The 1O basics of successful overseas property investing
Investing overseas can bring great rewards both financial and lifestyle. However it is fraught with potential pitfalls and is not something that should be entered into without undertaking proper research and taking the proper precautions.
In this article, we examine the 10 essential factors of investing overseas safely and profitably
1. Supply and Demand.
Supply and demand is the fundamental law governing property prices.
The key is to research and use your knowledge to try to determine which areas will be subject to an increase in demand, but where there is an inelastic supply of property so that prices are pushed upwards.
Typical examples will be prestigious central locations; areas with very restrictive planning regulations, such as national parks; places where there is clearly a very limited amount of desirable land to build on, such as front line beach property - especially if there are strict planning policies in place as there are in Mallorca or Cyprus where builders may not build new property over 2 stories high.
Triggers that can create demand include:
- Economic Growth
- Falling interest rates
- Growth in Employment:
- Special Events (Olympics, World Cup, City Of Culture, EU accession)
- Regional Factors (airports marinas golf courses)
- Local factors (good schools, restaurants, transport)
- Tastes and fashions
- The Easy Jet factor – arrival of low cost airlines increases tourism
2. Follow the Big Money
One of the ways some investors use to gauge which areas are likely to see large rises in property values is to keep an eye on which countries are receiving large amounts of Foreign Direct Investment (FDI). The money could be coming from the EU (visit the EU website to see which areas are designated as having Objective 1 status), or from foreign governments or corporations. You can be sure large corporations will have spent huge sums researching an area before deciding whether it is a viable area to invest in… and it is one way to cut down on the research you yourself need to undertake.
Large scale investment in the infrastructure of a region will benefit that area far beyond the initial investment, as the effect will be multiplied many times over as wealth is created and spent and re-spent.
Look for areas where there is investment in for example new airports, marinas or golf courses. The general pattern is that as the money moves into an area (golfers and boat owners generally have money), the restaurants and nightlife become more chi-chi, the area becomes generally more attractive, and property prices rise.
Research your areas and get in early to maximise profit.
3. Interest rates
There is a direct correlation between falling/low interest rates and rising property prices as it makes property more affordable. For the best buys, therefore, look for countries with falling interest rates such as countries due for EU accession or ones like Cyprus that will be joining the Euro shortly - they all have to lower interest rates to converge with the Central European Bank.
4. Currency Exchange
Currency fluctuation is a risk that can affect all overseas property investors and one which you must consider and take steps to mitigate. A slight variance in currency rates could potentially add tens of thousands to the price of your property.
You need to consult, at an early stage, a well-established, reputable currency broker and pay heed to his advice regarding which currency to pay for your property in and when to make the payments.
It may be possible to fix the exchange rate for up to 2 years, so if you are buying long-term off-plan you can be certain the price will not shoot up due to pound weakening against whatever your particular currency is.
There are various methods of fixing preferential rates and the advice of an expert could see you shaving a decent percentage off your purchase price.
5. Do your sums
Banks in England are comparatively soft when it comes to repossessions. In some countries, however, if you miss just a couple of payments you may find your house being repossessed. It is therefore vital that you accurately calculate all your purchase costs, which can often add on as much as 20% to the contractual price for the property and make sure you can truly afford it - with enough left over for furnishings and marketing your property.
You will also need to research all your likely marketing, management, maintenance and utility costs and write out an accurate operating statement so you can ensure that your likely rentals will comfortably cover your mortgage payments and your other ongoing costs.
You should also do a sensitivity analysis to see what would happen if interest rates go up. It is vital that you either fix your mortgage interest rate or have a contingency fund to cover increased mortgage payments should the rate go up and other unexpected expenses.
6. Accessibility of High LTV Mortgages
The buy to let market in the UK started to take off in 1996 mainly for one fundamental reason: it suddenly became a lot easier to take out high LTV mortgages at reasonable rates of interest.
Conversely, as mortgage availability has dried up this year, so has the buy to let market. Readily available finance fuels the property market and you can use this to your advantage. Therefore look for situations when lenders in a particular country (especially one that is already popular with overseas buyers), start to introduce borrower-friendly mortgage products that make it easier and more affordable to buy property, as demand will increase and prices are likely to rise.
7. Risk and reward
All investments carry some form of risk – and normally (but not always) the higher the potential returns, the greater the risk. You need to analyze your own character and decide what sort of investor you are and what sort of investments are suitable for you. There is little point in investing in areas that promise high returns if the associated risks are going to give you sleepless nights.
Do your research thoroughly. Before you invest anywhere, draw up a list of all the potential risks, decide what you can do to mitigate those risks, and what action you could take should they actually occur.
8. Gearing
One of the keys to successful property investment is the ability to use OPM (Other People’s Money) effectively to maximise your returns. From an investment perspective and, with all other things being equal, I would always recommend choosing the country that allows you to gear your purchase more highly. Here’s why:
Bill and Ben each have £30,000 to invest. Bill invests in a Turkey because he can buy a nice property outright for £30,000 (he could not get a mortgage). Ben puts his £30,000 as a 10% deposit on a £300,000 property in Mallorca (he makes sure his mortgage payments will be covered by the rental income).
Each property grows at 10% a year.
After 5 years, Bill has made a profit of £18,315 (£48,315 less £30,000). However, Ben has made a profit of £183,000 (£483,153 less £300,000)…bthat’s the power of OPM!
9. Beware the bubble!
You must have a pre-determined exit strategy and know who you will be able to sell to. Is there a genuine market for purchasers who will actually want to live in the property or buy it for a long term buy to let investment?
Over the last few years, many professional investors have operated in areas such as Dubai, Bulgaria and Cape Verde and have made substantial profits by buying low and flipping the property for a good profit before completion.
However, flipping properties is like a high-risk game of pass the parcel. In Dubai there have been cases of properties changing hands 5 times between reservation and completion and the final price being more than double the initial reservation price – consequently we are now starting to see many distressed sales in Dubai from investors who bought in bulk intending to flip and are now unable to sell as the market has softened. You definitely do not want to be left holding the parcel when the music stops, or you may find yourself in deep financial trouble.
The Sunny Coast in Bulgaria is now suffering from chronic oversupply and it’s proving hard to find an exit as the tourist market is not yet developed enough (and may never be), and the properties which UK investors thought were so cheap when they bought them are way too expensive for local Bulgarians.
So you must ensure that there are genuine economic factors driving demand for the market and it is not just being driven by investors’ greed - hoping to cash in on the latest hot spot.
10. Legal issues
Although it may seem expensive, it is vital to find a good lawyer with sound local knowledge. Do not use the Yellow Pages to find one; it is much better to find someone you trust to refer you to somebody. If you do not know anybody then the British Consulate in that area should be able to help.
Laws relating to ownership of land vary massively from country to country. You need to be fully aware of what you committing to. For example, are getting sound right to title? Is the property free of debts? What rights do third parties have over the property?
Many popular hot-spots outside the EU unfortunately have high levels of corruption, so if the contract is not in English ensure your lawyer is bi-lingual, provides you with a full summary about all the contractual terms, and ensure that you are happy with all aspects of the contract before proceeding.
You may also want to consider using a specialist international law form in the UK to check everything over.
|
