Medium Term Investment Strategy

This strategy involves the purchase of either an off-plan unit or resale property, completing on the purchase and holding onto the property for a period of typically 2 to 5 years although it could be longer, before ultimately selling. During this period the property is rented either on a holiday rental or long term rental basis in order to generate income. When considering this strategy it is important to be clear as to whether income generation or capital appreciation is the key objective and tailor your investment accordingly.

Although possible, it is extremely difficult to achieve a high return for both income generation and capital appreciation with the result often leading to average or below average returns. It is usually better to focus on one specific objective in order to maximise the return. Typically investors look for capital appreciation and use any rental income to negate the cost of financing and maintenance.

Avoid emotional purchases as this type of strategy is a medium to long term investment which requires careful analysis of the returns and critically the investor needs to be able to afford the cost of maintaining and financing the investment.

Key Opportunity

The strategy is to either maximise the possible capital appreciation by holding the investment until market conditions change, i.e. sell at the highest possible price. Alternatively, maximise the income generated by the investment via rental means at perhaps the expense of capital appreciation. Additionally the property may be available for the investors own holidays!

Timescale

The time period for holding the property is typically 2 to 5 years in order to ensure there is sufficient capital growth to cover the initial purchase expenses, such as taxation, legal costs etc.

Level of Complexity

Fundamentally this is a normal property purchase therefore a very simple concept; however please bear in mind the need to maintain a second property in another country involves more management than a property close to home. There will be physical, economic and legal requirements to adhere to, ranging from basic maintenance of gardens, pools etc, rental administration, perhaps financing mortgage payments, community charges, annual legal returns and taxes.

Key Risks

Depending on whether income generation or capital appreciation is chosen one of the two key factors is the identification of a property which will be attractive for that particular strategy.

For example if the rental strategy is chosen then the type of property will determine the type of tenant. One bedroom apartments will appeal to younger singles or couples, should be located near to lively nightlife locations, bars, nightclubs etc. The rental for this type of property will be lower than a three bedroom property attracting families but they require different facilities such a proximity to beaches, supermarkets, children's amusements etc. Also the type of tenant will become a factor when considering the quality of furnishings to be purchased and importantly the condition the property is left in following a rental.

The location of the property is always important as it will determine the amount of rent achievable and the level of capital appreciation achievable, however please remember that the initial price of the property will also reflect this.

Secondly is to continually monitor the market to ensure that when the property is sold it does not happen during a market downturn such as a change from a sellers market to a buyers market, which would of course reduce the sale price. Please bear in mind this is more difficult to achieve when the investment is in a different country.

Return

In holding a property for a longer period it is possible to achieve more significant returns as the example below demonstrates. This of course assumes that the market growth rate remains constant. In the example below capital appreciation is the objective therefore the rental income is designed to cover the annual finance and maintenance costs.

Please see the example below:

An off plan investment is made at a purchase price of EUR 200,000 with completion in 24 months. The deposit required is EUR 40,000 with expected legal costs and taxes of EUR 24,000. A mortgage can be arranged for 80% i.e. EUR 160,000. The total cash investment is (EUR 40,000 + EUR 24,000) = EUR 64,000

  • The area has shown a growth rate of 10% pa. Rental income is expected to cover at least the mortgage expense and annual maintenance costs When the property is sold in 4 years after completion i.e. 6 years after the initial contract to purchase, the price is (EUR 200,000 * 10% growth * 6 years) = EUR 354,312.
  • Therefore the gross profit is (EUR 354,312 - EUR 200,000) = EUR 154,312.
  • Gross Return EUR 154,312/EUR 64,000 = 141%

    Financing

    The investor must be prepared to finance the balance of the purchase either via their own cash resources or more commonly and more sensibly via a mortgage.

    Please be aware that some countries may not have an established mortgage market for non residents at the time of the initial off plan contract, although they may be expected to be offering mortgages to non-residents by the time the property is completed.

    With this possibility in mind it is wise to be prepared to have to finance the balance of the purchase through other means, perhaps via an equity release or re-mortgage on an existing property in a different country.

    The rental opportunity is highly dependent on location and may be seasonal in nature leading to high rental yields during the summer months and little or no rental during the winter months.

    Some developments offer guaranteed rental schemes that alleviate this problem and more importantly remove the worry of finding tenants in the first place.

    If no guaranteed rental scheme exists there are specialist rental companies that will contract to rent suitable properties for at least 6 months of the year.

    Taxation

    Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject.

    Taxes will be payable upon the initial purchase of the property and is usually the most significant expense that needs to be recouped.

    Expect to declare and pay tax on the rental income generated, particularly if you use a rental agency in the country that the investment is situated.

    As the investor is the legally registered owner expect to have to pay capital gains on the profit upon sale. Please remember there is an obligation to declare all income and gains to the relevant tax authorities.