About a year and a half ago, Lief Simon advised readers of his “Global Real Estate Investor” report to buy Argentinean real estate. Since then, property in Buenos Aires is up 30% to 40%. In December, he got his readers in on the ground floor of a development where prices increased 76% in four months. And this year, he’s already uncovered a deal that’s projected to return 200% to 400% profits in 12 months.
We recently caught up with Lief in London to find out what opportunities he might have for ETR readers.
ETR: Lief, as the editor of “Global Real Estate Investor,” you spend most of your time traveling around the world researching and analyzing various real-estate markets. You’ve personally transacted purchases in 11 countries and currently have investments in six of them. I’m especially interested in the most recent one. Could you tell us something about it?
LS: Well, yes. About four years ago, I learned of a real-estate opportunity in France. For lack of a better name, it’s called the French Leaseback. I have been telling my readers about it — and now, I just invested in one myself in Antibes, which is on the French Riviera, halfway between Nice and Cannes.
ETR: What is the French Leaseback, and how does it work?
LS: The French government has put incentives in place for developers and investors to create short-term rental properties for vacationers. It’s similar to a triple-net lease, but, based on construction inflation, the rent automatically goes up every year.
ETR: Wait a second. What’s a triple-net lease?
LS: Oh sorry. That’s a lease on a property where the tenant pays not only rent but also taxes, insurance, and maintenance. They mow the grass, shovel the snow, and do just about everything associated with the property. The lessor usually has no management responsibilities at all. In the U.S., triple-net leases are often used with IRS 1031 exchanges.
ETR: Interesting. Now, let’s get back to what you were saying about French Leasebacks being similar to these.
LS: Right. Some of the advantages are similar — but the leaseback I’m talking about is typically used for a vacation home. Here’s how it works: Basically, you buy into a development that’s specifically for vacation rentals. The French government will reimburse the 19.6% Value Added Tax (VAT) that you pay when buying new construction, and the development is put in the hands of a management company that you sign at least a nine-year lease with. The management company pays you between 4.5% and 6% net on your net cost (your cost after the VAT refund). The management company then takes care of all of the expenses except the land tax, which is minimal in France.
ETR: Some of our readers may be thinking that this sounds like a timeshare, which has something of a bad reputation in the U.S. Can you explain the difference?
LS: There’s really no comparison. With the French Leaseback, you own the property 100%. After the initial lease, you can do what you like with it, including living in it full-time. During the lease period, some developments allow you to opt to use it personally for one to four weeks each year — but since this reduces your guaranteed cash returns, I don’t recommend doing it. Some management companies offer discounts to owners on all properties that the company manages. If you intend to vacation in France from time to time, this is a better option, since you don’t reduce your returns and you pay only if you stay.
ETR: Does it take a lot of money to get started with a French Leaseback?
LS: It’s generally difficult for non-residents to find financing to buy real estate in other countries. But in this case — and in France in general — it’s not a problem. This means you can get into one of these leaseback properties for as little as 2,000 euros ($2,407) plus closing costs. The least-expensive property I know of right now is 40,000 euros ($48, 000). Most properties range from 100,000 euros ($120,000) to 500,000 euros ($600,000) net of VAT. Financing can be obtained for up to 80% of the VAT-inclusive price. Of course, the higher the leverage the lower the monthly cash flow will be.
ETR: What are the risks?
LS: The main one is the currency risk. These properties are priced in euros. However, since the euro is a major currency — and with a minimum nine-year investment horizon — that really isn’t a huge issue. The other risks are those you typically face in real estate – depreciation of the property, increases in interest rates (if you have a variable-rate mortgage), poor management of the property. Again, these risks are minimal. The properties I’m talking about are located in tourist areas. This means they aren’t likely to fall in value as long as they are well maintained. That’s the management company’s responsibility — and getting a bad management company isn’t likely, since this system has been around for awhile and most of them have extensive experience and manage multiple properties. And as for the mortgage, you can get a 20-year fixed, but the rates will be higher (at least to start).
ETR: What’s the upside potential?
LS: Some people may think “What’s the big advantage of a 4.5% to 6% net return?” The upside potential is that you can easily leverage a leaseback property, which sets it up to have breakeven cash flow from day one. If you do that, using relatively conservative appreciation numbers, you could end up with 12% to 15% annualized returns after the initial nine-year lease. Then, you can renegotiate the lease and generally increase the net payout to 8% to 10%.
ETR: Oh, one more thing. What locations are you talking about? Where you can get these kinds of deals?
LS: How about a pied-a-terre in the heart of Paris, a cottage in an Alpine ski resort, a penthouse in Cannes, or a private island retreat on Corsica?
ETR: Sounds like something worth looking into. Thanks very much, Lief.