A few years ago, on a visit to Paris to check on one of our rental apartments there, we sat down one afternoon with our rental manager, Linda.

“Every one of my apartments is rented,” she told us. “In fact, I need more inventory.”

Yet, at the time, our apartment had been vacant since our tenant of one year had vacated a few months earlier. Three months without cash flow later, we were growing concerned.

“If all of your apartments are rented, and you could fill more if you had them,” we couldn't help but wonder aloud with Linda that afternoon, “why is ours sitting vacant?”

“But you said you wanted long-term rentals only,” Linda replied. “We will find one, I'm certain. It will just take more time.”

“But if we allowed short-term renters?” we asked.

“Oh, I'd have someone in here within two weeks. If you were open to short-term clients, you could have been fully occupied these past three months, just like all my other apartments.”

One of the advantages of real estate investing overseas in general and of rental investments overseas in particular is that, when an asset isn't returning according to expectations, you can adjust the asset. Did you buy a house in a resort region where there's a lot of competition for rentals? Improve your chances of attracting would-be renters' attention by adding a swimming pool. Did you invest in an apartment in a place without zoning restrictions and you're having trouble finding tenants? Try advertising your asset as commercial rather than residential. Are you struggling to fill your long-term rental in Paris? Offer it on the short-term market.

There are arguments to be made both for and against renting long versus short term. For us, the biggest short-term minus is the wear and tear it can mean on the property. Holidaymakers coming and going week after week take less care and cause more damage than a retired couple settled in for a couple of years. Each new renter must learn how to use the dishwasher, the washing machine, and the heating system. In the process, breakage is unavoidable. A tourist staying in an apartment for a week or two isn't going to replace a glass or a dish when he breaks one, but someone living in the place for a year eventually has no choice. With short-term tenants, keys get lost, and knick-knacks disappear. You accept all this as a cost of the investment.

Long term comes with a downside, too. If your place is rented 100% of the time, you can never use it yourself. In addition, in most markets, long term typically means reduced net return.

However, the biggest downside to renting long term in another country is that, unlike the short-term vacation renter who can be counted on to return home, long-term renters have rights. These rights vary country by country, but without exception they favor the tenant over the landlord. That's why, in many markets, it's almost impossible to find an unfurnished long-term rental. It's easier to evict a tenant if they don't have to move the furniture out with them.

We first learned that secret when we moved to Ireland and needed to find a place to rent while we shopped for a home to purchase. We were happy that every rental we looked at was being offered furnished. The furniture we'd shipped from the United States was on a boat somewhere in the Atlantic Ocean. It wasn't until we had moved into our house and started looking at investing in a rental property that we discovered furnished was the only option for purchase. When we asked why, we were told about the country's tenant laws.

Friends who moved to France wanted to rent an unfurnished apartment so they could buy furniture they found comfortable rather than making do with furniture the landlord found convenient and affordable. They discovered that the terms for a long-term unfurnished rental were much harsher than those for a long-term furnished apartment. To rent unfurnished, they would have had to have “sequestered” two years of rent in their bank account. That amounted to freezing a not insignificant amount of money. It was still in their account, but they couldn't access it until they moved out of the apartment. What if, they wondered, they lived in the place for 10 years? That's a long time not to have access to tens of thousands of euros, which could be released only by a letter from the landlord.

Why two years of rent? Because that's how long it can take to evict someone in France.

Rule number 1, therefore, if you want to rent long term, is to furnish your property. Rule number 2 is not to rent to citizens of the country where the property is located. This isn't racist but practical. People from the place where you're investing are likely to know much more about tenant rights and what they can get away with than a foreigner would.

We've successfully rented one of our furnished apartments in France long term. Our tenants ranged from a Japanese bank manager on a one-year temporary assignment to a law professor on sabbatical with his wife. As an aside, the law professor was a pain in the neck, despite not being French, which led to a third rule to do with long-term rentals: No lawyers.

You can charge a premium for a furnished long-term rental compared with an unfurnished property. However, it's not much of a premium so, remember, Ikea is your friend.

It's easier to manage a long-term rental than a property being rented short term. Still, we recommend hiring a local to help. You need someone on the ground to make sure the rent is paid and to be your representative for any tenant problems. The rental agent fee for long-term rentals around the world is generally the same as in the United States—one month's rent, or 8.33% of the annual rent. In some markets, a flat 10% of the annual rent is normal. If you're renting long term but for less than a year, say a six-month lease, the fee could be as high as 15% of the total rent during the lease period. In some markets, including France, the renter pays the rental management fee.

You may also need to engage a property manager to help with a rental overseas. If you're not in the country to deal with repairs or other tenant issues and to pay the bills, you need help. The property manager can be the same person or agency as the rental manager or it could be handled separately. Property management is typically a flat fee, say between $50 and $150 per month.

If you decide to take the risk and rent your place long term but unfurnished, make the security deposit amount big enough to protect your interest (like the French do). This might be unusual in some markets and some potential tenants will object, but better to reduce your pool of renters than to make yourself vulnerable in this way.

Your Rental Investment Will Not Be Successful without These Three Things

Your return from any rental investment overseas depends first and foremost on the market. Are there renters enough to go around? Consider both the supply of rentals and the existing or anticipated demand. You may need to break things down, as different rental markets may exist in parallel—one for tourists and another for executives on extended-stay contracts, for example. A family of holidaymakers is looking for a different kind of rental property than a banker from Japan on assignment, even if each is shopping for a rental in the same area of the same city.

The second key to a good rental return, as we've discussed, is the rental manager. A good manager can translate to a good return from a decent rental in a decent market. A bad manager can mean no return, even from a great rental in a booming market.

The third variable affecting return is the type of rental you choose to buy and what you do with it. In most markets, a one-bedroom makes most sense, but there are exceptions. In Paris, for example, one-bedroom rentals are a glut on the market. Two-bedroom rentals are in shorter supply, meaning that, if you can afford it, a two-bedroom can make more sense and yield greater return.

In a beach market, a beachfront unit is key. People are coming for the sand and the sea. Front-line units will always enjoy better occupancy. In a city high-rise market, you want a building with an elevator, a doorman, security, competitive building amenities (in Panama City, for example, lots of new inventory is coming online and renters are choosing based on building amenities as much as any other factor; the newest buildings have the best amenities), parking, and day-to-day services (grocery store, newsstand, restaurants, dry cleaners, etc.) within walking distance.

A property that works for short-term rental generally works for long-term rental as well, but the reverse is not always true. When shopping for a property you intend to rent long term, therefore, it's smart to focus in areas that would work for a short-term market, too. That way you could switch from one type of rental to another should your situation or the market change. Flexibility is a good thing.

You're Also Buying the Building

Lief was recently elected to the board of directors for the owners' association of a building in Panama City where we own a rental property. The experience is giving us insights into what goes into maintaining a 27-story building. Every owner has his pet peeves and grievances. Lief and his fellow board members listen to them all, meantime spending hours each week trying to keep the building functioning, maintained, and constantly improving.

This speaks to another thing to remember when shopping for a rental investment unit anywhere in the world—in addition to the apartment, you're also buying the building where it's located.

We know of a building in Panama City that has no working elevator. A recent advertisement for an apartment for sale on the 14th floor of this building tried to make the best of the situation. It read: “No need for a gym membership when you live here.” The price was attractive and reflected the lack of elevator access. The problem is that, eventually, the broken elevator will have to be replaced. This will trigger a special assessment on all building owners. This isn't uncommon. If the cash flow from regular monthly building fees isn't enough to cover both the costs of operating the building and of required maintenance and necessary improvements, well, the money has to come from somewhere.

Or not. And this is the risk. If owners aren't organized and working together, the building and your investment suffer. It won't be possible to get the consensus needed to execute special capital calls, to increase the amount of the monthly building fees, or to carry out big-ticket repairs or improvements. The bottom-line result is that the public areas and amenities in the building will deteriorate.

When trying to identify a rental investment, therefore, shop not only location, unit, and price per square meter, but also building and building management. Ask about the building association and ask to see the related documents, including minutes from recent association meetings, financial statements for the building fund, and details of building improvements planned or being considered. Years ago, shopping for our first rental apartment investment in Paris, a friend made a recommendation that we probably didn't appreciate enough at the time. “Try to find out if any big improvements are planned for the building within the next year or two,” he told me. “Are they going to add an elevator? Clean the building façade? Relay the cobblestones in the courtyard? Fix a leaking roof?”

Why? Because these are extraordinary expenses that will have to be paid for by a capital call on all owners. To avoid surprises in your first years as an owner, try to find out what kinds of works are being discussed. In France, the syndic, or building management association, is a legal entity with a lot of teeth. If your syndic tells you that you have to pony up an additional 2,000, 5,000, or even 10,000 euros in a year to cover repairs or improvements to the building, you have no choice but to comply. Well, you can choose not to comply, but the consequences are severe.

In Panama, on the other hand, building associations are haphazard and mismanaged. Sometimes they exist in name only. If the owners don't pay their monthly building fees, what are the building managers and other apartment owners going to do? In any given building in Panama City, you have a percentage, sometimes significant, of absentee owners, foreigners who bought the unit as a speculation or a rental investment. They're in the States, Canada, Germany, Venezuela, or wherever. How is the typical ad-hoc and mismanaged management team in Panama going to chase them down for their $200 a month? The effects of this are beginning to become evident in some buildings in Panama's capital. Broken elevators, faulty plumbing, ill-maintained swimming pools, unkempt social areas, and so forth.

What's your rental apartment worth when the building where it's located is falling down around it? What's your rental return going to be long term?

How to Project Rental Cash Flow

As we've suggested, your target return should be 5% to 8% net per year over the long term. However, projecting your true net return can be complicated, because the expenses of owning, maintaining, and renting vary market by market and property type by property type and change over time. This is why many in the business of trying to sell you on a particular rental investment opportunity prefer to speak in terms of gross yields. Don't let them. Drill down to a net figure.

The rule of thumb for long-term rentals in the United States is 1% of the property value per month, or 12% gross return per year. However, the net on that gross could be less than 5%, depending on your costs. Depending on the state where you're operating, for example, property taxes can take a big bite out of your gross cash flow. By way of comparison, the gross return from a rental we own in Panama City right now is 9%. Our net in this case is more than 8%, thanks to low costs and low property taxes.

Another point when projecting and tracking your yields: Understand the difference between making your calculations on original purchase price versus current value. Rental yields work like bond yields. If the property value goes down and the cash flow remains the same, then the yield goes up. And vice versa. Calculating current yields on the purchase price of a piece of property can lead to bad decisions, especially if you've owned the property for a long time or prices have recently spiked.

Returning to our Panama City rental example, the net yield based on purchase price would be more than 13%, because we bought the apartment years ago when prices were lower than they are today. That return, though, is misleading. If we sold the property and reinvested the proceeds in another investment, we wouldn't be able to realize the same yield on the greater capital amount.

A colleague in Bali got our attention a few years ago by quoting rental yields of up to 18% per year in that market; however, when pushed for details, it turned out that true net yields were running more in the range of 5% to 6%. That is, they were typical. References to exceptionally high yields are one of two things—blatantly untrue (once you drill down to true net) or the result of a market distortion creating a window of opportunity that won't last long. A few years ago, for example, you could, in fact, earn double-digit net yields from a beach rental in Punta del Este. After a couple of years, though, the gap between cost of acquisition and annual rental revenues narrowed, and, today, net yields on this part of Uruguay's coast are in the range of what you should more or less expect generally, anywhere in the world—5% to 8%.