Buying preconstruction, or off-plan, as it's referred to in the UK and Ireland, isn't necessarily a cash-flow investment, but it can be if you keep the property and rent it out. Many investors, though, see a preconstruction purchase primarily as an opportunity for leverage. You take control of the asset by paying just a portion of the purchase price—typically 20% to 50%—over the construction period. And you buy for a discounted price.

We've made preconstruction purchases pursuing both strategies. We bought a preconstruction condo in Spain with the intent to flip it before taking possession, and we purchased preconstruction in Panama intending to keep the asset for rental indefinitely. Both of these experiences rank among our top 10 investments in terms of profitability. The apartment in Panama, which we still own, has come with a lifestyle bonus.

The condo in Spain was, in fact, our first pure real estate investment play overseas. Lief took a research trip along the southern coast of Spain, driving from Barcelona to Huelva, stopping in each active real estate market along the way. In the Costa del Sol, he came across a developer who had just released a beachfront project the day before. Forty percent of the apartments had already been reserved.

Having already seen hundreds of properties on the trip, Lief was convinced that this project was the opportunity he'd come looking for. It had all the characteristics of a successful preconstruction investment. The location was at the edge of the then Costa del Sol hot zone. The timing was perfect, as the developer had just released the first building of a multibuilding complex. Even with 40% of the units sold, several prime units remained available. The terms were standard for the time and the market, requiring ongoing construction payments totaling 30% of the purchase price. That worked for our budget. Foreigners could get financing in Spain at the time for 70% loan-to-value (LTV), meaning we could borrow the balance due when the apartment was completed in 24 months.

In addition, the developer was willing to relist investor units for sale. As our plan was to flip the property before closing on the contract and having to make the final 70% payment, that sealed the deal for us.

We signed the purchase agreement, then immediately asked the developer to list the apartment for sale. We made the construction payments over the next 18 months, as they came due, and we began speaking with banks about a loan to pay the 70% we'd be liable for at closing if it came to that. Then, four months before our unit was scheduled to be completed, meaning we'd be required to close, the developer notified us that he had a buyer. We resold the apartment a few weeks later. The buyer sent us our 30% deposit and our profit after the 5% commission fee to the developer. He paid the 70% balance when the apartment was ready. In 22 months, we almost doubled the 30% we had put down for the purchase. The annualized return worked out to 38%. Now if only we could repeat that every 22 months.

This investment was textbook. It played out exactly how every investor who has ever bought preconstruction with the intention of flipping before taking possession has hoped the experience would go. One important reason for this was that the market remained robust throughout the construction period. One risk to buying preconstruction in a market like Costa del Sol at the time, where new buildings are going up everywhere, is excessive inventory, meaning continually expanding competition for your unit when you list it for sale.

Another reason this apartment sold easily before completion was that the building was beachfront. You walked out the patio door of the apartment and across the common area of the complex directly onto the sand. Most preconstruction projects Lief saw on that research trip were back from the beach. They were either large cookie-cutter complexes with no charm or golf course projects. Being on a golf course can be a plus, but being right on the beach in a resort market is a guaranteed advantage when it comes time to resell.

Had the apartment not sold, we would have financed the rest of the purchase price and rented the property on the short-term market. We'd have kept it listed for sale, however, because we wanted the capital that was tied up in the unit for next investments.

Another preconstruction purchase, made in Panama City, Panama, in 2003, was bought with the intent of holding on to the apartment indefinitely and renting it short term. The Panamanian developer had designed a building specifically to attract foreigner investors. It would be built in the heart of the city, overlooking the Bay of Panama, and it would contain one-bedroom apartments only. This was uncommon. Historically, apartments in this high-rent district of Panama City were three and four bedrooms, which suited high-end Panamanian buyers. However, in the early 2000s, Panama began attracting growing numbers of foreign tourists and retirees, demographics in the market for smaller apartments in prime locations. This building was the first of that kind.

The terms were better than in Spain. We paid only 20% during construction and 80% at completion. Banks in Panama were lending 80% to nonresidents, and we were able to put financing in place long before the building was finished. The construction period had been projected at 30 months but extended to 40. That deferred our cash flow; however, as soon as the building was completed, we furnished the apartment for short-term rental (this was before the 45-day short-term rental restriction in Panama City discussed in Part III, Chapter 9), and we were in the Panama City cash-flow business. Hotels were expensive in this city at the time, and tourism was expanding faster than anyone had anticipated. New hotels were planned, but, until they came online, we Panama City short-term landlords enjoyed a window of extraordinary return. During the 18 months we rented that apartment on a short-term basis, we achieved an annualized net yield of 16%.

Hotel inventory expanded, hotel developers lobbied the government to restrict short-term rental inventory, and the market slowed. Meantime, the demand for furnished long-term rentals had increased, as the dozens of international businesses setting up operations in Panama City were bringing in thousands of foreign executives and managers, all of whom wanted international-standard apartments in good locations. Ours qualified, so we stopped offering it short-tern and began marketing it as a furnished long-term rental. Another example of the upside of buying a property that works for as many different potential renter pools as possible.

While we had always planned to hold on to our unit, many other preconstruction buyers flipped. The value of their investments increased over the construction period. Some made as much as 100% on their 20% down payments over about four years. That's not 38% annualized, but it's nothing to sneeze at.