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Investing in short term rentals overseas. Why do we prefer Argentina as our target market?

Finding real estate opportunities that are mispriced can be challenging, but one way to do so is by looking for markets where financing has been shut off. In the United States, for instance, financing was cut off during the mortgage crisis in 2008, resulting in a drop in property prices below their actual value. When financing options such as mortgages are limited, demand for real estate decreases, making it easier to find opportunities.

Currently, there are three international markets where financing is not available in 2023: Argentina, Venezuela, and Ukraine. Ukraine is undergoing a military conflict, and Venezuela has been under socialist dictatorship, which has resorted to printing money to cover the state’s financial deficit. In both cases, it is uncertain when these conditions will change.

Argentina, however, is a stable democracy with an upcoming election in October 2024 that is expected to end 18 years of left-wing parties ruling the country. As of March 2023, the left is projected to gather less than 30% of the votes. Once a fiscally responsible government takes control, it is likely that inflation will be tackled, and mortgages will return to normal. However, there is no way of knowing when this will happen, although it is certain that financing will be reintroduced at some point between 2023 and 2028.

Argentina has already experienced the reintroduction of financing in 2017, which resulted in a 40% growth in demand for condos and apartments, leading to a 19% increase in prices in just 18 months. Therefore, it is likely that property prices in Argentina, which are currently historically low, will undergo a significant correction within the next five years, assuming all other factors remain constant.

Limited financing presents an opportunity for real estate investors to find mispriced properties, particularly in stable democracies like Argentina. While the reintroduction of financing may lead to a correction in prices, investors who purchase now could potentially realize significant gains in the future.

In addition to the previously mentioned factors, Argentine properties are transacted in USD, making it easier for US investors to invest in the country. The real estate sector as a whole relies on the USD for every transaction, which limits currency exchange risks for foreign investors when buying and selling properties. Our recommendation for US investors is to incorporate their LLC or corporation as a foreign entity in Argentina or to purchase the property directly as a physical person to further minimize risks.

When it comes to cash flow, short-term rentals through Airbnb are the best alternative for foreign investors to minimize currency exchange risks. By listing a property on Airbnb, investors can set a daily price in USD and receive their payments directly in their US bank account. This approach allows investors to enjoy rental income while minimizing the risks associated with currency exchange.

The current market conditions in Argentina present many investment opportunities with high appreciation potential. For example, brand new studio apartments (440 sq ft) in Buenos Aires city can be purchased for under $70,000 through the local MLS. At Abroadster, we prefer studio apartments as an asset class because they have the highest occupancy rates on Airbnb overall. However, not all locations for studio apartments will perform well, so it is essential to purchase properties that have high short-term rental potential and follow best practices to maximize returns on Airbnb.

Historically, the neighborhoods of Palermo, Recoleta, Buenos Aires Centro, and Retiro have had the highest tourist demand, making them ideal locations to invest in. At Abroadster, we take this approach to investment and focus on markets where access to financing is not possible to optimize appreciation. We source properties according to their short-term rental potential and purchase price, ensuring that our strategy to invest in international markets with limited financing is successful.

The net income you can expect from a 440 sq ft studio apartment in Argentina varies between 9 to 14k USD. For a studio apartment priced at $55k USD (that’s our sweet spot price), cap rates should be 8%-13%. A moderate appreciation percentage to adjust your projections should be 4.5%. With this in mind, the Internal Rate of Return (IRR) for a project of this sort should be over 11%.

In conclusion, American investors can optimize their appreciation potential and cash flow while managing currency exchange risk by following the strategies outlined in this article. By investing in Argentina’s real estate market, incorporating their LLC or corporation as a foreign entity or purchasing property directly as a physical person, and renting properties as a short-term rental on Airbnb, they can take advantage of historically low prices and high occupancy rates. However, it’s important to source properties that have strong short-term rental potential and purchase prices that align with the projected cap rates and appreciation rates