How a Second Home Overseas Could Pay For Retirement

Renting out your vacation home can generate retirement income.

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When considering the purchase of a second home overseas, either as a place to live part time in retirement or a place to holiday with your family, the most important thing is to remember that you’re buying primarily for personal use. The driving consideration, therefore, should be the pleasure potential. Buy what and where you want.

Kathleen Peddicord
Kathleen Peddicord
At the same time, one of the best things about a second home overseas is that it can double as an investment. A piece of property in another country that you use only part of the time can be rented out, generating enough cash flow to cover associated carrying costs and, ideally, leaving something left over each year to boot.

In this way, your part-time foreign retirement residence could help to subsidize your retirement overall. To maximize the potential for this, you should pay attention to what matters most for rentals in your chosen market and balance these factors against your personal priorities.

Property type and size are universally important rental factors. In most markets, a one- or two-bedroom property is more rentable than a three- or four-bedroom place. The incrementally higher rental rates you should be able to charge for a three-bedroom usually don't compensate for the higher cost of purchasing the larger apartment. While a super high end property might suit your personal preferences, a higher end (read: more expensive) property probably means a lower rental return. To keep your occupancy up, you'll likely have to compete on price with the general (not high end) market.

Here are questions to answer when considering any potential second home or vacation rental overseas purchase:

Where in your target location do people most want to stay? In Paris, for example, perhaps the world’s most recession-proof rental market, the traditionally best arrondissements for rental are the 5th and 6th. These are also among the most costly arrondissements. More affordable and also good for rental are the 4th and the 9th arrondissements, meaning an investment in these areas could generate better cash flow.

Take a similar approach when shopping for a rental in any city. Rather than focusing on the heart of the most rentable district, look around the fringes of the main tourist area and work your numbers to determine if the lower acquisition costs could result in a better cash flow, even with slightly lower expectations for rental price and occupancy.

When shopping for a rental in a beach location, the closer to the beach the better (obviously). However, again, prices will be higher right at the beach, so something slightly back with an ocean view might be a better buy.

What size rentals are in demand in your target market? Again, generally speaking, one- and two-bedroom apartments are the rental sweet spot. However, a market can be overrun with rentals of this size, creating opportunities for either smaller studios or bigger three-bedroom places.

In Medellin, investors are buying two- and three-bedroom apartments, even if that's more apartment than they need. Prices are so low it's hard not to be tempted to buy bigger and, right now, rental returns for these apartments are high. That said, a one-bedroom apartment in this city could generate the same or better cash flow. Again, it's a matter of balancing investment agenda with personal circumstances and preferences.

Is there a high season and what's the opportunity for occupancy beyond that time? Also, when considering the rental season, remember your plan (if you have one) for personal use. Would you want to be occupying the place yourself during the season when much of your rental return otherwise might be earned?

Punta del Este, Uruguay, is a good case study in this context. The high season in this coastal resort town is mid-December through February. Over this 10-week window, you can charge outrageous rental rates. In fact, it's not uncommon to earn as much as 80 or 90 percent of the annual rental income during this peak-season period alone. The rest of the year, the going rental rates are a fraction of the short-term rents you can ask in January and February. That's ok, as you can earn enough during this period to make the investment worthwhile overall.

Unless, of course, that's the time of year you'd want to use the place yourself. In that case, your intended rental investment could default into a holiday home for the family, period.

Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 28 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring and investing overseas in her free e-letter. Her newest book, How To Buy Real Estate Overseas, published by Wiley & Sons, is the culmination of decades of personal experience living and investing around the world.