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Investment: Different Ways to Profit from Property

Overview

There is a difference between investing for income and investing for growth. When deciding what type of property to buy, you need to consider how you intend to profit from the investment. Below, we look at the three main ways in which property can generate a return on investment; rental yield, capital appreciation and profit.

Rental yield

Buying for rental income is probably the best long term investment strategy available. Not only can the cash generated from the investment be used to re-invest into additional assets, it can also be more profitable than buying and selling property. There is an old Farsi saying which goes ‘hold the property and it will hold you’. This simply means that when you buy property it is better to keep it. This is true for several reasons. Firstly, historically speaking, property prices always go up over time. There may be peaks and troughs at different points but the price trend is always upward. Secondly, when a property you own increases in price, you make money. If your property increases in value from £100,000 to £200,000, you have made £100,000. In most countries this profit is entirely tax free until you sell it. In theory therefore you could make a million pounds a year or more and not pay a penny in tax. Additionally, when you realise your profit by selling you will incur a variety of transaction costs.

If you keep a property, over time it will increase in value as will the amount of income you make from it. The value of your assets will grow and you will incur no tax or costs for the privilege.

Letting a Property. Letting a property abroad can be a hard slog. Setting up websites, finding tenants, arranging advertising, taking enquiries, finding someone to take day to day care of the property… The anxiety of trying to control events from a distance can be difficult. However, this doesn’t have to be the case. If you take the time to select the right property and instruct the right professionals to maintain and let your property, you should be able to sit back, and enjoy the income. On new developments built specifically for the holiday or second home markets, the management company may be as much part of the development as the swimming pool. Communal and management fees are specified in the initial contract and cover services such as ground maintenance, local rates and sometimes also electricity and water costs. It is, however, potentially more difficult for people buying an older property with no built-in letting and management system.

Fees. Management fees will usually be charged whether you rent out a property on a development or not. However, you should be particularly aware of these when renting as they will impact upon your returns. Management fees are often expressed as a charge per square metre or square foot. The charges can however vary significantly and you will need to read the contract carefully to ensure that fees are realistic.

When letting your property, the management company will also charge a percentage of rental income for the services that make rentals feasible such as finding tenants and maintenance. The level of management fee will often depend on whether you are renting to long term or short term (holiday) tenants. Management fees for holiday lets are usually higher because there will be more cleaning involved for changing over tenants on a weekly basis. In most places you should expect to pay between 5% and 20% of the rental income.

Calculating Rental Potential. Rental potential is a simple equation based upon the daily, weekly or monthly rental price (depending on the time periods you are letting the property for) multiplied by the occupancy rate. For example, an apartment with a monthly rent of £500 would deliver an annual rental income of £6,000. However, you may only be able to find tenants for 6 months of the year. The actual rental income would therefore be £6,000 x 50% = £3,000.

After the gross rental income, you will then need to deduct costs which will usually include management fees, rental management fees, maintenance costs and taxation.

Working Out Occupancy Rates. One of the most important determinants of your rental income is occupancy. The agent and developer should both be able to give a realistic idea of occupancy rates but you should also check this from an unbiased source. In relation to holiday lettings, you need to consider the length of the letting season; information on this can usually be found on the internet, listed in the matrix at the back of Homes Worldwide magazine or from the local tourist board.

When assessing likely occupancy try not to be unduly cynical, or to automatically disbelieve people who tell you that the letting season is comparatively long. Cities are a cert for year around letting and there are areas of the countryside which also attract people in summer and winter. The Alps attract high numbers of summer visitors for walking holidays and the mountain resorts of Eastern Europe look like developing in the same way.

Whether to rent to locals or try for the international short-let market. Part of working out the expected occupancy is deciding whether you will market to locals or to holiday lets. The two markets are very different. Renting a house to the local market will provide a more reliable income, with tenants often booking an apartment for a year or more. It is also sometimes possible to rent to businesses or international organisations. In Brussels for example, apartments are sold with a rental agreement with the European Union already in place. The EU uses your apartment to house politicians or diplomats and you receive a regular and generous income.

Long-term versus short-term rentals

Long-term lets

Renting long term is less work. There is no need to arrange for tenants to be met at the airport, no need to clean between lets or to arrange for the garden to be maintained. Your tenants will also expect less; you won’t have to put in a swimming pool or worry about access to an airport if you are renting to local business people. Of course, what your tenants expect will be determined by local norms so you need to make sure your property is competitive. On the other hand, your rental on a daily basis will be much lower than for holiday lets and you won’t be able to holiday in the property yourself.

The advantages of long term lets include:

Lower management costs.

More pages

Page 1: Overview
Page 2: Short-term lets
Page 3: Resale

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