April 5, 2024

JF3501: Challenges, Tax Structures, and Protecting Investor Capital When Investing in International Short-Term Rentals ft. Martin Papp




Martin Papp, a general partner at The Nova Haus, joins Slocomb Reed on the Best Ever Show. In this episode, Martin discusses his background in real estate investing and his current focus on building luxury boutique short-term rentals in high-growth markets. He also explains the return potential in international markets compared to the United States and the challenges of financing properties abroad.

Martin Papp | Real Estate Background

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Slocomb Reed (01:39.202)
Best ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and today we are joined by Martin Papp. Martin is joining us from Irvine, California. He's a general partner of the Nova Haus. He also is the owner of Papp's Tea, which is a tea company in China. His fund specializes in building and operating luxury boutique short-term rentals in high growth markets, especially internationally, not inside the United States. He currently has five single families and condos, uh, that are operated as short-term rentals in East Asia. And he is in the process of building, uh, a luxury boutique short-term rental operation in Costa Rica.

Martin, can you tell us a little bit more about your background and your current focus?

Martin Papp (02:34.697)
Sure. Thanks, Slocomb. Thanks for having me on. This is exciting and I hope to provide some unique insight into things that maybe a lot of people don't get a chance to do. So I graduated from university in 2008. I think you graduated in 2009, right?

Slocomb Reed (02:52.64)
Yes, I did.

Martin Papp (02:53.605)
Yeah, I was checking out your background as I was like, we're probably the same age. Um, but you know that, as you know, that time wasn't a great period, uh, for job opportunities, maybe if you had a bunch of capital was a perfect time to go out and buy a bunch of real estate, uh, you know, but right out of school, it wasn't, wasn't much, much there. And so I had just read a book called outliers by Malcolm Gladwell, really good book. Have you, have you read that one or listened to it?

Slocomb Reed (03:20.306)
I have, yeah, I've read all of Malcolm Gladwell's books. Yeah, I'm an audiobook guy, yes.

Martin Papp (03:23.301)
Yeah, me too. But I mean, it was, they made a strong suggestion that your success is largely determined by your environment, you know, where you are, when you were born, you know, like who are, what are the resources around you. So I decided that at that moment in 2008, that I needed to go somewhere that was growing, not, you know, in a recession.

So I went to China. I went there to, with the intention of learning Mandarin, which I did. I spent 10 years there, got married there, wife now almost married for coming up in 10 years, got a son, and we started building a business. And we built this tea company that I was talking about where we opened retail stores. So I was getting into some commercial real estate design, customer experience, branding, and that business got venture capital funding from a firm in Shanghai. And that went really well. It's still profitable today.

I run it remotely here from Southern California where I am and we sell to over 400 locations across China. That has allowed me to have some income, start building up some capital to start investing in property. So that's what I've been doing since 2016. Been buying, started with condos in China, doing short terminals on Airbnb through there until a few years ago Airbnb actually left. So now we have to long-term rental those through a Chinese app. But we also got a villa in Phuket that we rent out. We also building property in Costa Rica. And I also have done a few builds in Southern California here, in Los Angeles and West Hollywood. Did a nice modern villa, single family home that we flipped. And a couple, and a condo in in Irvine.

And now I'm running a company called Nova Haus, which is building luxury short-term rentals overseas. And that's where I just found that there was better returns than what I could find in the US. This is about me looking for something where I'm looking like where is a good deal? Where am I going to be able to make some money? And for me, it just seemed night and day difference between, say, the Villa and Paquette, and the rental condo I had in California. And I was like, hmm, definitely money goes farther in some of these overseas countries. So that's what I'm focused on right now is investing out of country.

Slocomb Reed (06:04.13)
Tell us more about the return potential that you're seeing in other markets right now.

Martin Papp (06:11.989)
Sure. So comparing the United States where if you're going to do a build, you know, like if you're going to develop something from the ground up, you're looking at least anywhere between $350 per square foot, maybe in some of the cheaper states. But like if you're in all the way up into California, you can be looking at $600, $700 per square foot just to build. And you can turn those into rentals and you can make some ROI on that maybe, you know, depending on how good your property is, the demand, maybe you're making five, 10% return. You could push those numbers up a little bit, maybe the yield.

But when you go to places like Thailand, or let's say Bali, you can build there for $100 per square foot. So you're talking about a fifth of the price of what it costs in the United States.

And if you find properties that have those ocean views and those really desirable locations, you can get and draw Western audience. People with Western salaries, people from advanced economies coming in with dollars to spend. And so the margin is so much better because your build cost was low, but your revenues, you can still charge several hundred dollars a night for a nice place. And that's where you can get into the 15%, 20% yields. I was talking to a guy that runs a little resort in Copangan, an island next to Co-Samui. You know that movie The Beach with Leonardo DiCaprio?

Slocomb Reed (07:50.411)
I don't know.

Martin Papp (07:51.609)
Yeah, well, it's like party island that has this big party every month. And that movie was based off of that party on that island. But they're making 25% allegedly. And that's all cash. There's no financing involved. There's no extra leverage. And that's the kind of thing you can do when you're in countries like that. So yeah, I'd say you could at least tag on five, five up to 10% extra points on your yield when you start going abroad in these developing countries.

Slocomb Reed (08:42.514)
You've mentioned all cash at least three times since we started. A couple of those times might've been before the interview actually began, Martin, but that's, um, let me ask, why is it that you're doing these investments in all cash?

Martin Papp (09:04.253)
It's a good question. Why wouldn't you leverage in the right moments with the right opportunities? Do it if it's there. But a lot of times when you're going to other countries, the financial systems are not as developed, let alone you're also a foreigner. So, you know, there's less opportunity in terms of local or regional banks to, or lenders to work with you. So a lot of times when you go to these countries, you're not, you're just not going to find financing.

So in places like Thailand, good luck, like trying to find somebody that's going to give you a cash out refinance or some kind of loan. Doesn't mean it can't be done, but you almost kind of need to be at a different level where you start working with international banks. Maybe you're doing a hotel or something that's maybe a little different. But if you're an individual, generally speaking, it's going to be really hard to get financing in some of these places. That is dependent on the country though.

So it varies. So for example, in Costa Rica, it's a little bit more developed, a little bit more expensive. You know, there you're looking around $200 per square foot to build, but they also have, you know, a growing financial system. And so there, if you work with a regional bank, you can get a mortgage or a construction loan or a private lender. But that's just one piece of it. Then you have to make sure it doesn't make sense. Like does it make sense to do those kinds of loans and where interest rates are in the last couple years, hasn't been very appealing.

It's like, you know, maybe it's a little bit better if you can get financing, but generally speaking, I've been of the opinion that if it's not a massive difference in terms of your ROI, it's not worth taking the risk of taking on debt if you can do it in cash. Now, the benefit of being overseas is that since things are cheaper, you usually need less cash.

So I can build a nice villa. I mean, I'm going big on my, I'm building a 10,000 square foot property with Ocean Views in Costa Rica. But if you were gonna do something smaller, you can go out there and build something nice with $500,000. And so those numbers are a little bit more manageable if you get a couple LPs, bring it on a couple people, and you can go out and build great stuff and still have great ROI on all cash deals.

Martin Papp (11:29.51)
So does that answer your question?

Slocomb Reed (11:38.482)
It does. Yes. Considering how much capital is involved. You know, yes, you're talking about lower, lower land costs, construction costs, but still being in it for all cash. 100% of the value of the property is equity. Given that, um, how is it that you're making sure your investments and the investments, the capital of people who are investing with you is protected.

Martin Papp (12:14.649)
Investing abroad obviously has risks and people sometimes I think overestimate those risks, to be honest. From my experience investing in the United States versus building abroad is that I found the United States to be the most difficult place because there's a lot of regulations, it's very pricey, small mistakes become big mistakes because everything costs an arm and a leg and there's a lot of uncertainty with especially in the short-term rental space.

And you have an inordinate amount of regulation that's very specific to each place. Like every state's different, every city's different. And I find that very, I find that risky as well. Now, when I go abroad, there are different types of risks. So one of the benefits is that it tends to be a lot less complicated in terms of regulation. And so but it's foreign, so I get that. So really what I do that I think is different, and this is really more to answer your question, is what do we do to protect investors' capital, including my own capital, is I don't buy property the way typical people buy, which is you go down to Belize or Mexico or something and you're looking through a window of a remax and you're like, oh, look at that piece of land or that home that looks awesome.

And you go out and talk to an agent in the office and you go out and buy it, and then you figure out afterwards all these problems that you have, you know, that if you had known more about the land or the area, you know, you would have You know avoided that property or done it differently So that's how most people do it And you know, it's almost like you're pushing a boulder up a hill from the get-go like it just gets harder and harder and harder The way that I do it with my partner is We first identify areas that are gonna have the right data. So we use you know, we're using Airbnb, everything is a great resource, even for properties abroad.

It's all there for you, laid out. We then identify areas that we like. Maybe we have some anecdotal stories of good places that are up and coming. Then we start to look for comps. And we look on Airbnb, we go talk to hosts. I send messages to hosts saying, hey, I love your property. I'm also thinking about opening an Airbnb in that area. Could you tell me a little bit about your experience?

Is it expensive? Are there unforeseen problems that you've encountered? And you'll find that some Airbnb hosts say, Oh, you're competition, you know, F off. But you'll also get people that reply to you that are sweet and kind and they want to share their story and they'll will guide you in a lot of the things that you would might otherwise have run into. So for once I've identified kind of an area and I say, okay, this could work. Then I go out and find the right legal firm and I will generally only work with top legal firms.

They're going to be more expensive, but I do it anyway. I make sure that they have a good track record, work with foreign direct investors. They will often then lead you to which property agent you should work with because they're the ones, the real estate attorneys, they're the ones that have 100, 200 deals a year. They know who are the good people to work with and who are not. And so from there, I start from the top down. And so the last thing I do after I've already got the the architect on board, the contractor on board, the legal counsel on board, and the property manager on board.

Once all those pieces are fit in, that's when you go and find the property. Because you have all this expertise now behind you saying, oh, that one would work, oh, that won't work, don't forget that the zoning here is not gonna work, there's no water on this hillside, you're not gonna get utilities over there. So that is how I eliminate almost 90% of the problems downstream by just taking that moment to plan it properly up front with the right people. And then things from there kind of go kind of easily.

Slocomb Reed (16:15.582)
And you're talking about hiring those experts locally within the market where you're looking to invest.

Martin Papp (16:21.413)
Yeah, sorry if I did not specify that. Yeah, definitely needs to be local. Definitely needs to be local. I wouldn't hire.

Slocomb Reed (16:27.179)

Sorry for the interruption, but your firm is a US based. So your investors are investing in a US corporation owning interest in a US corporation that owns real estate abroad as well. And so I'm assuming, and our listeners are not seeing you nod, so I'll acknowledge that on audio, but your investors are afforded the protections and advantages of investing in a U.S. entity regulated by the Security Exchange Commission that happens to be making its investments internationally. Am I making those assumptions correctly?

Martin Papp (17:12.305)
100%. That's exactly what's happening. The fund is a private fund just like any Reg D offering that you would have a syndication of a limited liability partnership and that's based in the United States. We're based in Nevada and that's just as you said, you get all the protections that you would under US tax law, US securities law and you still get tax advantages. You can still depreciate your properties even if they're foreign assets.

And then as you rightfully said, investors invest in our fund and then the fund has subsidiaries in foreign countries that own the assets. So for example, in Costa Rica, we have a Costa Rica company that owns the property and that company is wholly owned by the US fund. So everything just blows up stream.

Slocomb Reed (18:07.062)
Makes sense.

Let's talk a little bit more generally about high end short term rentals that are invested in completely with capital instead of debt. You were referencing some fairly high cashflow numbers earlier. Taking the perspective of a limited partner investor.

The question I'm struggling to figure out how to ask here, Martin, is if I'm the LP, how do I know that my goals are going to align with your business plan and your investment thesis? So the vast majority of our listeners are familiar in some way with value-add apartment syndication investing where the target metric is internal rate of return.

There's a targeted hold period of approximately five years. The assumption is that value appreciation will have been enforced in the property. Over time, there's been some cash flow in the meantime, but the real serious returns will come in the end when the property is sold, which is why something like internal rate of return telling you the time value of your money over time is the key metric there. Thus far, you've referenced cash flow.

I am personally more of a long-term hold investor. I'm involved in a couple of value add plays right now as an operator here in Cincinnati, but I think as a buy and hold investor in terms of appreciation and cashflow. So what...

Martin Papp (19:59.805)
That's just because we haven't had enough. Sorry.

Slocomb Reed (20:00.663)

Well, I was going to, yeah, I'm still getting, I'm still leading up to the question, Martin, uh, the, um, the, the little question is what is your primary return metric? Um, is it, is it cashflow? Is it IRR? Is it something else? And then what are, what are the goals of an LP investor that your business plan aligns with well, is it people who want to be in a deal for a long time and see consistent cash flow? Is it people who want to, um, place their capital, but see it back with, um, with gains in a few years? What, what is it that, um, what is it that makes LPs a, what is it that makes a fund like yours a good fit for an LP with regards to their own financial goals?

Martin Papp (20:56.657)
Yeah, it's an excellent question. I think that it totally does depend on what the goals of a particular investor that determines what's going to be a good investment for them. So in regards to our fund, we have designed it to be an IRR play. So we are looking at big payouts after a five to seven year hold. So with cash flow, quarterly dividends starting in year three after the properties have been completed. So it's a bit of growth and income play at the same time. The ideal investor for us would be somebody that wants the option to, sorry, I can't talk like that, huh?

Slocomb Reed (21:39.402)
Well, I was going to say, if you phrase it in terms of the kinds of returns that are available or what it is like, um, when you, when you say, um, it's an IRR play, I mean, well, let me, let me just ask my, my follow up question here before we go down that path. Um, Martin, are you planning to sell the property after five years? Is that how you make this an IRR play for your investors?

These, these properties, I'm not talking about one in particular. I'm talking about the business plan because you know, I'm coming from the, the multifamily residential world where we choose to go short-term rental instead of long-term rental because, uh, it gets us greater cashflow. You, um, your plan then is to sell these in about five, sell, sell properties like this about five years after you acquire them.

Martin Papp (22:38.985)
So these are developmental investments. So you're really capturing the value of low cost of build in high appreciating markets, especially in hospitality sectors that are growing quickly. And that's where you can get the 20% and up IRRs. But we like to pair that with a really attractive business that's generating quarterly dividends cashflow for our investors. So...

The thing that I haven't really had a chance to explain is there are winners in terms of the space of where you can get financing and where you can't. So as I was saying, like in Thailand, it can be really difficult, but that's why we've totally focused on Costa Rica because there you can get financing. So what we do is we use all cash to build the property and then we do a cash out refi in year three once the property has been built and there's been 12 months of revenue.

Then at that point, the investor gets all their money back. And then it's a hold until year five to seven, where you then get another big payout. So it's really two large payments, one in year three, one on the sale, and then with cash flow intermittently through quarterly dividends. That's what we do. There's many ways to do it, obviously, that you know that, but that's how we're set up for our Costa Rica fund.

If you're going to do that in Thailand or Bali, it would be a little different. In fact, not to get in the weeds, but Thailand, you can't actually own the land. So really what you're doing is you're doing long-term leases, and then you own the structure on top of those leases. And in that situation, the metrics of how you define what is a good investment change, and it becomes usually more about cash flow because your property is actually depreciating over time since you're going to lose ownership of the lease eventually.

That's very different than Costa Rica where the property rights are just like us in the United States where you can have freehold rights indefinitely.

Slocomb Reed (24:41.634)
That's interesting.

Martin Papp (24:44.773)
It gets very interesting, but more than one podcast.

Slocomb Reed (24:47.362)
I believe it and man, if this were a long form podcast, if we had an hour and a half, we would spend it on this stuff for sure. I really only have time for one more question before I transition the conversation though, Martin.

Slocomb Reed (25:05.078)
Given the importance to your business plan of selling these properties for a significant gain, significant profit, five-ish years in the future, how do you gauge the demand or the supply and demand factors for a product like yours five years into the future in the variety of markets where you're currently invested?

Martin Papp (25:34.909)
We definitely think about macro trends and where property is headed. And that's kind of the fun entrepreneurial component of this. Like at the end of the day, I find that I'm best described as an entrepreneur because I'm always thinking about where the world's going. And I believe wholeheartedly, along with most people I think in my demographic, that the era of how we work and play and take leisure and mix it with business is changing.

There's no longer this, you know, we work 50 weeks and then you have a two week vacation anymore. People want to maximize their experience in life while also working. And so our property is one of the reasons that we don't just go out and buy single family homes that already exist and just kind of, you know, improve them. We really start from the ground up is because we want to design total unique properties.

So, I mean, you should definitely visit our website at some point, see some of the designs. But we're building things that like haven't been built. I don't mean in terms of like ingenuity of like, you know, the materials used or whatever, like everything's been done before and well tested. But the type of space we're creating is very unique. And it's built for millennials, it's built for upscale remote workers.

It's built for people that want to have communal spaces where they can work and play at the same time. So just real quick example of what I mean is our property is gonna have an 8,000 square foot hanging garden that goes down the entire property along the roof. And it's in the jungle of Costa Rica next to the manual Antonio National Park. So you're gonna have this beautiful canopy that goes over the entire property that will be the largest private hanging garden of any residence in Costa Rica. And that turns into a wormhole where you can climb up a net and then jump from the wormhole into the pool. On the rooftop, on the fourth floor, there's a hot tub that looks out over the ocean. There's an ice bath, a sauna, open air gym. There's a podcast room. There is an executive meeting room.

So really we're creating entirely unique spaces that this is no longer a single family home, folks. This is the new modern art of architecture and hospitality and immersive experiences. And those unique properties are the ones that are going to do well on an Airbnb platform or VRBO. You know, the single family home stuff just doesn't cut it anymore. And so that's how I kind of think about the play five, seven years out is that, hey, if you're thinking about just making another single family home, let's, I think that's because as you said, where's the world headed?

I think the world's headed towards chasing experience, chasing lifestyle, chasing those Instagramable moments. You need properties that stand out and have really unique features in order to be competitive in which we'll become an ever more competitive landscape in hospitality and in architecture and design. And so that's why we take the extra effort to do really cool stuff.

And it's more fun. You can go visit these places, you know, we hope little whole little investor parties.

Slocomb Reed (28:52.63)
That makes a lot of sense.

Martin, are you ready for the best ever lightning round?

Martin Papp (29:00.634)
Okay, let's go.

Slocomb Reed (29:03.222)
What is the best ever book you recently read?

Martin Papp (29:08.721)
Best ever book I recently read. Um, Sapiens.

Slocomb Reed (29:15.702)
You've all know a horary? Yeah, that is a really interesting one for sure. What is your best ever way to give back?

Martin Papp (29:15.741)
by Yuval Narari. Yeah, that's such a great book.

Martin Papp (29:26.065)
Best ever way to give back. With empathy.

Can I say that? That's what I mean. Like you people have tough lives, you don't know it. Like show some empathy. All this hate, hate it. That's how I give back.

Slocomb Reed (29:41.68)
What is your favorite way to show empathy?

Martin Papp (29:44.765)
Um, not to judge, you know, people, people have their own way of thinking and their own choices in life. And it might not be your own, but, but you have to empathize with the fact that they've lived a life of certain experience that have led them to that moment. And that's, that's the way they feel.

Slocomb Reed (30:06.186)
Martin, on the deals that you have done, properties you have acquired, what is the biggest mistake you've made and the best of a lesson you learned from it?

Martin Papp (30:17.245)
Biggest mistake and the best lesson I've learned from it.

I mean, it's not very deep per se, but it's just very matter of fact, is that I've learned that budgets are from given to you, quoted by whether it's a contractor or an architect, are very inaccurate, and they will almost always go over budget. And if you don't plan for that, you're in for a rough time. So best lesson that I've learned is not to try to nickel and dime.

Because even if you pick the cheapest contractor or the cheapest subcontractor, you get those cheap prices because they want to win your business. That doesn't mean that's the end result of what it costs. And so you have to take into account a much larger amount of contingency expenses than what usually you would like to see. That's probably a pretty basic one, but that hit me pretty hard, my first property that I did in in West Hollywood and that was very stressful.

Slocomb Reed (31:29.634)
That was here in the United States.

Martin Papp (31:31.589)
That was here in the United States. Yeah, because before that, the condos that I was doing in China, those are just bought as is. So you don't have to do too much. But if you're like building, man, there's so many things that even if you think you thought it all through, like there's just going to be stuff that you didn't see coming. It just happens. I'm sure that people that have done this can relate. But you know, I had a whole design done on a house where they had this beautiful open doors and they said that we'd be able to do it with a nice 12 inch beam or whatever.

And at the end they're like, oh actually we can't. So we're going to have to use completely different materials. It's going to have to be completely changed. You're going to have to go back to engineering and you just tagged on another $50,000 and you're like, that wasn't in the contract. Sorry.

Slocomb Reed (32:30.886)
On that note, Martin, what is your best ever advice?

Martin Papp (32:40.521)
My best ever advice would be...

There's no such thing as the best ever advice. But what I can think of right now as some good advice is to be grateful even in stressful moments. When you're going through hard things is to embrace the fact that you're a blip on this world for 20 seconds and you'll be gone and whether people will remember you or not in a thousand years from now is probably unlikely. Like just humble yourself and realize that, oh my God, I'm on this like amazing, crazy universe of life and all the things that you're stressing about probably don't matter as much as you think they do. And instead, take a breath and just be thankful that you're got to experience a piece of all of it.

And so I constantly remind myself not to be overly stressed because anything you're stressed about is usually artificially induced because at the end of the day, we're all blessed to even be considering a profession in owning real estate or developing real estate. You're the top 1% already of being able to even enjoy that type of consideration.

So yeah, just be grateful and don't let little things stress you out.

Slocomb Reed (34:17.078)
That makes a lot of sense too.

Slocomb Reed (34:22.614)
Martin, where can people get in touch with you?

Martin Papp (34:26.033)
Easiest way would be to go to our website www. The house is spelled with an H-A-U-S. It's the German house. So Nova N-O-V-A-H-A-U-S.com. You can also probably find me on LinkedIn, Martin Pap. And yeah, I'll be happy to carry on conversations with whoever wants to continue chatting.

Slocomb Reed (34:51.65)
Those links are in the show notes. Martin, thank you. Best ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can value to through our conversation today. Thank you and have a best ever day.

Martin Papp (35:11.145)
Thank you, Slocomb. Appreciate it. Goodbye, everyone.

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