Investing in a rental property in a foreign country is one of the best types of real estate investments you can make today. In fact, in every diversified property portfolio, there should be some money in overseas rental properties. To retirees and ex-pats, this kind of purchase can double as a retirement or second home in a foreign country where you would like to spend time. The rental income will cover the carrying costs, or even a mortgage, which means that your escape hatch overseas may come at a super low or even no cost at all.
There are a number of factors you will have to consider before deciding to make your overseas investment, for instance, what kind of returns can you expect? How will you finance the investment? Where to buy the property? And most importantly, how do you manage that property from abroad? We will answer all these questions in a minute, but first, let’s learn more about investing in short-term vacation properties.
The short-term rental strategy
In most cases, short-term rental investments target properties in the central districts in major cities with stable real estate markets. By renting them out for short periods, and of course, with efficient management, the investor can earn up to 5% net yields in a foreign and much stronger currency, while at the same time keeping the risks at bay. Short-term properties, (or daily holiday rental accommodation), are in great demand, especially in the leading cities across the world, and particularly in Europe. So, by investing in these kinds of properties, investors are not only after good yields but also property that’s easy to rent, given the increasing demand, as well as excellent capitalization potential. Also, the popularity of these properties among the urban individuals is also contributing to their quick selling. That’s not all; if you are not looking to sell, you can use this property for holidays, business trips, or even residence just in case of “force majeure.”
How can you finance this property?
You can get a loan – in most countries, foreign investors are allowed to take a mortgage that has a maximum loan-to-value ratio of about 60% at an annual interest rate of about 3-5%. When the rental income exceeds the loan interest, it leverages the investment, meaning that the borrowed money boosts the income proportionally to the interest rate. To get the best deal on a mortgage, seek assistance from a local mortgage broker who has better connections and can negotiate for better lending terms.
Moreover, to acquire a short-term property, there are additional costs that you should know about:
Acquisition tax – it applies to any property purchase, and it is based on the way the transaction is structured, such as personal purchases or through a legal entity. In the UK, for instance, it is referred to as Stamp Duty, while in other countries, it is known as Property Transfer Tax or Land Tax, and it’s about 2-4% of the buying price.
Rental income tax – the tax charges range from 15 to 25% and are imposed in the country where the property is located. To ensure that you don’t pay more than you should, you should consider hiring a local tax advisor. The advisor helps you structure the investment in a cheaper manner, especially considering the fact that there are so many expenses that can be deducted from the taxable amount.
Lastly, you have a choice to make, either you register the property to an individual, or as a legal entity. Now, this decision will depend on the number of flats in your portfolio. In the initial stages, the properties can be registered to an individual, and when the investment starts to make profits, further down the line, you can register it as a business.
Where should you buy?
When deciding on where to buy the property, it is crucial that you choose a country and a city with a stable real estate market. To identify these places, look out for the following: demographics, (that’s the population) and the GDP. In such areas, the property will be easier to rent, thereby minimizing any chances of you suffering a loss, just in case the market takes a downturn.
The best places to invest in short-term rentals are those locations with much more developed travel industry and business environment, as they guarantee demand throughout. Lastly, you need to check whether it is possible to register the investment as a business, legally, given that short-term rentals tend to drive rental growth in the long-term – competing with hotels.
How can you manage the business from abroad?
There are two ways in which you can manage short-term rentals; either, you do it yourself, with the help of your family or a vacation rental management software, or hiring a professional management company.
Personally managing short-term rental properties is not easy. In fact, it is not recommended, since the investors can’t manage client turnover, sign any paperwork required or even maintain the property unless they are present. To solve this problem, a short-term rental management software allows you to manage a plethora of things including contracting management, manage rent payment, and in case of any issue, a tenant can leave a comment or review, raising an issue, which gives you the opportunity to address it right there, in real-time. The software enables you to control everything on a single platform.
Secondly, contracting a property management company to manage your property is the next best alternative, especially if you don’t have time to do it yourself. The company takes care of things like declaring taxes, cleaning the property, and also organizing a schedule for the tenants. What’s more, contracting a management company spares you the worry of whether your investment is making profits or not. However, though, you need to ensure that the hire is a competent company, as that’s the only way you will be guaranteed of profits.
Remember this: even in the most stable market, good returns are not always guaranteed. You have to go the extra mile and make it happen!