This week's Wednesday Wealth Dilemma is about overseas investment property. This is a long blog post about ours - why we bought it, the pitfalls and pleasures, and what we should do with it now. As always, it would be good to hear your own experiences, and thoughts about our dilemma, by adding a comment below.
Like middle-aged lemmings on speed, the missus and I leapt at the chance to withdraw equity from our home during the property boom. We used that borrowing, together with a local Euro mortgage, to buy an off-plan apartment in the French Alps in 2003.
The glossy sales pitch
A brand new village was being created in a stunning Alpine location with views across to Mont Blanc.
The developer was a well-known North American company which had already built several successful snow resorts, one of which we had skied at and loved. This was their first European foray, and we figured they'd want to make it their showcase for further expansion.
The location of the apartment would be ski-in, ski-out, which is heavenly, as all of you who have trudged a mile in ski boots to the nearest lift, carrying skis, poles and a mountainous hangover will testify.
They promised the return on investment would be a healthy "5%-10%, once the village had been fully developed, based on average occupancy rates of 70%-80%".
The investment logic
Despite investing in one place, we wanted to be able to explore different countries and cultures whenever we liked, rather than return to the same place year after year. The ownership structure offered that flexibility - we would own the freehold but would enter into a leaseback arrangement, retaining 2 weeks each year for our own use.
The rest of the time, the apartment would be marketed by the French management company and run by them, like a conventional hotel.
We hoped that once the mortgages were repaid, the property would eventually provide an income for our retirement.
Seemple, n'est-ce pas ?
The reality
Our apartment was completed on time, on budget and is top notch. We're above the boulangerie - and the smell and taste of freshly baked croissants on a sunny alpine morning are incroyable.
So what's the problem? Money, naturellement.
From the start, compulsory costs were way in excess of what was "promised" by the developer during the sales pitch. Revenues were less than forecast, which was market-driven to some extent, but the financial reporting of the French operator was more opaque than a crêperie window in a blizzard. And the complex structure of relationships set up by the developer contained inherent conflicts of interests between different parties.
Our return on investment was initially around 2.5% gross, 1% net of costs other than mortgage interest. It's currently closer to a dizzying 3.5% gross and 2% net, still a far cry from the heralded 5%-10%, even though the village is completed. I know the financial and property markets have since collapsed, but it's tough to see how the promised land was reachable even at the height of the boom.
Where are we now?
- 6 years into a 10 year repayment Euro mortgage, currently paying a reasonably low variable interest rate of 2.35%
- The developer recently sold their parts of the village to France's leading holiday apartment rental company - we're hopeful that they will be more transparent with owners and have more marketing muscle to improve both room and occupancy rates as markets recover
- We are trying to sell our apartment, but so are many other owners. Our asking price is marginally above what we paid for it, but the Euro is now around 25% stronger against Sterling than when we bought. Mortgage repayments cost more, but our apartment is worth more in local currency terms. We could probably sell if we dropped the price 10%-15%.
So where does all this fit in with a blog about growing your wealth, and what is the dilemma?
The dilemma
What should we do with our mountain retreat? Should we:
- keep the apartment for a few years in the hope that the new management company starts to improve the return and its value?
- keep for the long term in the hope that once the mortgage is repaid, it provides a reasonable retirement income as we had originally planned?
- sell now while the value is lower but the Euro is strong? That raises the further question of what we'd do with any equity realized, but let's cover that in another blog post!
- chuck in our jobs here, live in the apartment, work in the boulangerie, get fat on fresh baguettes and become ageing ski-bums? And don't forget, you too can follow a lovemoney goal on Get ready to retire.
Please post any comments below!
The greatest risk is the risk of riskless living - Stephen Covey