For many, renting a property out is a key element in making their dream of buying property abroad achievable. Buyers I speak to often talk about a desire for the property to produce some income for various reasons; whether to help pay the property's mortgage, to serve as part of a pension/savings plan or to simply generate some extra income towards the various costs of ownership in the hope that it will 'wash it's face'. Few however consider the implications of different countries' (and sometimes even regions within those countries') rules and laws on rental property until long after they've completed their purchase which can have a dramatic effect on a properties income generation.
Simply put, if you're looking to rent out your potential purchase for periods of time then you're an investor and as such you might as well think like one. With this in mind I've outlined below some key points to consider.
It may be a cliché but it's worth considering this in all it's facets. Essentially if your property is to generate income it needs to have easy access to its market. It can often be a trade-off between what you as the owner might like from a holiday home against what the majority of holiday makers desire from a week or two in a property. Of course, a rural idyl might sound like a great escape for you once in a while but the majority of holiday makers want access to facilities and attractions so if you want regular income then your property needs to satisfy this demand. Spend time in the destination and assess the demographic of the holiday makers there. Consider what 'they' will want close by. You can almost guarantee that young or old, most holiday makers in warmer climes will be looking for access to a beach, shops, restaurants and nightlife with a minimum of driving. If it's a city then proximity to bus routes and metro/subways for cultural tours and nightlife. Tourists that go abroad and choose self-catering are more likely to use public transport as its part of the experience. In the mountains for ski properties then real estate close to ski-lifts are king but also bear in mind locations where the lifts are open throughout the summer which would elongate your period allowing you to rent out to hikers and mountain bikers during the summer months too.
Generally speaking the more local attractions in the area the more tourists will flock there. But do bear in mind that people want to 'feel' like they are on holiday so the more things they can do nearby without the need of a car or taxi the more likely they are to rent in the first place and better still, come back.
Good infrastructure in terms of transport links is vital. For holidaymakers who are going away for a week your accommodation needs to be comfortably within an hours drive, ideally less. If the cost of a taxi starts to look prohibitive and people need to hire their own car it will quickly reduce your target audience. It's not a deal breaker for some families but you can see how your potential audience is reducing can't you?
Another point to note is the flights themselves. Worth considering are regions served by airports who have more than one carrier from the U.K. and if possible flights throughout the calender year. Don't assume there are regular flights - check who flies and from where plus how frequently as this is the bloodline to your property.
What type of property
The type of property that you buy will also affect how often you can rent the property out and to whom. Think about who you are trying to attract and what type of property they will be interested in. If you're looking to rent to a family in a hot country they will need access to a pool or beach very nearby. If it doesn't have this then forget it!
The number of bedrooms will obviously have an impact on revenue. I appreciate 1 bedroom properties will be more affordable but if you can stretch yourself to a 2 bedder you'll open yourself up to a much wider market - it might even be worth considering buying in a slightly secondary area in order to afford a 2 bed place so check your rentals which we'll cover later.
Urbanisations and developments
Huge advantages of buying properties on developments are that they usually have leisure facilities onsight that you don't have to maintain yourself. Even if you're not sporty yourself potential renters maybe, but it's worth bearing in mind that there will be a management fee to cover the upkeep of such facilities.
Do not underestimate the power of your property being on a golf course. Golfers tend to holiday at different times of the year often in the slightly cooler months which will allow you to extend your letting season. Even close proximity to a golf course or several golf courses can help you rent out the property.
What is the 'real' tourist demand in that area?
Often, people buy a property abroad after having visited the area in the peak of the tourist season. They see properties being rented out and assume this will be the case all year round.
When you go and have a look at a property the estate agent or vendor will often inform you of figures you can expect to receive for renting the property for a single week in the high season. Invariably you will be told the maximum rental figure rather than perhaps the average. Don't assume that you can get this rental amount for the whole year. Do your own homework, check property portals and visit letting agents. Ask yourself how easy is it going to be to rent out the property during the off season? This is where your investment can earn you those vital extra euros or dollars. Factors to take into consideration would be; What is the local area like in the winter – are shops and amenities still open? Are there still flights available? Is there demand from people to visit at these times? Generally most purchasers will overestimate how many weeks a year they will be able to rent out the property. Remember it's better to take a lower rent than see your property empty so make sure you're always competively priced throughout the year. Above all be realistic and even to a degree be pessimistic with your calculations if rental income is being used as a guide to helping with mortgage repayments.
Holiday home or cash cow?
This is the big balancing act. If you want to use your overseas property for your own holidays and you go at the peak times then this will of course significantly reduce down your rental income. Easily accessed properties are great for owners who can take advantage of the odd void week or grab a late week away towards the end of the season. The perfect scenario? Your property is rented out so much there's rarely a free week to use it yourself!.
Cost of ownership
Never underestimate how much it costs to maintain a foreign property. Once you buy the property you will have a range of different and ongoing costs that the rental income will need to pay such as;
- Maintenance costs (including regular redecoration if you are regularly renting out the property)
- Contents insurance
- Buildings insurance
- Public liability insurance
- Rental agency fees
- Cleaning costs
- Community of Owners fees (if applicable)
- Tax on rental income
- Advertising costs
This list is by no means exhaustive but don't be tempted to think you can be a casual landlord.
Think carefully about your rental contract and ensure you have a contract drafted which sets out very clearly the terms of any rental. Stipulate whether there are any extras to be paid (for example for electricity, telephone etc). Always provide a detailed inventory to make sure that nothing goes missing and try to provide costs for certain items that may need replacing if damaged during the course of a rental. You may find it easier to employ a rental or management agent. If so make sure, as with your rental contract, that there is a proper agreement in place setting out very clearly the responsibilities of each of the parties and particularly insert a clause detailing how any issues which may arise under that agreement will be settled.
Short term or long term?
Most people only consider letting their property out to short term holiday makers but if income is the main driver then long term tenants could be a solution. Whilst yielding less income per week, they offer a longer steady stream of income with less void periods without the regular overheads of agents, cleaners and advertising.
Worth bearing in mind however is that long term rental laws in many countries tend to be slightly more biased towards the tenant than we are used to in the UK. Tenants can have all sorts of rights to extend the contract and may also have protected rights in terms of how much you can increase annual rents.
Know the rules
As mentioned above the laws and regulations vary in different countries but they can also change between regions, for example, Andalusian law in Spain has recently formalised the rental market putting responsibility firmly with the landlord for maintaining certain standards and provisions of accommodation along with formal reporting of income- different to some other parts of Spain. Over in Florida, Home Owners Associations can have differing rules over upkeep of property and as to how many tenants properties can have each year. The variations of laws can have a huge impact on your investment so it's imperative to get expert advice before you purchase.
Who should own the property?
The form of ownership can have a major impact not only on the taxes that you pay when you rent the property but also the taxes should you eventually sell the property or leave your property in your Will.
So to sum up, if you're considering buying a foreign property to rent out, whether as a holiday rental or to a long term tenant it's imperative you take independent advice on the legal position and potential tax consequences. If you would like more information or advice from a specialist overseas solicitor then you can contact our legal team.