By: Greg Salley, Equity Residences Managing Director and real estate investor.
Equity Residences investors indicated Tuscany, Italy as one of their preferred destinations. Consequently, our team set out to analyze local markets and in the spring of 2018 we launched our first European home in Siena.
We discovered that Italy is currently a great market for real estate investments. Italian home prices have been falling steadily and Tuscany experienced a steep decline in recent years due to bad loans issued by local banks. Days after the oldest bank in Europe, Monte dei Paschi, based in Siena was rescued by the Italian government we were on the ground evaluating opportunities in Siena.
During the acquisition and remodeling process, we worked with a dedicated team of Italians who facilitated the transaction and completed the project on time, despite the distance and time zone differences.
Here are six of the lessons we learned while acquiring and remodeling our Italian penthouse.
This sounds like Real Estate Investing 101 but it holds true in this case.
We were lucky our investors picked Tuscany as a top choice for their travels. Tuscany is a big region, and opportunities for buying there are plentiful. We looked at everything from old ruins located in the middle of farm fields to renovated medieval housing before making a final decision.
Tuscany has very strict laws about what can be built with most areas limited to restoring old ruins under strict guidelines determined by the history of the ruins. The value of the ruins is also largely determined by the history. For example, a former Knights Templar ruin I looked at holds a higher value than a “newer” farmhouse ruin I viewed.
As we researched the different options, we realized that for Americans being in the old walled city of Siena presented an enticing variety of diversions and experiences. In addition to being able to walk to many restaurants, shops, and cultural sites, Siena is easy to get in and out of, allowing for effortless exploration of the Tuscan countryside.
Because Siena is a very popular destination at almost all times of the year, our penthouse there provides abundant availability for our investors and renters. In turn, this will create a high level of satisfaction for our limited partners, generate attractive cash flow from rentals, and provide a fertile market when it’s time to liquidate the asset.
Vacation home capitalization rates in Europe tend to be on the low end of what we’re targeting. Lower real estate costs do not always offset this disadvantage because seasonality can be high in some markets.
We always strive to maximize rental income for our investors to offset operating costs and pay dividends. So, we look very closely at income-generating potential for all the homes in our portfolio and balance it with investor demand for locations.
Hawaiian and Costa Rican markets tend to have very low seasonality while commanding high rents. This can be more challenging with European destinations that tend to be more seasonal. We choose Siena because our analysis showed a positive cash-flow-to-expense ratio.
Additionally, we purchased at a 15-year low price, so there is significant potential for appreciation over time. The exceptional price for our penthouse is the result of the bank Monte dei Paschi of Siena being bailed out last year by the Italian government.
Siena is less seasonal than the Tuscan countryside, but visitation declines during the coldest months. To reduce seasonality, we chose an apartment in the center of the city with heated floors, steam shower and a fireplace to keep it warm and inviting in winter and spring. We set our rental rates by season to ensure high occupancy and, thus far, Siena has seen very strong renter demand from platforms like Air BNB and VRBO.
When investing in foreign countries, it is imperative to understand local real estate laws and to assemble a team of local advisors before you land in the country. There are always time zone, language, and cultural challenges, making it harder to coordinate a transaction. A good team of advisors can significantly reduce the difficulty.
We were fortunate to work with Italian realtor Annalisa Caparelli of Engel & Volkers. Annalisa has vast experience with international buyers, making cultural differences less daunting. She introduced us to a local notary who facilitated the deal. In Europe, a notary effectively does all the property research — title, debts, and other aspects of the transaction.
We also have a great accountant in Milan who helped us to set up our accounts in Italy. We have an excellent relationship with the developer, who renovated the building, and his team of local architects and folks who helped to design finishes and furnish the property. We describe our vision for the Siena penthouse in more detail on our blog.
Annalisa says that while “Italians are aware of local laws and procedure,” foreigners are often surprised by the layers of bureaucracy.
KYC laws get even more complicated when applied to companies. As a company, you need to prove you are in good standing and that you legally obtained the funds used for the purchase. This can be a potentially lengthy process involving many signatures and multiple trips to a notary and the banks.
According to Annalisa, “Italy and all European countries are very worried about the money laundering…In recent past Italy and in Europe had problems with money laundering.” So now, European countries “are much more careful and for sure those laws slow down the purchase process.”
After our acquisition trip, we returned to Siena last year to select tiles and kitchen counters and help design the fireplace, bathrooms, and all the elements that make the villa unique. We made another trip a few months later to close on the penthouse and to hire a local concierge team.
Subsequently, we had to fly to Italy again to sign some last-minute paperwork with a bank. It took an Italian bank five months to open a company bank account, during which time tour accountant helped us pay local bills.
During the investment process, we fell in love with Siena and its people. Italians are very warm and welcoming to foreigners and do their best to work with American investors.
We asked Annalisa what she loves the most about Siena.
“I really love the lifestyle! I often work till late in the night. Maybe I feel tired, but when Piazza del Campo appears in front of me and I meet my friends at a restaurant, drinking a glass of wine or eating a good Italian food, everything seems to be perfect.
“We have no crime…We have breathtaking views and incredible monuments. It is really easy to make friends and enjoy the slowness after a busy day.
“The only thing I really miss is the sea, but it is only one hour away!”
Even though buying and launching our Italian penthouse was not easy, we became enamored with Siena. You will too!