Buying a second home abroad - the pros and cons
Investing in property is now an international game, as Britons look to spread their wings overseas.
Buying a buy to let in Barcelona or a holiday home in Florida is certainly more enticing than investing in a drab semi in Swansea or Swindon. Overseas property can also look dazzlingly affordable compared to the saturated UK housing market, and the prospects also sound brighter as developers lure investors with reports of double-digit annual gains.
Most Britons buy second homes for their holiday or retirement but growing numbers are treating it as a pure investment, tempted by developments promising guaranteed annual yields of 6% or 7%.
There is likely to be a fresh surge in Britons buying abroad as the over-55s take advantage of their new-found pension freedom.
Be warned, sharks swim free in foreign waters and many have already sunk their teeth into the wealth of unwary Britons.
Don't be an innocent abroad, you need to plan your foreign property adventure very carefully.
After years in the doldrums, old favourites, such as Spain and Florida, are bursting back to life.
MartinDell, director of Spanish property portal Kyero.com, reports growing interest from local and foreign residents wanting buy-to-let portfolios while prices remain low. Many are drawn by rising yields, up from 4.7% a year ago to 5.3% today. Popular tourist areas, such as Las Palmas de Gran Canaria, can yield up to 6%.
Dell says: "You can rent out a modern, one-bedroom apartment with sea view for €700 (£512) a month, while a spacious three-bedroom townhouse with sweeping views of the bay costs as little as €145,000 (£106,000)."
Mark Bodega, director at currency specialist HIFX, says Florida is attracting British buyers again, tempted by the 50% drop in prices since the financial crisis. "The pound has slipped against the dollar but low costs, high rental demand and low property taxation makes investing in the States a popular choice."
Old favourites such as France, Italy and Portugal are popular but developers are also pioneering new territories.
Property agency Universal21 is hoping to entice British investors to Istanbul. It offers five-year rent guarantees with full property management and no extra fees.
Agency director Monica Anca says you can buy one-bedroom apartments in south-west Istanbul from £50,000 and enjoy rental yields of 6% to 7% a year.
"With recent capital growth of 20% a year and zero capital gains tax after five years, this is a popular investment area."
Albania now has its first ‘affordably luxurious' development aimed at investors, the Lalzit Bay Resort & Spa.The off-plan scheme offers incentives such as a 6% rental guarantee for the first three years or discounts of up to 30% for cash buyers.
These are just two among scores of off-plan and buy-to-let property investment schemes investing in locations as diverse as Tuscany, Montenegro, Mauritius, Barbados, Dubai, Brazil and Panama.
When it goes wrong
But the foreign property dream can quickly turn into a nightmare. Britons who invested in luxury off-plan Caribbean developments through the Essex-based Harlequin Property Scheme may have lost tens or hundreds of thousands of pounds each after the scheme collapsed amid an investigation by the Serious Fraud Office.
Other Britons may have lost their lifetime savings after investing in the failed EcoHouse social housing scheme in Brazil.
Foreign property is an unregulated investment; there is no Financial Conduct Authority to battle for compensation on your behalf if something goes wrong, and local protection ranges from weak to non-existent.
Angelos Koutsoudes, head of the Overseas Guides Company, says: "Overseas property remains infested with dodgy operators and crooks and UK investors have lost hundreds of millions of pounds."
Buying off-plan can give you an instant profit if the sale value is worth more than the building cost but the risks are legion, he says. "The place may never get built, or be finished to substandard quality. Or maybe the building is finished but the access road neveris. Your developer may go bust or run off with the money."
Foreign estate agents joke that foreign buyers forget to pack their brains but Koutsoudes says. "More truthfully, they are out of their comfort zone, eager to please and overexcited," he says.
As with any investment, you should beware of anybody promising excessive returns, he says. "If the deal is that good, why hasn't George Soros bought it?"
Clare Nessling, director at overseas mortgage specialist Conti, says any yield guarantee is only as strong as the company offering it."Ask for evidence to substantiate the stated returns and references from previous buyers. What is the developer's track record and how long has it been trading? What are the yields based on and have they been achieved in the past?"
A common trick is to hike the purchase price of the property, so buyers are effectively funding the rental guarantee from their own pockets. Nessling says: "The truth is that a quality property in an attractive location doesn't need a guarantee as it will attract renters anyway."
Stephen Hill, head of the professional negligence team at solicitors Bolt Burdon Kemp, is even more sceptical about rent guarantees. "A very generous guarantee means the developer is making a lot of money, almost certainly out of you. It suggests the price you are paying is too high, and the rental yield may fall sharply once the guarantee runs out."
Hill also scorns overseas off-plan projects, which make up the bulk of the property cases he handles. "It is much safer to buy a property that has already been built."
If you do decide to buy off-plan, research the developer online, checking the company and director's accounts and history, Hill says."Your deposit should be secured with an insurance bond in case the developer can't complete or goes bust."
Only proceed if you are free to instruct your own independent English-speaking solicitor, who has absolutely no links to your seller, estate agent or developer.
Hill says there are opportunities from reputable companies but you should avoid anything that looks too good to be true.
Most investors want capital gains as well as rental income but there are no guarantees you will get this, either.
Turkey may have delivered capital gains of 20% a year but a slowing economy and political turmoil means this is unlikely to be repeated. Prices in Dubai are falling. The US Federal Reserve is keen to hike interest rates, which could force up borrowing costs around the world.The danger is that you are buying into a global property market inflated by six years of cheap money.
Peter Esders, commercial director at international legal services company Judicare Group, says before entering into any property agreement you need to work out your exit strategy. "Check whether there is a vibrant resale market for when you want to sell.Who is likely to want to buy the property? How easy is it to get your money out of the country?"
You also need to think about tax."If the property is an investment, rather than for personal use, you can make significant savings by putting the property in the name of a company.This requires specialist advice."
You should also work out what taxes you will have to pay on any income or growth, both locally and in the UK, Esders says. "In most cases, you will have to declare rental income to the local authorities and also where you are tax resident. Many countries have double taxation treaties to avoid you paying tax twice."
Esders says you also need to offset your mortgage and running costs against the income, and remember that your income will fall during the off-season, if you can rent out your property at all.
Also think carefully before buying somewhere that relies on budget airlines to take people to that destination."If that airline pulls its route, you could struggle to rent out your property," Esders says.
Finally, be honest with yourself. "Too many investors are really buying for their personal use. If you use the property during peak holiday times, you are missing out on the best income periods."
Douglas Salt, director of Frank Salt Real Estate Malta, recommends says: "Think about potential selling points for your property, such access to amenities, public transport,shopping centres,office regions and so on. Not only will this attract a greater pool of prospective tenants but it will be an added asset should you decide to sell later."
Ray Withers, chief executive at investment specialist Property Frontiers, says if you're looking to purchase more than one property you should spread your risk. "Buying in a range of countries, or even continents, will limit the impact of any regional events or market recession."
So if your first property is in a holiday resort, balance this with something in a thriving urban centre, Withers says.
Finally, don't ignore the impact of currency swings, which can wreck all your sums. Around 15,000 Britons came unstuck after buying off-plan properties in Cyprus using Swiss franc mortgages. When the safe haven currency soared in the wake of the financial crisis, their mortgage repayments went through the roof.
Jordan Tilley, head of UK and Europe at UKForex, says currency risk cuts both ways. "The pound's recovery against the euro is attracting Britons to the continent but it is a dampener for existing investors who will now get less when they convert any gains back into sterling."
Buying overseas property opens up an exciting world of opportunity but it is also a world of risk.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An off-plan property is one sold to the buyer before it has actually been built and so the prospective buyer relies heavily on architect drawings, scale models and the assurances of the property developer in order to “see” what they’re buying. For investors or speculators, in a rising market, buying off-plan means you buy at this year’s prices and, when you take possession, the market value will have increased. The biggest risks with off-plan are the developer will go bust or not complete the project or that the market will fall and the completed property will be worth less that the agreed purchase price.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.