The Money Doctor John Lowe lists the golden rules when investing in overseas property
It is easy to understand the lure of overseas property investment. Pick a location you love, buy a villa or apartment for much less than it would cost here in Ireland, watch the capital value soar, cover the expenses with rental income and enjoy free holidays until you decide to sell. Get it right and it’s a winning formula that, over the medium-to-long term, could show returns of 15 per cent or more a year. Get it wrong and you could find yourself saddled with a vacant, loss-making property in a dead-end destination. Not that there is any need to get it wrong, as profit opportunities abound. All you have to do to join the jet-to-let set is follow the five golden international property investment rules below.
Golden Rule One: Set clear objectives.
What is it you want from your investment? A capital gain? A holiday home? As with any investment, you should start with a clear idea of what you want to achieve. Suppose, for instance, your main objective is long-term gain with minimal monthly expense. Check the “rentability” of your proposed location against the cost of maintaining it and if you are balancing the books on that score, your hope then lies in the capital appreciation when eventually you do sell.
Golden Rule Two: Don’t get burned by property hotspots.
Every day the papers are full of stories about how property in various exotic parts of the world is enjoying unbelievable growth. Those hotspots, according to the media, include Tallinn (Estonia), Warsaw, Dubai, Morocco, Shanghai and Bulgaria. While there is no doubt these places may still be popular, the question every investor should ask is what will happen over the medium-to-long term. Take Morocco, for instance. Ryanair announced that it was opening up 20 new routes to the country, and the Moroccan government set a target of attracting 10 million tourists a year by 2016. Property prices are half the cost of those in, say, Spain and have been rising by 15 to 30 per cent a year. Against this, the country is hardly democratic; it has suffered a number of terrorist incidents; planning and building regulations are lax; there is the potential for water shortages in the future; and it is likely to resemble a vast construction site for the next decade. More to the point, with so much property coming on stream, re-selling in the short term could be a problem, plus there isn’t a developed rental market. Unless you love Morocco, therefore, you might be better off picking somewhere more established.
Golden Rule Three: Plan for the worst.
You’ve found the perfect property in a location which has enjoyed good capital growth in recent years; your bank has agreed to extend the mortgage on your family home so that you can buy the property; and you think that the rental income should just about cover the extra cost. All of which is fine, but there is no harm in having a contingency plan. Property prices are not a one-way bet; interest rates could well rise again; and it is wise to allow for lower-than-expected rental yield. Because property is not a liquid asset and because dealing with an investment property overseas is trickier than
dealing with one here in Ireland, to guarantee minimal loss you should allow for things not going entirely to plan. This includes having the tenant from hell, or not being able to rent it at all.
Golden Rule Four: Research!
It is said that the main criteria for buying property is location, location, location, but in the case of buying property overseas it is more a case of research, research, research. Remember that a villa costing €100,000 in Croatia is only good value if it is good value in Croatia as well. Also, many developers are in the habit of exaggerating rental returns let alone the tax implications. In addition to making sure you don’t pay more than a property is worth, you should have a good idea about who is going to rent the property from you and whether the market is likely to change in any way. Pay special attention to transport (bear in mind that low-cost airlines change their routes all the time) and to the area you are choosing (how will it look when you come to sell?). The greatest profits may be found in unexpected places. Moscow and Mumbai were tipped in the past by the Financial Times as two of the best cities to buy investment property in, but a recent PWC study (Emerging Trends in Real Estate) found that the top six returns — allowing for the risk factor — were actually Paris (6.22 per cent), London (6.2 per cent), Helsinki (6.11 per cent), Madrid (5.95 per cent), Barcelona (5.91 per cent) and Dublin (5.83 per cent).
Golden Rule Five: Get professional advice.
It may seem obvious, but every year thousands of investors find that they have made a serious mistake because they didn’t get professional help. Never buy a property without the assistance of an English-speaking solicitor and without having all the documentation translated; take separate advice on planning regulations if you are intending to build, renovate or extend a property; and employ a tax consultant. Tax is one of the biggest issues for overseas property owners, as charges may be much higher than expected. You should also, by the way, check the inheritance laws of the country where you plan to buy. The ability to pass a property on to your chosen heirs is not automatic in many jurisdictions. Make a separate Will.
Where would I invest if I were looking for overseas buy-to-let property?
I would consider some of the more established holiday destinations. Spain, which is easy to get to and has a well-developed infrastructure, is underpriced at the moment from their recent property crash. All the G8 countries have a certain solidity, politically and financially, and shouldn’t be overlooked. Finally, I would consider somewhere further afield — New Zealand, the USA and Canada all look undervalued to me but don’t take my word for it, check it out for yourself.
Before making any financial decision you should always take professional advice.