BBC Capital

Four places to buy property — and two to avoid

About the author

Bryan Borzykowski is a Toronto-based business writer and editor. He writes about personal finance, wealth issues and other money topics for BBC Capital and also contributes to the New York Times, CNBC, CNNMoney, Canadian Business and the Globe and Mail. He’s written three investing and personal finance books, too. Follow him on Twitter @bborzyko. 

  • The perks of property investment

    If there could be only one rule of investing it would be diversify - and then diversify some more. That typically means buying a mix of domestic and global stocks and bonds, but more adventurous investors have found another way to broaden their asset mix: investing in global real estate.

    Buying homes and condos in the right markets - those that are still growing, are popular with international visitors interested in renting and have a thriving local culture - can be a good way to keep a portfolio afloat during downturns, said Ashley Osborne, a Hong Kong-based executive director of international properties for Colliers International.

    Housing price fluctuations can be relatively immune to global market movements. Prices depend more on local factors, such as supply and demand for properties and rentals, the country or city's economic growth, local consumer spending and more, Osborne said.

    Certain locales also offer much higher yields in the form of rental income profits than bonds, said Yolande Barnes, director of residential research for Savills, a London-based property research firm.

    The best places to buy are in international cities that attract a lot of foreigners such as New York or Japan, said Barnes. Investors should also look at places where demand for housing is high, but supply is low and consider areas where rents grow year-after-year.

    Some people like buying investment properties purely for the capital gains potential, said Osborne, but be careful: the higher housing prices get the lower the annual yield. If you don't need the rental income and can easily pay the mortgage, then playing the capital appreciation game can work, he said. If you want a regular income, though, then avoid 'hot' markets.

    So where are the best places to buy a rental property? Which cities or regions should you avoid? (Thinkstock)

  • Tokyo's rental boom

    Japan has been going through major economic changes this year. Its central bank has embarked on a multi-billion quantitative easing program, which seems to be spurring economic growth. The move has also made the country more attractive to real estate investors, Barnes said.

    Thanks to the government's bond buying program, Japan's 10-year government bond yields have hit all-time lows. With rates at 0.8%, it's become easier to borrow to buy. That's helped increase rental and housing prices, Barnes said.

    According to the Prime Minister's office, rents increased by 2.6% in July over the year before, while land values increased by 0.1% year-over-year that month, the first gain since 2008.

    With the economy growing better than it has in years, Barnes expects rents and prices to continue improving. Currently, investors can get an annual rental yield of about 5%.

    Japan's market, however, is unusual in that housing values tends to depreciate over time, she said. New homes and condos are often rebuilt after 30 years, so it's important to look at land values, rather than home prices when selecting property.

    That peculiarity in the market is another reason why it's an attractive place for income investors - when real estate prices fall, yields rise, she said. (Thinkstock)

  • Cautious opportunity in Cairo

    Despite the political upheaval taking place in the city, Cairo offers some of the best yields around, said Matthew Montagu-Pollack, the publisher of the Bristol-based Global Property Guide.

    However, investors should be careful of where they purchase property, as not every neighbourhood has potential. Look for homes and condos in the affluent Maadi suburb. That's typically where deep-pocketed foreigners like to stay when they visit the region, Montagu-Pollack said.

    Property owners can see yields as high as 9.5% per year in that part of town. Outsiders typically aren't moving to the area for good - they're in the city temporarily and would rather rent.

    "They're not buying so that makes rental yields much higher," he explains.

    Property taxes are low and capital gains taxes are non-existent, which adds to the attractiveness of the area, said Montagu-Pollack.

    Of course, there is a danger investing in the region today. With so much political unrest, it's far from clear what the country will look like a year from now. If you're willing to make a bet on this volatile country, the payoff can be big, he said. (Getty)

  • Latvia's seaside attraction

    Montagu-Pollack admits that he has a bit of a love affair with this Eastern European locale. "It's a stunningly beautiful city," he said, "and people tend to gravitate to beautiful cities more."

    While the Baltic Sea sightlines bring renters to the region, it's the attractive 5.4% yields that excite property investors.

    The region is experiencing good economic growth after a recession in 2010. Latvia's gross domestic product - important measure of a nation's financial health that measures the value of goods and services a country produces - expanded by more than 5% in 2011 and 2012.

    According to Lithuanian real estate company Ober Haus, that growth has helped increase rents - they were up about 15% last year - but prices are still well below their pre-recession levels, leaving room for more appreciation. Investors can expect rents to continue rising off their bottom, Montagu-Pollack said.

    The country also has "reasonable" capital gains taxes of about 15% and its laws are pro-landlord, he said. The best finds are in Riga, Latvia's capital city, which is where most foreign buyers and renters flock. Montagu-Pollack points out that the city's unemployment rate is fairly low, at around 7%. That's a positive because it means people have money to spend on housing, he explained. (Thinkstock)

  • Manhattan's pricey persuasion

    America's most populated city is notorious for its high rents, but "what's bad for the tenant is good for the landlord," said Barnes, who says investors can expect 6% annual yields. However, not every investor will be able to afford a property in the city - the median price for a condo or co-op was $865,000 in July, up 5.4% from the first three months of the year.

    Manhattan is attractive for one simple reason: everyone wants to live there. "It's an entry point to an international market," Osborne said. Still, despite that demand and high prices, he thinks it's one of the cheaper global cities. As America's economy strengthens, though, rents and real estate values should continue to rise.

    Barnes points out that while 70% of the real estate market is co-ops - a memberships-based housing complex - investors should think twice about buying one. Co-op boards often make the decision on who can buy a property and when to sell so it can be difficult to get and it may be even harder to leave.

    The condo market's values are also rising faster than co-ops, she said, and it's more open to overseas investors. Also avoid houses - they're not as in as high demand, so they receive lower rents, she said. (Thinkstock)

  • Avoiding Hong Kong's rapid rise

    Investing in foreign properties fails when housing prices are too high and rents are too low. While you want capital appreciation, if values rise too quickly then yields will plummet, Osborne said.

    Hong Kong's housing prices have skyrocketed over the last decade. According to data culled by the Economist, the country's house-price index soared 285% between Q1 2003 to Q1 2013.

    It's expensive, said Barnes, because Hong Kong real estate is one of the easier investment assets for mainland Chinese to buy.

    "The mainland buyer's lack of investment alternatives has impacted real estate values," she said. "There's such a weight of local money pressing on the market that the relations between rents and capital values has been lost. Hong Kong should be a no-go for investors, she said. According to Savills, investors will only revive a yield of around 2.5%. (Getty)

  • Monaco's monumental per-metre prices

    While this luxurious city-state on the French Rivera is a great place to visit, it's a terrible location for investors, said Montagu-Pollack. With its reputation as a playground for the ultra-wealthy, it shouldn't be surprising to learn that real estate in the region is pricey.

    Reportedly, buyers will have to cough up $57,600 to $63,700 per square metre for real estate in the country. Like Hong Kong, Monaco is attracting wealthy homeowners, but from all over the world. Knight Frank, a London-based real estate consultancy, said in a recent report that there are more than 120 nationalities living in the city.

    The company also pointed that home prices are becoming even more expensive - they've gone up about 10% in 2013. Investors can expect yields of about 1.9%. "Those yields are tiny," Montagu-Pollack said. (Thinkstock)