Foreign multi-unit as income stream?

[leostrauss]

I'm a resident of Canada and a dual citizen (Polish/Canadian) with some significant (undeployed) cash assets and thinking about plunging into a somewhat atypical investment project.

Here's the scoop: I'm in an incredibly fortunate situation that my parents gave me an empty lot in Warsaw (Poland) on which I can build whatever I want.

I don't want to move to Poland but I'm trying to retire early and I have two options regarding the lot:

1) either selling the lot (worth about PLN500K = 170K CDN) and adding to my cash reserves or

2) building a multi unit which my mom and sister would look after and I'd receive rental money from. The breakdown looks really attractive as the building could generate close to 10% yield on cash (I have enough money to build for cash) if fully rented.
This looks like a better yield on cash than investing in the stock market or buying leveraged REITs which don't even yield as much in monthly income. Obviously the "free" building lot really gooses up this yield but even if the lot had to be bought this yield seems mighty attractive to me and I'm being very conservative with rent prices.

Now, the lot is not in a perfect location as it's in the suburb of Warsaw called Wesoła ~15KM from City Center (Śródmieście) but I think it should rent fully as there are stores, schools, daycare centers, a church and even a swimming pool all within the walking distance of the lot.

The building would be in my name and I'd receive the gross rental and pay my family to maintain the building and collect the rent cheques. I fully trust my family to not cheat me out of a single dime.


My biggest concern about this investment is the fact that I'm not going to be close to the building and will rely on third parties (if my family members get tired of running it) to look after it. My second biggest concern is cost overruns on construction (although that can be controlled for).

Here's our current situation (all figures in CDN$):

Self:

- RRSP ~250,000
- TFSA ~49,500
- Non-Reg: ~300,000

Wife:

- RRSP ~100,000
- TFSA ~45,0000
- Non-Reg: ~15,000

No debts to speak of and also under the assets column we have a single family home in Canada worth about 260,000 CDN which is fully paid for (no mortgage).

This multi-unit building would eat up all of my savings in the non-registered account (~300,000CDN) but has the potential to generate more than $2400CDN per month net of expenses.

I need about CDN$60,000 per year before taxes to consider my family financially secure and this could go a long way toward that goal.

Thoughts about this idea from the hivemind?

[maizefolk]

So in total you'd invest 470k CDN (opportunity cost of not selling the land plus cost of construction) in return for ~29k/year in net income?

If I have the numbers right, you'd be making 6.1%/year, not a 10%.

[leostrauss]

Yeah this is true. Still though that has got to be a pretty good return especially if there is any appreciation in the value of the building and/or the lot?

10% is if I consider the lot "free" which I do as it's a gift and it was purchased a long time ago (decades).

[maizefolk]

If you do not build the apartment building, would you sell the land, or would you keep it as a non-revenue generating asset? If the former, you need to factor the opportunity cost into your mental math of whether it makes sense to do this or not.

6.1% is a quite reasonable return. However, for context, over the long run the S&P 500 index returns approximately 6.8% after inflation. Appreciation of your property is a potential positive x-factor that could increase your total return. On the flip side there is the risk you will have a prolonged vacancy, or it will turn out you need to spend more on maintenance and upkeep of the property than you are estimating or if the exchange rate of canadian dollars to polish zloty might increase, reducing the value of your polish income for supporting a family in canada (the exchange rate could also just as easily move the other direction and increase the value of your income).

I don't think the math is definitively saying: "Don't do this!" but it is saying you could easily go either way

[Voltigo]

Hello.

I don't post very often on this forum, as most of the stuff is not related to my country's reality. But as I saw that you want to invest in Poland, I decided to share my knowledge, as I am a Polish citizen.

To start with, 6,1% return in Warsaw seems like a good deal, as the properties in Warsaw are, on average, more expensive than in the rest of our country. But that's the information I read in some Real Estate journals and got from propert manager and I am sure that one can find better deals there. However, one can get, on average, higher returns in other parts of Poland.

I totally agree with maizeman about the possible risks. According to me, the possible changes of exchange rate is the biggest of them.
As I've written, properties in Warsaw are rather expensive, so they don't have that much potential to get more expensive. However, one cannot forsee the future and I am not any different.

But there are some other advantages of investing in Poland, not stated by maizeman.

It is highly tax-effective. One can pay 0 in income taxes, as when the building is older than 5 years, it can be amortized at 10%/year max so taxable income will be 0. In your case, you could amortize the property at 1,5%/year in the first 5 years, than change it to 10%/year.

One pay almost 0 in property taxes (it is something about 0,1%, but it's different in every city)

My parents have 5 condos as investment properties and 2 of them are rented with property manager. The PM charge 11% of rent for the service. I consider it rather cheap.

How many units would you like to build? How many rooms would they have and what would be the size of each condo? You could contact with a property manager and ask him about the rent level in Wesoła.

But, as I said, we don't have any properties in Warsaw and I have no idea about the local real estate market and I don't know whether the location is desirable.

By the way, you would be consider rich in Poland both in terms of income and wealth.

[sammybiker]

Not worth the stress both financially and on the family to go after a 10% yield. 

I know the Canadian market is tough but surely you can find some value add deals that might get you close to that number. 

No development experience I assume,  7,000km away, huge cash outlay and family...no thanks.

And this is coming from someone who buys, renovates & rents real estate from 14,000km away!