The World Wide Web is full of amazing stories. The challenge is to determine the real stories from the fake or misleading news. Recently, while I was surfing the web, I found some interesting stories.
Hankering for a sweet treat fit for a king?
“Burger King has apparently unveiled a new chocolate Whopper comprised of a flame-grilled chocolate patty, topped with candied blood oranges, raspberry syrup and vanilla frosting, in a chocolate cake bun.”
Can’t travel, but would love to know what Sweden smells like?
“Scandinavian homeware retailer Clas Ohlson announces the latest product launch—bottles of fresh Swedish air. Featuring a ‘classically Swedish design’ and bottled in the area surrounding Insjön, the product will apparently allow customers to breathe like a Swede.”
Looking to diversify overseas and thinking about Colombia?
“Buy a Home In Medellín, Colombia for US$150,000 and make US$3,000 per month for a 24% rental return.”
Want to get rich fast?
“Invest US$100 And Turn It Into US$1,000,000 In Only One Year!”
Ok, I made that last one up, but I actually found the other stories online.
Because I live in Medellín, Colombia, the third story caught my eye. Curious to learn more about this amazing opportunity, I did a little investigative work on my own to see whether Overseas Property Alert readers might also have the chance to cash in on this deal.
Turns out I couldn’t find any actual properties which meet the original author’s criteria and which produce income at the levels described. Frankly speaking, this claim is a misleading exaggeration that could trick readers investing with a disappointing outcome.
Does The Right Property Exist?
The Pitch: According to the article, your target property is a single-family house in Laureles, a barrio of Medellín. The perfect house is older but renovated to modern standards. All in, your total investment is US$150,000.
The Reality: While I was able to find a handful of available houses in the Laureles area, those which were priced at US$150,000 or less were small, terribly dated homes. To entice the type of tenant willing to pay the author’s suggested rental rates and achieve the 24% return, the properties would need to be updated… or even fully remodeled.
More Pitch: Your property needs to have three to four bedrooms that could be rented separately to maximize rental return. Then, you can charge US$30 to US$50 per night per room. Some rooms could be short-term rentals for the highest rental returns, while others would be long-term rentals for stable income production.
More Reality: In reviewing several companies catering to short-term rentals in this area, I found a few offering private rooms in a shared home. The prices ranged from US$10 to US$38 per night for a room.
Long-term tenants pay a reduced monthly rent, not 30 days of the daily amount. Local real estate websites suggest long-term rental prices average US$1,370 per month for entire homes and apartments (not just for a room).
As a result, your target market can’t be local residents, as most Colombians can’t afford this rent (the average Colombian salary is only US$692 per month).
What Kind Of Occupancy Can You Expect?
The Pitch: Occupancy rates are not even mentioned by the author. Obviously, without regular occupancy your rental return will suffer.
The Reality: Renting private bedrooms in a shared home limits your pool of potential renters. At least in Colombia, the renters who are willing to share a home (and perhaps share a bathroom with strangers) are backpackers, digital nomads, or short-term visitors.
These folks will stay in private homes because they don’t want or can’t afford to pay hotel rates of US$100 per night and up. Plus, generally speaking, transient tenants do not treat their temporary home the way a home owner would, so your costs usually increase if you focus on short-term rental options.
Short-term occupancy rates in Medellín tend to hover around 65% to 80%, so simply using the daily rate multiplied by 30 days is not a fair calculation for true rental returns.
Short-term tenants also mean constant turnover, more maintenance and upkeep, the need for a responsible and trustworthy property and/or rental manager, and more expenses overall that reduce your overall profits.
Speaking of which…
Are The Projected Returns Calculated Before Or After Expenses Are Paid?
The Pitch: While suggesting a fantastic potential return of 24% annually, it is clear that this number is calculated before all related expenses are paid.
The Reality: These key expenses must be considered when describing true rental returns:
- HOA fees
- Property taxes
- Utility costs, which vary in Colombia by strata, with Laureles paying some of the highest utilities
- Management fees
- Maintenance and upkeep costs
- Furnishings, appliances, decorations, including replacement costs
The author’s proposed rental returns do not take these expenses into consideration. The suggested return of 24% is a gross return number that doesn’t tell the whole story. This type of projection is misleading to an unsuspecting reader.
Proposed Rental Returns Versus Actual Returns Currently Available
The Pitch Summary: The suggested rental return rate of 24% is based upon renting three to four bedrooms in a shared house in the Laureles barrio of Medellín, Colombia. The house would offer updated spaces, modern conveniences, and comfortable furnishings, all for an initial purchase price of US$150,000.
Rental rates are suggested at US$30 to US$50 per room, per night, or US$300 to US$400 per room, per month. The combination of short-term rental and long-term rentals could bring in as much as US$25,000 to US$36,000 gross income per year. With an initial investment of US$150,000, you will realize a 24% rental return if you receive US$36,000 in rent per year.
The Reality Summary: I couldn’t find a modern, fully furnished, single-family home with updated amenities and appliances in Laureles for US$150,000. The homes I found at that price point were older, traditional homes, with rustic design, dated appliances and kitchens, and no furnishings. (If the goal is to rent individual rooms on a short-term basis, they must be furnished.)
The homes I found for less than US$150,000 need a lot of work to make them viable rental options. The necessary renovations and updates would bring the cost well above the suggested investment price.
The author’s suggested rental rates are not realistic. Short-term rates for comparable rooms are not US$30 to US$50 per night. Instead, you can realistically expect US$10 to US$38 per night.
The suggested long-term rentals of US$300 to US$400 per room per month are possible, however, a monthly rent of US$1,600 (if four bedrooms are occupied) doesn’t yield the amount needed to achieve the promised yearly returns. The numbers just don’t add up.
Finally, a well-established apartment rental company told me that they could never get US$3,000 per month for a US$150,000 home in Laureles. Only the most elaborate penthouse apartments in El Poblado (the most upscale area of Medellín) valued at more than half a million dollars could bring in this type of rent in this town.
In reality, true net rental returns on a US$150,000 investment fall in the 4% to 8% range if a manager handles your property. If you manage your own property, you could clear up to 12% return, after expenses.
Today’s lesson? Don’t believe everything you read. Perform your own due diligence before investing to ensure you understand the pros and cons of every opportunity.