Overseas property investment: key considerations
If you’re considering overseas property investment, or simply want to capitalise on bargain basement rates, but are uncertain how to go about it, keep reading.
- Choosing A Property
Overseas property specialist Mark Stücklin recommends buyers start their search by creating a clear, codified list of requirements and objectives for their property.
It’s also important to establish why you want to buy a property abroad. Do you intend to use it as a holiday home to rent out when you’re absent, or will it serve exclusively as a rental property? This is an important distinction, because if the property is chiefly your second home, it’s likely you’ll be using it ‘in season’, and your rental income will suffer as a result.
Peter Esders, commercial director at international legal services provider Judicare, believes a primary consideration for buyers when choosing a property is how easy it will be to sell the property if or when necessary.
Transport is a key consideration. While the quality and quantity of transport links obviously enhance a property’s attractiveness to renters, they also have implications for its long-term viability. If the area where the property is situated is served by a single bus, train or airline, then the loss of that link could reduce its value significantly – or end its feasibility as a rental property outright.
It’s also important not to purchase a property on the basis of prospective value – say, if a major attraction, or transport hub, is scheduled to be built nearby in future. While the project may increase the worth and appeal of the property if and when it comes to pass, Esders believes any overseas home purchase which isn’t motivated exclusively by tangible realities is a gamble.
“It’s easy to make an investment case based on hypotheticals, but as long as those remain theoretical there’s a risk you could make a very poor investment in a property you can neither rent out nor sell,” he says.
“Any property you buy should already be within an hour or so of an airport, already boast local attractions, already be well-served by transport.”
If buying from a developer, Richard Gorrill, director of overseas mortgage provider Conti, urges thorough research into the company’s background.
“What’s their track record and how long have they been trading? Are references available from previous buyers? Also, check comparable properties in the area and any re-sales offered on the same development,” he says.
“Also, if you see a ‘must-have’ property, give yourself a ‘cooling off’ period before making a commitment – especially if you’re tempted to put down a deposit there and then.”
Buyers who require mortgage finance are advised to obtain an ‘Agreement in Principle’ before agreeing to purchase a property, signing contracts or paying a deposit.
“This will tell you exactly how much you can borrow and what price range you can realistically consider,” says Gorrill.
“It will put you in a much better position with agents and developers, proving to them that you’re a serious buyer, and you’ll be better placed to negotiate price – it’s tangible evidence you can take along when househunting, and it can also lead to your application being fast-tracked.”
Furthermore, Gorrill recommends securing a mortgage in the local currency, with income made in that currency used to meet monthly payment obligations, to avoid exchange rate fluctuations.
Esders suggests trying to lock in a purchase at an agreed rate, noting that rates do not need to move substantially to affect the value of your purchase.
“A property priced at £150,000 may look like less of a bargain if the pound falls significantly against the euro – and if you’ve already signed a contract, that could be problematic,” he says.
Calculate annual running costs compared to capital gain or income to identify whether a property represents a good investment, using realistic figures. Don’t place much stock in the claims of a vendor.
“If you’re assured a certain level of capital appreciation or income by a vendor, it’s wise to automatically disbelieve that promise, and assume the figures are being inflated to make the sale,” says Stücklin.
“Be very wary of ‘rental guarantees’, too. This almost always means that you will be overcharged for a property, and your own money paid back to you over the allotted period.”
Esders notes that projections of rental income can be easy for buyers to miscalculate, and sellers to distort.
“If you’re told you can get £1,000 per week for a property, and rent it out for 40 weeks a year, bear in mind this doesn’t mean you’ll receive £40,000 rental income,” he says.
“You’ll likely get considerably less per week off-season, particularly in the seasonal destinations which practically shut down when tourists leave.”
Finally, resist any temptation to rent out the property for cash and not declare it.
“The tax authorities in holiday hotspots often have dedicated teams investigating which properties are being rented – and even if it’s not noticed there, it will likely be here,” Esders says.
In most cases, you will have to declare rental income where you are a tax resident, and where the property is located. However, the UK has double taxation treaties with most countries in the world (click here to view a full list), meaning you likely won’t be taxed twice.
Esders warns that overseas tax systems can be very different to those buyers are familiar with, with different tax year dates, allowances and methods of calculation.
“I recommend people purchasing overseas seek professional tax advice to ensure they’re full compliant – and take advantage of any and all deductions,” he says.
For instance, depending on the constituent tax regime, putting the property in the name of a company could mean a significant tax bill saving.
- Legal Considerations
There are many potential pitfalls and areas of complication that you must navigate when buying abroad. For instance, you may be required in some jurisdictions to secure a license to rent out a property, and some complexes in certain regions may prohibit tourist lettings entirely.
As a result, Stücklin believes hiring an independent, competent, English-speaking local solicitor to oversee the transaction to be of paramount importance.
“It’s imperative they are not connected to your seller, estate agent or developer in any way – lawyers recommended by sellers are to be avoided. They should be proficient in your chosen country’s laws and processes and also know the specifics involved in buying a property there,” he says.
“It’s essential that they confirm to you that all required permissions, licences and planning consents have been obtained. In particular, your lawyer should check that you’re buying a property with the correct title. And that you are being registered as the official owner.”
You should never sign a contract that you don’t fully understand. If two versions are provided (one in English, one in the local language), ask your solicitor to confirm the English version is an accurate translation, and doesn’t contain errors, extras or omissions.
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