Most of us know someone who has made a small fortune investing in property, either in the UK or abroad or both. Or, if we don’t know someone we doubtless know someone who knows someone who….. You get the idea. They’re all at it except us!
The opportunity is too huge to miss
It’s true, many people have done remarkably well from investing in property overseas and many continue to do so. Indeed, there are even stories emerging of first-time buyers using the overseas property market to get onto the property ladder.
So how is it done?
The first point to make is that no-one should ever take investment advice from anyone who is not properly authorised to give such advice – e.g. authorised in the UK by the Financial Services Authority. This is more than a warning against being caught out by charlatans – there are very real protections and even compensation schemes which will not be available to those who have not used authorised and regulated persons or firms. OPC is not authorised by any regulator so please read this article in the spirit in which it is written – as a general introduction to the subject and not as authoritative advice.
The Numbers
A hypothetical example will help to give the general gist of how people succeed in making money from property. The general rule is to use what the Americans call “leverage” and we call “gearing” – debt-funded purchases.
Suppose you spot an off-plan development of apartments one of which you can buy for €200,000. Because it’s off-plan the property doesn’t exist yet – it’s just a plan for what will be put on a plot of land. Let’s assume the build phase will last 2 years and local property values are climbing 10% each year. By the time your property is “key-ready”, as they say, its value will have grown to €242,000.
That’s not a bad return if you’d paid all of the €200,000 up front. But look what happens if you use debt and only have to pay, say, a 20% deposit at the outset. (We’ll assume for the purposes of these figures that you can get a mortgage at 80% of the property value although this will vary from place to place).
You pay €40,000 at the start plus some transaction expenses (taxes, legal fees, etc). 2 years later you have to pay the balance of €160,000. But you can raise a mortgage of (80% x €242,000 =) €193,600. So, not only can you pay what you owe the developer but you still have €33,600 left – nearly all the money you put down as a deposit.
Assuming you can let the apartment for enough to pay the mortgage you can reap the benefit of all that continued increase in the value of your property.
Don’t get too carried away
Ok, so why isn’t everybody doing this and becoming millionaires? There has to be a catch. As my wife is fond of reminding me – there’s no such thing as a free lunch!
Well, not everyone can do it. As you will frequently find, no matter how many assets you have banks don’t like lending to people who don’t have the income to make repayments. The old adage, “money goes to money” does have some validity.
And you should not be too cavalier, either, about the risks. True, property has tended to be a good long-term investment and tends not to drop in value as dramatically as shares in companies sometimes do. However, anyone who bought a house in the UK at the end of the 1980’s on largely borrowed money found that house price deflation can happen and its consequences can be severe. In the example I outlined above a relatively modest decline in values would leave you unable to finance the final payment from a mortgage – and that can lead to the loss of your deposit if you can’t find the cash on time.
So what do I do to protect myself?
There are some simple guidelines one can adopt when investing in any asset class and they apply as much to property abroad as to anything else.
- don’t invest without taking proper advice – and not from the barman!
- do your homework – check out what is really likely to happen to property values in the area you’re buying; check tourism forecasts; compare your results to the volume of new build underway; and monitor how re-sales are performing;
- be careful who you buy from – use reputable agents and developers especially when buying off-plan. There’s nothing worse than finding the developer has gone bust and all you own is a few square metres of arid desert with a holly bush!
- don’t over-borrow – gearing (using debt to finance purchases) works extremely well in rising markets but hurts like nothing else when markets stagnate or drop;
- diversify – if you’re going to put your eggs into something make sure you use as many baskets as possible. It is generally better to buy a few apartments in different locations (preferably different countries) than one huge villa somewhere.
So, in general there is no reason why property should not be wealth creating for you provided you approach it in a considered and business-like manner. If you are planning to rent the property out and use it as an investment asset buy with your head and not your heart – it really doesn’t matter that you couldn’t see yourself staying in that apartment. What matters is whether apartments like that are popular with your target market.
I hope this brief overview has been helpful, especially to those of you just embarking on this strategy. All that remains is to wish you happy hunting and to suggest you check out some of the investment-suitable properties we have on this site: have a look here.
