Investment Guide

Introduction

Investment in property, or real estate as it’s called in most English-speaking countries other than the UK, has never been more popular. Investor anxiety about poorly performing shares and pensions has seen tens of thousands of Britons place their trust in bricks and mortar in order to secure their future prosperity.

Initially, the UK’s booming property market – according to data produced by the Economist, house price capital appreciation between 1997 and 2004 was 147 per cent, which, in Europe, was second only to Ireland – saw investors put their faith in the real estate at home. However, around mid-2004, as the market in Britain peaked, the canny speculator turned his attention overseas.

In truth, the really savvy investor had long been putting his money into overseas property. In keeping with the UK, the global real estate market began to rise in 1997. Capital growth in South Africa was the highest worldwide, at 195 per cent from 1997–2004. However, unlike in the UK market, house price inflation continues unchecked in many corners of every continent.

For example, in the first quarter of 2006, Estonia witnessed capital growth of 17 per cent – the highest in the world ¬– in year-on-year performance, according to the Knight Frank Global House Price Index. The figure will make for an impressive return for those who entered the Estonian market last year, but what all investors will want to know is not where has performed well, but where will do so next.

In preparing this guide, we aim to provide an introduction to property investment, outlining the what, where, why and how, to assist you in your ambition to build a profitable international property portfolio, whether you are investing overseas for capital growth or for income.

INVESTING FOR CAPITAL APPRECIATION

Know thyself

The first rule of property investment is to know thyself. Investment is synonymous with speculation, and, by its very nature, is not a certainty. In other words, prices can fall as well as rise, and you could lose your capital, in addition to not making a profit. Over the best part of a decade, in the main, global property has been on a bull run (prices have risen faster than their historical average), but, as we have witnessed in the UK, bearish (the opposite of bullish) tendencies are afoot in many countries’ property markets.

It is imperative, therefore, that you not only know yourself but are honest about your investment personality. Are you a risk-taker? Can you afford to be a gambler? Or do you prefer to make a smaller amount of profit in return for less stress? If you prefer a stress-free life, place your capital in a high-interest savings account. You will know what interest you will earn and when it will be paid. Barring a highly unlikely collapse in the financial institutions, your money will be safest there.

If, however, you prefer a modicum of risk in order to gain, and can afford to take it, you may look to invest a proportion of your capital – it is not advisable to put all your investments into one commodity – in an established property market (such as Spain or France), where the return may not be as high as in an emerging market (for example, Bulgaria or Turkey), but is less risky. Alternative, arguably lower-risk, strategies are investment funds (including Real Estate Investment Trusts, or REITS) and Property Investment Clubs (PICs) – see section headings below.

Lastly, should you have nerves of steel and the financial acumen to back your judgement, there are a number of higher-risk-but-with-greater-return strategies you can adopt. For example, you could invest in an emerging market, such as Bulgaria, where double-your-money capital gains have been reported in only three years, between 2002 and 2005. Alternatively, buying off-plan (literally before a brick has been laid), when prices are cheapest, and selling the property before completion, when prices have increased, having paid only a deposit, is another. See below for a fuller explanation of off-plan purchasing.

Capital appreciation

Capital appreciation is the figure, usually expressed as a percentage, by which a property increases in value over a specific period. Governments and analysts generally publish figures quarterly or annually in arrears. Several things influence a property’s capital appreciation: economic factors (both national and local), supply and demand (which are themselves impacted upon by many influences), location, the type of property, and local amenities. Often, the advent of a new airline route or the opening of a major attraction in an area will bring about a rise in local property prices.

According to the Knight Frank Global House Price Index (published 29 April 2006), average global house prices stood 6.1 per cent higher at the end of March 2006 than at the end of March 2005. Furthermore, global house price growth has slowed sharply from the peak reached in 2004, when prices were growing by 10.9 per cent per annum. Currently, the annualised growth table is led by Estonia (17.0 per cent), Denmark (16.1 per cent) and New Zealand (13.5 per cent). Bulgaria figures at number four of the 29 countries assessed, with a 12.5 per cent growth. Spain is sixth in the table, demonstrating an 11 per cent rate of annualised capital appreciation.

Past performance, of course, is not necessarily an indicator of future ones. Be aware that capital appreciation predictions you may read are not always impartial. For example, a property developer or estate agent may have a vested interest in promoting a certain area or development, and will exaggerate potential capital growth and rental yields. Therefore, seek unbiased opinion as best you can. Government statistics are generally accurate when reported, although not always when forecasted, as has been witnessed in Chancellor Gordon Brown’s u-turn on Britain’s forecast GDP growth in 2006, which was later downsized to half what he originally predicted.

Opportunism

Opportunism, in property investment terms, is about knowing when to invest in a market and when to exit it for maximum profit. Along with the phrase “I wish I had invested in such-and-such a market five years ago,” one of the most often-heard comments in property investment is “I wish I’d sold up 18 months ago when the market was at its peak”. The smart investor, therefore, will not only buy into a new market before the crowd, he will sell to the crowd – who lately have realised the appeal of the new market – to achieve his gain.

The factors an opportunist will consider before buying into a market will be the same as the ones those who follow in his footsteps will consider – except that his conclusions will be based on a market’s potential rather than its more apparent certainties. Take, for example, the Bulgarian property market. In 2001, EU accession was mooted, but Bulgaria was not then even a candidate country. Its banking and financial structures were not acceptable by Western standards, and the judicial system needed overhaul, BUT the country had a strong vested interest in improving all these aspects within a short space of time to gain EU entry – which is now scheduled for 2007.

Researching Bulgaria, the canny investor could see for himself that the country’s economic reforms, allied to its reasonable climate, geographic location and cheap property prices, made it a prime market in prospect. Critically, he invested at this juncture, in 2001. He has been rewarded for his prescience by an on-paper gain of an average of 100 per cent between 2002 and 2005, and considerably more in certain areas on some properties.

The opportunist investor will now have sold up in Bulgaria – at the very point when many people are buying into the market – moving his attention to other, more lucrative, countries.

Supply and demand

Supply and demand is the first tenet of capitalism. Essentially, the price of any commodity is based upon what is available to purchase and how much a buyer is prepared to pay for it. Many factors will impact on an item’s availability, and its price will vary according to those influences and the demand by the public to have or to own it.

In property investment terms, the investor always aims to buy into a market where there is a sufficient supply of property – but not an oversupply – to create an interest in a region or country among the public and a consequent demand to see it for themselves. In turn, the public will want either to rent the property in the short-term, or to buy it in the longer term. The balance between supply and demand is a fine one that is a critical factor for the property investor in realising a profit.

Currently, in Bulgaria, for example, construction is booming at an unsurpassed pace, leading some commentators to question whether there is likely to be an oversupply of property in the near future, the consequence of which will be falling or stagnant prices. Aware of the issue, the government has placed a moratorium on new developments in certain areas, in an aim to allow the market to correct itself so that supply and demand become harmonious – the ideal, yet rarely realised, position.

Buying off-plan

Buying a property off-plan, literally from a set of plans or architect’s drawings, may not be the norm in the UK, but it is common practice overseas. It may seem to be a leap of faith – buying something that you cannot see or touch – but the advantage of doing so is a price reduced by, often, as much as 30–50 per cent of that of the completed property.

Price reductions of the scale mentioned are made as an inducement to the buyer by the developer, because effectively the purchaser is paying the developer for his own property to be built. Prospective off-plan purchasers pay a deposit, often of 5 per cent, followed by several stage payments of approximately 23.75 per cent at four significant points in the build process – for example when the foundations are laid, the walls go up, the roof goes on, and finally on completion. The whole process may take 18–24 months.

In addition to making a large profit by buying at phase one and selling on completion, astute investors have realised the potential of buying a property at phase one and selling it prior to completion. Firstly, in doing so they will avoid paying completion costs, and secondly, should they sell having made only one stage payment of 23.75 per cent, the capital outlay will only have been 28.75 per cent of the purchase price. Known as ‘flipping’, this practice has worked particularly well in a rising market, when capital appreciation has grown at a rate of 20–30 per cent in the course of the year during which the property is being built.

For example, on a property priced £100,000, the buyer will pay £28,750 (28.75 per cent) during the first year of the build. The balance of 71.25 per cent will fall due to be paid during year two. Property prices during the year will have risen by 30 per cent, meaning that he will sell the property for £130,000, making a profit of £30,000, having laid out only £28,750 in capital, which, naturally, he will recoup at the point of sale. His only fees will be to an estate agent and a nominal paperwork fee to the developer because he didn’t complete on the transaction – a total of, say, 5 per cent, leaving a profit of in the region of £25,000 for one year’s ‘work’.

The downside of such a practice is that it only works in a rising market. In a slow or stagnant market, the capital appreciation will be lower and the risks higher. For example, it may not be easy to sell the property prior to completion. In such a scenario, the buyer will have to complete and pay the attendant fees and taxes of approximately 10 per cent in most countries. Additionally, some developers, aware of the practice, have inserted a clause in the purchase contracts, stating that they are entitled to a percentage of any profit realised before completion.

Resaleability

It is commonplace to hear people boast about how much their property is worth. “Oh yes,” they will say, “My villa in Spain is worth £500,000 on paper.” The phrase ‘on paper’ hides a multitude of sins, and while it is a barometer as to what a property may be worth, that doesn’t mean that’s the price for which it will sell. What something is worth and how much it will sell for are not the same thing at all. The term resaleability can be used specifically when debating a particular property’s potential to be resold, but in investment terms it is generally used when referring to the broader picture of an area, region or market.

Consider, for example, Bulgaria’s property market in terms of resaleability. Until 2006, analysts argued that the country didn’t have a resale market. What did they mean? Say you bought an apartment from a developer for £30,000 and wanted to resell it six months later. In the UK, no problem. In Bulgaria, it could be difficult. Here’s why. £30,000 is a fortune to a Bulgarian, whose average salary is approximately £150 per month. The average property price is £5,000–10,000, despite the thousands of expensive new-build properties constructed in the past five years. Therefore, if you are to be able to sell your now second-hand property, you will need to do so to a fellow Western European who can afford the asking price.

The length and breadth of Bulgaria is becoming dotted with new-build properties, particularly along its Black Sea coast and in the mountain resorts and cities, such as Sofia and Plovdiv. Hundreds of developers and estate agents are each spending thousands of pounds annually to attract British buyers to purchase the properties they are selling. Often, stage payment inducements, free incentives and other marketing gambits will be utilised to encourage buyers to part with their cash. You, trying to sell your ‘old’ property, will, therefore, have a hard – though not impossible – time. Additionally, other investors, seeing now as the time to extract their profit – because the masses are buying – will be trying to move on their properties.

Purchase costs, fees and taxes

It is an easy, if amateur, mistake to consider only the purchase price when buying a property. Purchase costs and fees often amount to approximately 10 per cent of the purchase price, and can be more. In France, for example, 12 per cent is a more realistic figure, and one that can be even greater if the buyer is expected to contribute to the estate agent’s fees, which is legally permitted.

In almost every country, one has to pay a form of purchase tax, equivalent to stamp duty in the UK. Additionally, factor in legal fees, notary fees (in most European countries), title registration fees, mortgage fees (if applicable) and foreign exchange fees (if applicable). Should the property you are purchasing be new build, VAT, or a local variation, may be levied.

Ongoing costs, although not strictly purchase fees, will include some form of municipal charge for refuse collection, utilities standing charges, and communal fees if the property is in a complex. These will be applied in most countries.

Selling costs, fees and taxes

On selling a property overseas, you should factor in the following costs and taxes: estate agent’s fees (which may be as high as 8 per cent in many European countries, although the average is around 5 per cent), legal fees and capital gains tax (CGT).

Almost without exception, estate agents are unregulated and may charge what they like, so always negotiate a price at the outset. CGT is payable following the sale of a property, and is assessed on the gain between the sale price and the original purchase price, often with allowances. Each country has a different CGT interpretation. In most countries, is usually possible to deduct the cost of any house improvements, together with the cost of sale fees. Ensure you keep receipts, and don’t pay cash in hand, or expect not to be able to get an allowance against any payments you do make in this manner.

Be aware that lower CGT rates often apply to resident owners for tax purposes, although the EU is attempting to bring into practice a one-rate-for-all policy. In Spain, for example, resident taxpayers pay 15 per cent CGT, while non-residents pay 35 per cent. Some countries do not levy CCT, including Dubai and the Dominican Republic. This is not to say you won’t pay CGT, as you may be obliged to pay it in the UK if Britain is where you are registered for tax purposes. Seek specialist tax advice to mitigate your financial exposure.

Macro and micro economic factors

Researching where to purchase an investment property involves assessing the macro (national) factors that are affecting a country’s house prices now and that give an indication as to how they might perform in the future. The question you want answered is: is now a good time to buy, that is, is the market on the way up, not down? For example, how is a country’s economy performing? Is its gross domestic product (GDP) – the unit by which analysts gauge a country’s performance – growing or diminishing? Is inflation manageable? Is trade improving? Is foreign debt a burden? Each and every one of these factors has a bearing on property prices.

Next, narrow your research to the micro (local) factors. After all, we don’t buy a country, but in an area or town. For example, is there news of a big annual event happening or the opening of a new attraction, such as a showpiece museum, that will create demand in the area? For example, capital appreciation was 30 per cent in Valencia last year on the back of the announcement in 2004 that the city had won the bid to host the prestigious sailing event the America’s Cup in 2007. Also, look out for a city or region where a no-frills airline is opening a new route. Before long, house prices will begin to soar, as more and more visitors and prospective house buyers descend on the area. Do keep in mind though, that these same airlines can and have dropped routes from their schedules without warning. This would have a knock on effect on the area’s accessibility for holiday rentals.

Exit strategy

An investor is not a serious one if he hasn’t formulated an exit strategy as part of a wider business plan – with financial forecasts – to realise his profit. The time to plan an exit strategy is before you buy, not after. For example, the legal status of a property’s ownership will have a bearing on future taxes payable. It’s essential, therefore, that you take specialist advice on tax and legal implications in the countries you’ve selected before committing any funds. The smart investor will also have considered – before he buys – at what juncture he is going to sell the property.

Timescale is a key factor in the equation to realise maximum profit. For example, your research should uncover the position of each and every property market you look at, identifying whether it is at the top, middle or bottom of its economic cycle. Clearly, you want to buy at the bottom of the price cycle, not at the top. Undertaking research before you buy will help you ascertain at what point the market is likely to peak. A point six months prior to the peak would be the time to start looking to market and sell your property, be it one, five or 15 years after you have purchased.

Of course, even the best-laid plans go wrong, which is another factor to work into your exit strategy. How flexible can you be, or afford to be? For example, if all your assets are tied up in a property and you have a mortgage on it, and the market dips, can you ride out the recession, or will you have to cut your losses? Often, the most difficult decision is to admit defeat and pull out, but if you have already thought through a Plan B, you will at least know what strategy to adopt in the event of a downturn.

Investment funds – REITs – and PICs

Property investment is often perceived as a game played alone, but increasingly investors are joining together to share risk and to gain the extra buying leverage that being part of a consortium can bring. In the UK, property investment funds – REITs are the chancellor’s preferred fund – are regulated. They are run by professional fund managers, who make decisions as to which properties are bought and sold, and when. The investor simply watches the performance and waits for his dividend to land on his doormat.

For those who prefer a more hands-on joint role, Property Investment Clubs (PICs) are an option. The idea behind PICs is a simple one: buyers come together to use their bulk buying power to negotiate discounts on property prices, mostly within a given development either in the UK or abroad. The type of property preferred is usually new-build apartments, where sales can be secured on the launch of the project at a discount often as high as 25 per cent. The attraction to the PIC member is that he feels secure in the knowledge that he is buying through a group.

The British government shut down several unregulated PICs last year, and some appear less than reputable (enter the words ‘property investment clubs’ in a search engine, such as Google, to see for yourself). Be sure to invest money in one only after thorough research, or a recommendation.

INVESTING FOR RENTAL INCOME

Rental yield

The rental yield is the annual income from letting a property expressed as a percentage of its value. For example, if you buy a property priced £100,000 and earn £10,000 in rental income, the yield will be 10 per cent gross. The term ‘gross’ refers to the figure before all costs are paid. These costs include, for example, management fees, community charges, income and local taxes, marketing costs, mortgage repayments, and so on – indeed, any expense related to the running of the property. The net yield is the figure arrived at when all costs have been paid.

Depending on specific circumstances (for example the mortgage interest rate you are paying, the income tax levied on rental income in the country where the property is located, or whether you use the services of a management company), you should expect to achieve a net yield of approximately 40–50 per cent of the gross. In other words, given the example above, you could reasonably expect to retain £5,000–£6,000 of the £10,000 in rental income, giving you a net yield of 5–6 per cent.

Only you will know, having done the maths, what you need to achieve to break even or make a profit, but commercial landlords consider a net yield of 5 per cent a viable figure. Less is unviable, and more, obviously, is better. Factors other than expenses that will impact on the rental yield will be location, amenities and rental availability, that is, how many weeks of the year the property can be let.

Annual letting weeks

The number of weeks per year for which a property can be let is the most important factor in achieving a strong rental yield. Based on a 52-week year, a 60–70 per cent annual occupancy rate (30–34 weeks) is considered to be good. However, only certain properties can begin to reach anywhere near that potential, particularly if the property is a seasonal holiday let and not a long-term let prospect such as a city apartment.

Firstly, consider that unless the property is in a city and therefore has long-term let potential – bear in mind that long-term lets achieve less income than short lets but do not require as much marketing and management – it will invariably be a seasonal let. For example, Bulgaria’s Black Sea coastal resorts have a four-month (16-week) high season and a two-month (eight-week) mid season. The rest of the year is, generally speaking, too cold for the area to be classed as a beach destination. Given the above scenario, the letting potential is only 24 weeks in any one year of 52 weeks, even before you begin to try to find fee-paying tenants.

Genuine year-round rental prospects are usually countries with 300-plus days of annual sunshine, which are few and far between. Spain, for example, can be very cold and wet from November to February, even on the southern Costa del Sol. However, the region does have golf courses aplenty, which means all-season rental potential. Additionally, factor in that, on a new property or development, it will take time to build up business. Year two will be more profitable than year one, and year three more so than year two, and so on, depending on the level of marketing undertaken.

Other considerations that will impact on rental availability will be the number of weeks in each year you may want to reserve your property for your own, your family’s and your friends’ use – often free of charge. Also, even in a market that has year-round potential, you should expect void periods (empty weeks) and seasonal fluctuations in the rent you can charge. The peak holiday periods will vary depending on whereabouts you buy. In Spain, for example, high season is May–August inclusive, mid season is March, April, September and October, and low season is November–February inclusive.

Purchasing factors

There are several generally accepted ‘golden rules’ when buying a property for holiday lets. Firstly, choose a property near to amenities, shops, restaurants and beaches (10–15 minutes’ drive is the maximum), and near (but not too near) an airport (30–45 minutes away is held to be the maximum, but you don’t want the property to be under the flight path, because of noise pollution). An apartment located close to a major attraction, such as Disneyworld, or Portaventura on Spain’s Costa del Azahar, will pay dividends in rental income, as will a property on a golf course in a year-round rental destination.

Ensure the property has a minimum of one bedroom and a living room with a sofa bed (but preferably two bedrooms), as most tenants will be families, generally consisting of two adults and two children. Furnish it neutrally, to broaden its appeal, and inexpensively, to reduce replacement costs.

If the property is in a city, ensure it is near transport, culture, restaurants and the other aspects for which people choose to visit a city. Don’t, for example, buy an apartment an hour from a city centre in a suburb and then promote it as being on the city’s doorstep. Alternatively, should you be intending to promote the rural property you buy as an away-from-it-all retreat, not all of the above will apply. For example, proximity to amenities and attractions will not be a requirement, but you will still want to ensure that the basic principles of not being too far from an airport and having sufficient bedrooms to attract at least a family party are taken care of – unless you are specialising in ‘solitude’ holidays, in which case a studio apartment or a cave will suffice. The point here is to research and know your market, and then to market the property accordingly.

Marketing

Marketing and advertising, as anyone who works in them or in a sector associated with them knows, seem very easy from the outside but are much harder when you have to do them yourself. Firstly, if you intend to market the property yourself or in tandem with a managing agent (see below), be realistic about the costs of promotion and your expectations of success. As a rule of thumb, reduce by half the income anyone predicts you will earn, and equally, expect only 50 per cent of the colleagues and friends who say “sure we’ll rent your place off you when you buy“ actually to do so.

However, a good trawl of friends, relatives and colleagues is a good place to start and often brings in a proportion of the income needed to achieve a respectable yield, as long as you actively promote the property by, for example, placing notices on staff notice boards and so on. Don’t underestimate the potential of local advertising in the form of newsagents’ windows. Local newspapers and magazines may work for you, but be aware that they can be an expensive route to market, with no guarantee of returns. Consider developing a web site and/or advertising on one or more generic web sites, many of which charge you on a ‘pay per click’ basis. Companies like www.holiday-rentals.com may be worth trying, but simply ‘googling’ holiday rentals followed by a country will return several million web sites from which to choose.

Should you select a ‘web partner’, or several, be sure to ask for testimonials from satisfied customers as proof that advertising on the web site works. Of course, any money you spend on advertising the property will impact on the profit, but it is a tax-deductible expense. For this reason, ensure you receive and file all receipts for any money spent on the property, including marketing and advertising costs. Chargeable items include consumables, such as paper, toner ink, the cost of advertising fees and the construction of a web site, providing you pay someone else to do it on your behalf (that is, you can’t design it yourself and charge a fee for doing so). Speak to an accountant – whose fees are tax deductible – who will advise you accordingly.

Property maintenance

If you require hassle-free income and few maintenance issues, you may be best advised to purchase a recently built apartment on a development. Should there be a problem with the water or electricity, for instance, it is your responsibility, as the landlord, to sort it out, which is not always easy if you are 2,000 miles away in the UK. Buying on a development, however, almost always involves a community charge to pay for the maintenance of common areas. Typically, fees are fixed annually and are around £100 per month for a standard two-bedroom apartment, and the development’s management invariably will be on hand to take care of local problems that may arise at your apartment, for an additional fee.

Alternatively, you may buy an older property not on a development and choose to recruit a local managing agent (see below) or a local person to check up on the property. Naturally, an agent will generally cost more, and invariably the service will be less personal than that provided by a neighbour, but you may prefer not to mix business with pleasure, or you may value your privacy. Of course, if you live locally and are capable and willing, you may choose to deal with maintenance issues yourself. Be sure you know where the stopcock and fuse box are, and carry a torch, as almost always the most serious problems arise after dark.

Managing agents

Managing agents overseas come in several guises – and often more. The managing agent may be doubling as the estate agent who sold you the property, or he could be the local bar owner who oversees your property when you are not there for a few quid. Equally, the company could be a slick operation that finds you tenants in addition to providing ‘house’ services for an all-in fee. Only you will know the level of service you require, but if your venture is commercial and therefore requires end-of-stay cleaning services, bed linen changes and general 24/7 maintenance, you will probably want to engage a professional company.

Typically, management fees in Spain, for example, are around 10–15 per cent commission for finding tenants and an additional 5–10 per cent for managing the property on a weekly basis. Services you can expect to be undertaken for the fee include cleaning, security checks, inventory taking after each let, collection and payment to you of income, and odd-job maintenance. Most landlords agree in advance with the managing agent that any work up to a certain financial limit, say £200, will be taken care of by the management company, without the need to seek permission.

Of course, the amount decided upon is negotiable, as indeed are all fees payable. Be aware that management companies can charge however much they wish – there is no regulation of the industry in most countries – and that paying 25 per cent for a full service is not unusual, and even up to 50 per cent is not unheard of.

To find a reputable managing agent, ask neighbours or the estate agent you buy from, and search local newspapers and business directories. Once you have appointed a managing agent, ensure you receive regular communication and payments. You are placing a great deal of trust in him, and to ensure your buy-to-let property or business is profitable, you really will need to keep abreast of the finances in order to achieve a viable rental yield.

Taxes

Taxes are unavoidable in most countries, Dubai being a notable exception to the rule. Taxes pertaining to rental income are generally levied as part of general taxable income in most countries, and it is the individual’s legal responsibility to declare his income. For example, if you are deemed a Spanish resident for tax purposes, you must make an annual declaration of income in Spain, regardless of your nationality. Take advice from a tax specialist before buying a property.

In Spain, any rental income received by non-residents is subject to tax at a flat rate of 25 per cent. Even if the property is not rented, owners are still liable for income tax, calculated on deemed letting income, at the rate of 2 to 20 per cent of the property’s official value. Allowances are permitted. Furthermore, you may be liable for tax on the rental income in the UK, assuming you are a UK resident for tax purposes, although a double taxation treaty between Spain and the UK means that you will usually simply pay the higher of the two tax rates, in this instance that in Spain.

In most countries, property owners will additionally pay an annual real-estate tax. In Spain, the tax is known as IBI (impuesto sobre bienes inmuebles). Based on the valor catastral (the official rated value of the property), IBI is paid by every homeowner, regardless of residential status. As this is a municipal tax, the amount payable varies by location and property size, but generally it will be in the region of 1,000 euros per annum for a three-bedroom house in a coastal area. Unlike income tax, which is declared, IBI is charged to property owners in the form of a bill. For this reason, you are advised to set up a standing order (domiciliado) at your bank, in the same way as you will to pay your telecommunications and utilities bills.

Insurances

As in the UK, you will be required to take out buildings insurance if you have a mortgage against the property – and would be well advised to do so in any case. Additionally, as you would in Britain, you should have contents insurance, which will be particularly relevant if you have fee-paying guests who may break items. As the owner of a property, you will also require personal indemnity insurance, to cover your potential liabilities to anyone who is, for instance, injured while on your premises.

Leaseback schemes

Leaseback is an arrangement whereby the purchaser of a freehold property leases it back to the developer or a management company for a period of time at an agreed rent. Leaseback has become synonymous with the French government-backed leaseback scheme, known as Residence du Tourisme, under which owners lease their property for a period of up to 20 years (nine years is the minimum) in exchange for a fixed return and tax benefits, including VAT rebate concessions. Owners are permitted to sell their property prior to the end of the leaseback term, but are required to sell the agreement to the buyer. Rental yields average between 3.5 and 5.5 per cent net.

Guaranteed rental schemes

The principle behind guaranteed rental schemes (GRS) is the same as leaseback. The purchaser buys the property and signs an agreement with the developer/management company to let the property on his behalf for a fixed period of time in return for a set income – often between 4 and 10 per cent net – for the period of the contract, thus removing the buyer’s need to let and manage the property himself. The rates offered are often less than the market might return, but give the buyer confidence in the short term – most schemes are for the first two years – while a secure rentals market is being established in emerging areas or markets.

And finally...

Investing in property abroad can be extremely enjoyable and profitable, but it is not a pursuit that should be undertaken by the inexperienced, naïve or headstrong. Property markets, as with any traded commodity, are volatile, and likely to decrease in value as easily as they have increased in recent years. Therefore, research every aspect of the process, and invest only when you are certain you have taken everything into consideration.

Particularly, when you are buying property for profit, it is essential to take professional advice specific to your particular ambitions before you begin to build a portfolio. Pay particular attention to legal issues and taxation matters as part of a planned investment exit strategy. Doing so will invariably save you money in the long term. After all, a profit is only a genuine one if you are actually able to retain the money you have made from your enterprise.