John M. Says:
Hi,
My wife and I are avid fans of International Living and have been reading for years. We’ve recently decided to take the plunge and purchase a property overseas. Since we don’t plan to use it for another two years, would it make sense for us to buy a place pre-construction?
Real Estate Trend Alert Founder Ronan McMahon Says:
Hi John,
A lot depends on where you are buying. In some markets, it might make more sense to buy a resale property – perhaps something that needs a refurb, or a bank foreclosure. In some locales, older homes are in prime locations, too, which is another consideration.
But in some up-and-coming destinations, buying pre-construction might suit.
You should get a discounted price with pre-construction to compensate you for taking on some of the early development risk, but the real incentive to buy pre-construction comes from leverage.
Terms of payment vary from project to project, but no matter what the terms are, you are leveraging your returns to some degree. A typical deal will start with a small down payment, and work through various stage payments during the construction period until you have paid anywhere between 30% and 80% of the purchase price. The balance is due when the keys are turned over and title transfers to your name. (You should never pay in full upfront on a pre-construction property; wait until it has been delivered and the title deed is yours.)
Let’s say you pay 50% over a three-year construction period, and values rise by 25%.
That puts you up 50% on cash invested. If values rise 50%— which we’ve seen with some past deals I’ve brought to members of my Real Estate Trend Alert investment group—then you double your cash invested.
Of course, if you don’t buy well, leverage can work the other way; a fall in price means that you are down on your investment. That’s why it’s essential to protect yourself and make sure your pre- construction deal has strong fundamentals from the get-go.
The “right deal” should be in an appreciating and liquid market, with high demand, supply constraints, and a strong developer at the helm.
The best way to make sure you’re only buying in the right deals it to join my Real Estate Trend Alert group here.
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