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Second - know when to sell.
Having decided to invest an exit strategy is
needed. You need to be able to sell the property at a profit. This
can be done in a rising market. If you purchased early in the rising
market you can sell in a flat market and still profit. You can’t
purchase in a flat market and sell in the same flat market and make
a profit without first adding some value to the property, perhaps by
refurbishment or building an extension, etc.
You must also take into consideration the selling
costs although there are an increasing number of web sites offering
free property sales services under the banner of “for sale by
owner”.
The difficulty is in knowing when the market is
going to turn flat. This can only be known with hind sight. The last
year of a rising market is also the first year of a flat market if
the year following turns out to be the same as its predecessor. This
gives rise to the TWO YEAR rule – If you purchased within 2 years of
the market going flat you purchased too late and into a flat market.
Third – recognise the market cycles.
A typical market cycle of ten years might be four
years rising, two years flat, four years falling. The problem is
that you don’t know that the market has turned until year six, when
it is too late.
The answer is to be an ‘early bird’ investor. In
a ten year market cycle you have just the first three years to stake
a profitable claim and no more than the three following years to
exit with your profits. This is the ONE THIRD RULE. Buy in the first
third of a rising market.
Fourth – investing for the long term.
Some people invest for say twenty years ahead.
The logic might be that although they miss out on the first market
upswing, the following one will start from a higher base and the top
of the second upswing will be even higher. The issue then becomes
how can the property investment earn its keep in the years before it
is sold?
The usual answer is to ‘rent it out’; buy-to-let
investing has become very popular over recent years. This is also
the plan of many investors who don’t have the capital to put down
and finance the purchase on borrowings. There is a very simple
calculation that tests the validity of this approach.
Start by ascertaining the realistic rental
potential of the property. If it is a holiday property and it will
only rent during the holiday season you will usually get a maximum
of 90 days rent per year. From this you have to deduct any fees
agents might charge. Good examples of this type of property are
coastal holiday apartments in Bulgaria.
If it is a holiday property with added
attractions e.g. golf, sailing, winter sports, theme parks and or a
long or year round season; then the property can be rented out for
longer, perhaps 60 – 80% of the time or more. Good examples of this
type of property are Bulgarian apartments in the mountain ski
resorts, property in the Canary Islands and property in Southern
Spain.
If it is a year round rent it will be being
offered in the local market at lower rates. Whichever is appropriate
you will have a net figure to count as income. However, also
remember that in most countries income is subject to tax and
property taxes also apply, so the net figure has to be carefully
considered.
Next, take this net figure and divide it by the
rate of interest you have to pay for the money. Don’t worry, if you
use a calculator the process is easy (if you are good with figures
you can show off and do it in your head!). An example goes like
this: Net rental income £5,000 divided by the interest at say 5% =
£1,000. Now multiply by 100 to bring the figure to one hundred
percent = in this example £100,000. Thus your rental income of
£5,000 will support £100,000 of borrowings. If you paid more than
£100,000 for your long term property investment you will have to
make up the difference.
If the rate you are paying includes the
repayment
of capital then it will be higher – say 6.5%. Just divide the £5,000
by 6.5% and you get £769-29p. This will support a purchase of
£76,900.
The above figures are based on UK interest rates
and UK borrowing as this is a very common way people raise money to
purchase property overseas. Interest rates in the euro zone are much
lower and mortgages may be found with rates of around 3.5 – 4%.
Rental incomes usually track property value so,
if you chose well, rental yields should increase making the above
calculations better as time passes.
Fifth – What constitutes a rising market?
Basically when people are
willing to pay more for
a property than it was worth yesterday. Local people can drive up
values within their own communities if their living standards are
rising. However, as often as not it is richer ‘outsiders’ descending
onto less prosperous regions that kick start a property boom. When a
boom has been underway for long enough many of the less prosperous
become as prosperous as the incomers, values rise and the lure of
cheap property has had its day – along with easy capital profits.
This can clearly be seen in the more traditional
overseas property locations of Spain and Florida. Whereas many areas
of Turkey are probably still quite early on in the process.
An under developed property market exists when a
country or local region has something to offer outsiders (with high
value currencies looking for a better climate) and its pricing is
based on local incomes. In Europe this equates to the previous
Soviet Block states and to Turkey in the eastern Mediterranean.
Taking the example of Turkey, property in Turkey is around five
times cheaper than in the UK. It used to be this way with property
in Spain but now on some Spanish Costas the prices are roughly the
same.
Two tier pricing can arise here but if the
markets (holidaymakers and locals) can maintain some physical
differentials then two tier pricing can be sustained for some time.
There will always be fuzzy boundaries that can be crossed and, over
time, the two markets will merge.
For the ‘early birds’ buying in at local prices
even before two tier markets emerge is the objective.
Sixth – Finally check out the
Income and Property
Taxes
Each country has its own rules on tax. Some levy
capital gains tax and some don’t. You might be an ‘early bird’
investor, you might do all the right things, you might be showing a
huge profit on your property but the taxman might want his slice
too. In the UK capital gains tax is 40%; in Spain it is 35%; in
Turkey it is zero after 4 years.
Happy Investing!
If you would like further information on any of
the points in this article or on overseas property investing in
general, please contact Mike Dunkerley, Regional Director, The
Global Property Group mike.dunkerley@thegpg.com 0044 (0)1242 524 081
www.thegpg.com
Michael Dunkerley is a seasoned international
business man. Most recently he has been engaged with international
property with The Global property Group -
http://www.thegpg.com/
He is also involved with importing and exporting
products from China.
He is a published author - Oxford
University/Polity Press on economic matters and computerisation and
several articles on supply chain logistics and effeciency. |
Logical
Investing to Make Money From Property