Real estate investment is an exciting and lucrative way to challenge yourself, increase your net worth, diversify your investment portfolio, and generate dividend income. Whether you buy a property outright, finance it, flip it, let it out, invest in real estate investment trusts or simply contribute to the crowdfunding of property development; there are ample ways to generate a return on your initial investment in real estate.
Investing in property in the UK can come with some serious tax advantages, not to mention for those residing in the UK – being in close proximity to their investment to keep an eye on maintenance, tenants, or developments within REITs. But real estate investment doesn’t have to stop at the borders. Investing in property abroad generates new opportunities and challenges.
Why invest in property abroad?
Investing in property abroad comes with newfound benefits that may be unattainable in the UK. Here are a few reasons that should point you in the direction of real estate investing abroad.
Diversify your investment portfolio
Those with entire investment portfolios concentrated in one area of asset-class, risks taking a significant hit on its value in light of the volatile times in which we live. The idea of diversification here, is to spread investments across different markets to help counterbalance the exposure to risk.
Diversification across asset classes is important, but so too is geographical location. To hold investments abroad is to further distribute risk. If the political, economic and social climate in one area adversely affects your investment, a geographically diversified portfolio could help to offset this.
For context, consider owning a property in the UK market with an annual growth of 1.5%. Owning a second investment property in Portugal, where the market has seen growth of 10.3% will help you see an overall strong investment performance if the reserve is materialised.
Short term return cycles
Take advantage of buoyant markets in holiday destinations for speedy returns. Investing in off-plan property in its early stage development will be met with a rapid increase in value as it gets closer to completion. Destinations like Spain’s Costa del Sol have seen increases in value of 8-22% between building phases.
Level of British investment in Spain’s real estate 2007-2018: (PSS)
Brits in Spain have seen a comparative advantage over others when it comes to buying properties in the country between 2007 – 2018. According to the Statistical Information Centre of Notaries in Spain, British buyers are by far the largest number of foreign buyers of Spanish property. They make up 14% of all foreign transactions, and despite economical and political unrest (including turbulent Brexit), still retain the crown for foreign property investment in Spain.
Investing abroad in a weaker currency offers investors the ability to enter the market at a much lower cost. Destination hotspots include Argentina, the Bahamas and Turkey, for example. The latter, in particular, is a compelling case. The pound sterling is strong against the Turkish Lira – up 24% since 2016.
Higher rental yields
Typical buy to let properties to be let out to young professionals on an annual basis might seem like an attractive investment. However, most of these in-demand properties have high entrance costs, including property prices. Despite rental prices also being high, the yield can be low. In London, it is on average 3.7%.
Medium to high rental prices combined with low property prices in much of Southern Europe makes for much more compelling rental yields.
Tax breaks and rates
Depending on the investment type, and whether you are a tax resident abroad, there are many opportunities to benefit from lower taxes on any real estate income. Europe has quite a few low-tax countries to choose from, including Andorra, France, Switzerland and Gibraltar.
Owning a holiday home
Investing in an actual property abroad gives you access to the accommodation whenever you desire. In itself, this is a cost-effective way to vacation. When you’re not using it for yourself, it’’s generating income through rent.
Rental income and finding tenants
Managing the property, and attracting business and tenants can be challenging to do from abroad. It might be worth marketing your property through a local estate agent, however, do take fees into account – especially if you require the agent to manage your property. For more cost-effective marketing, consider dedicated holiday lettings websites, word of mouth and marketing your property during the time you spend in your chosen destination.
You’ll have to pay tax on the rental income you receive. Whilst some is eligible for deduction, it is only applicable on costs of expenses from your rental income – not personal use. Do factor in cleaning, maintenance and operating costs when deciding whether a real estate investment abroad is for you.
Real estate abroad: promising or precarious?
As with all investments, real estate comes with its own risks. Whilst there are ways to maximise profitability and minimise risk, it’s worth considering all factors the following factors before deciding whether you have the risk appetite for a real estate investment abroad.
Despite the caveats, you can overcome them with knowledge of the real estate market and strategic planning. Real estate is a long term investment and its risks can be offset by having other investment classes in your portfolio.
A promising investment opportunity:
- A less volatile market than other financial markets
- Always demand for property
- Tax benefits
- High rental yields
- Quick returns
On the other hand, property takes considerably longer to offload or sell, compared to other asset classes like stocks and shares. Should you find yourself needing immediate access to your money, you might run into some delays.
A precarious and risky investment:
- Hidden associated costs
- Periods of unoccupied properties
- High entry costs into real estate
- Long to sell
Daglar Cizmeci, is a serial investor, founder and CEO with over 20 years’ industry experience in emerging tech, aviation, logistics and finance. Chairman at ACT Airlines, myTechnic and Mesmerise VR. CEO at Red Carpet Capital and Eastern Harmony. Co-Founder of Marsfields, ARQ and Repeat App. His work has been published in ReadWrite, Business.com, FX Empire and Yahoo Finance.