways. First, each building complex had something new that added a unique activity space not only for the next building but for the overall community… a movie theater, a kids-only pool area, a wine bar, etc. They also built a commercial area to serve the entire complex, which includes shops and restaurants that allowed renters to not have to leave the complex if they didn’t want to.

However, the most important feature of the community became clear to me when I was standing on the balcony of a recently completed unit and looking across to another developer’s buildings going up. Those other units may have had swimming pools and other amenities planned for each building. What they didn’t have was organized rental management for investors.

The location was the same for each set of buildings… close to the beach, but not on the beach, but the developer we worked with has the better investment option by far because of the all the intrinsic value they were creating.

If you can find a home run property with intrinsic value like I did in on that Spanish beach more than two-decades ago, buy it. Unfortunately, most of the time you’ll have to look a little harder to find a property that has features that set it apart from the local competition.

When you do find that type of property, you’re likely to have a winner.

Stay diversified,

Lief Simon

Editor, Simon Letter