Expat Case Study: Evaluating a Buy-to-Rent Condo Investment

Chad Creveling, CFA and Peggy Creveling, CFA |

Creveling & Creveling protects its clients' privacy. The following case study outlines a fictitious example designed to demonstrate the type of financial decision-making required to achieve financial security. It does not refer to any specific case.

The Situation

To help invest for their retirement, Bill and Emily are considering using their cash savings to purchase a new condo in the Asian city where they live, and then renting it out to other expatriates. Purchasing the condo would take up a considerable amount of their retirement savings, and they want to make an informed decision before going ahead with the plan. However, they are not sure how to evaluate an individual property as an investment, nor how to compare it to other possible investment options.

Their real estate agent has told them they could get a 5–6% gross rental yield. Right now, their only benchmark for comparison is the 1% they are receiving on bank deposit. In comparison, the agent's 5–6% gross rental yield sounds attractive. However, the bank deposit is low risk and easily accessed, whereas there are a number of risks in the condo investment and the condo cannot be quickly liquidated.

Additionally, Bill and Emily are not sure if 5–6% is realistic. For one, it doesn't factor in the costs they face in purchasing and maintaining the condo. They are also concerned that market oversupply may make it difficult to find a good tenant at the rental rate that the real estate agent is assuming. Some of their friends have lost money on real estate investments, and so they want to do their homework before making the decision to buy.

The Approach

To make an informed decision before investing in a buy-to-rent condo, Bill and Emily need to compare their expected long-term return and risk in investing in the condo against their other options, including bank deposits and other types of investments. To do this, they will need to collect some data and run a comparative analysis.

Estimating the Return on a Rental Condo

Bill and Emily will want to calculate an expected net return on the money they would invest in the condo after all expenses are considered. They will need to consider all income as well as all costs, including closing costs on the purchase, expenses associated with renting and maintaining the property, and property taxes (if applicable).

The condo they are most interested in purchasing is a new two-bedroom with a price equivalent to USD 250,000. Some similar condos in the same building have recently rented for USD 1,000 per month, so they have decided to use these figures as a starting point. Additionally, Bill and Emily do some research and make the following assumptions:




Purchase price


Translated from local currency equivalent

Closing costs, % of purchase price


Real estate agent, transaction, and legal fees

Rental rate


Per-month rental rate of similar condos in building

Occupancy rate


Average 11 out of 12 months each year

Rent price inflation rate


Average per year

Rent cost inflation rate


Average per year

Building maintenance fees


USD 1 per sq meter x 100 sq meters x 12 months

Agent booking fee


One month’s rent per year

Contents and liability insurance


Cost per year for fire and liability insurance

Annual wear & tear (WAT)


Minimum cost of annual repaint

Major maintenance fund


Average of 1% of total value per year—budgeted for
major maintenance and appliance replacement over time

Net rental yield: Using the above figures, Bill and Emily estimate that their annual net rental income would be about 1.8% per year, after all costs (building fees, standard wear and tear, vacancy rates, and occasional major maintenance) are considered. This is considerably less than the gross rental income of 5–6% per year that the real estate agent indicated. This is also a pretax figure. At this point, Bill and Emily believe that if they figure in depreciation costs, they may not have to pay income tax on their investment. However, if they hold the property long enough or if the tax code changes, they may also owe some tax on the rental income.

Price appreciation: Bill and Emily are unsure of how the value of their condo may change over time. Originally, they thought they could make a good return when they sell, especially since the asking prices of new property projects being launched in the city have been steadily increasing over the past few years. After researching the market, however, they have concluded that secondary market prices have not done as well―buyers seem to prefer new buildings, there are relatively few resale transactions, and many buildings are not maintained well after a few years. They decide they would plan to sell their unit in five years before it begins to look shabby, and hope that its value would at least keep up with the expected local wage inflation rate of 2% per year. After closing costs and tax on the gain, their total return on investment (net rental income + appreciation) would average 1.6% per year.

Risks to Condo Investment

Next, Bill and Emily will need to consider what risks they may be taking in purchasing the condo. Some of these include risks to the return estimate they calculated, risk from holding most of their savings in one undiversified investment, and risk associated with holding an illiquid asset.

Risks to return calculation: A number of risks could result in the actual return that Bill and Emily receive being lower than the figure that they have calculated. For example, given their concerns of market oversupply, one area they will need to consider is whether the rental rate they are expecting could come under pressure, and if the vacancy rate of one month per year is realistic. Even relatively small changes in these assumptions would lower the net rental yield and overall expected return. They will also need to consider whether their cost assumptions are realistic. Finally, if property prices are in a bubble or if their building is not well-maintained, they also have to consider whether their condo can be sold at a gain in a couple of years. It is possible that their overall return on investment could be negative.

Undiversified risk: Bill and Emily will also need to consider whether they can afford to effectively "hold all of their eggs in one basket" in the form of using a large portion of their savings to purchase a single undiversified asset. Being undiversified means they face a greater risk of loss than if they were diversified, but they do not enjoy a greater expected return to compensate them for this risk.

Illiquidity: Finally, Bill and Emily will need to consider the consequences they may face in purchasing an illiquid asset. For example, selling their unit could take anywhere from 3–4 months to two years, depending on market conditions. They would not be able to sell just a few shares in the condo if they needed to raise cash―their only option would be to sell the entire unit. They are unlikely to be able to sell it quickly unless they are willing to take a substantial price cut.

Comparison: Rental Condo vs. Diversified Portfolio

Bill and Emily are considering the rental condo investment because of the low interest rate they are receiving on their bank deposits. However, there are other investment options that they could consider besides bank deposits or the condo. One choice that could make sense would be to construct a well-diversified global investment portfolio that holds low-cost exchange-traded funds (ETFs). This would give them exposure to a variety of global assets in small amounts, including stocks, fixed income, and alternative investments such as REITs, commodities, and specialized bond funds.

Portfolio expected return: While the market value of such a diversified portfolio may vary from year to year with market fluctuations, over time its value will increase. Depending on their proportion of risky assets, a well-diversified portfolio might have a long-term average expected nominal return of 6–7% per year (assuming 2% annual inflation), based on historic averages. Depending on their nationality, country of residence, and where they intend to hold the portfolio, they may be subject to tax on their returns.

Portfolio risk: Risks involved in investing in a diversified portfolio include short-term market volatility, which can affect the value of the portfolio from year to year. Many of the risks that are associated with investing in the condo unit are not connected to investing in an investment portfolio. In particular, the investment portfolio is diversified, so the chances of the value of the portfolio being much lower than expected over the long run are lower than with the condo investment. Additionally, the portfolio is a liquid asset that can easily and quickly be sold in part or even in whole if needed. (See Expat Investment Advice: Seven Things Expats Need to Know About Investing for more information on constructing a diversified portfolio.)

The Solution

In Bill and Emily's case, they have calculated a long-term return on their proposed buy-to-rent unit that is only slightly higher than cash on deposit, and lower than the long-term return that they might expect on a global diversified investment. This is despite the fact that the condo investment has greater associated risks. For the condo to make more sense as an investment, the expected return that Bill and Emily have calculated ideally should be significantly greater than other options, such as the diversified portfolio. This is both to compensate them for the possibility that their return could be significantly lower than they expect, and also for the time that they would need to spend managing the property.

Additionally, as this investment will make up a significant portion of their personal retirement savings, it may not make much sense for their particular situation even if the expected return was substantially higher. If Bill and Emily want to include property in their investments, they may wish to look for a different way to do so.

In conclusion, the above case study is intended to illustrate the type of analysis and decision-making that goes into buying an investment property. While Bill and Emily may not decide to invest in this particular condo, they may continue to look for another that is more suitable for their situation. Alternatively, they may be able to use a smaller portion of their savings to purchase a stake in a property partnership, property fund, or REIT with a better risk-return profile. They could also then invest another portion of their funds in a diversified portfolio.

This article is a revised and updated version of one that appeared previously on www.crevelingandcreveling.com.

Additional Resources

Seven Things to Consider Before Buying Overseas Property
Expat Investment Advice: Seven Things Expats Need to Know About Investing
Expat Investment Advice: How to Obtain Consistent Portfolio Returns
Market Returns Are Never Average