Overseas rental properties, known as “fly to lets” can offer advantages over British buy to lets. As recession looms and landlords continue to be blamed for the housing crisis, here are seven good reasons to consider shifting your portfolio overseas.
A few years ago it felt like every other person you met was developing a ‘portfolio’ of buy to let properties with which to featherbed their retirement, and gain regular income each month too.
But the past ten years have seen increasing controls and taxes on UK buy to lets and it seems unlikely to get any easier. Moreover, an impending recession, according to the Bank of England, could see capital growth stall, or even for the property bubble to burst.
So why not consider buying abroad instead? You have the option of long-term rentals (much needed with so many good properties moving to short-term rentals like AirBnb) or shorter-term holiday lets. The latter, of course, offers the option to use the property yourself when not rented out. Possibly, you could use it for the whole winter, staying within post-Brexit rules.
Here are seven more reasons to consider swapping your buy-to-let portfolio for fly to let.
Unlike the UK, most other countries do not impose a punitive extra amount on second homes. In the UK, higher rate taxpayers who invest via a mortgage have been hit by more and more tax changes since 2016. These limit income tax relief on property finance to 20%, tax revenue not just profit and add an extra 3% stamp duty for second homes and investment property. This both your upfront costs are increased and your profits hit too. In addition, you’ll pay capital gains tax on the profits when you sell.
There is one big risk for any fly-to-let landlord. If you are receiving an income in one currency but paying out costs in another, then moving exchange rates can ruin your profit and loss projections. It is vital, therefore, to talk to Smart Currency Exchange about locking in your exchange rate with a forward contract, to ensure your property stays profitable. Call or email us today.
Growth, not a bubble
UK prices have been rising at around 15.5% over the year to July 2022, according to the Office for National Statistics, the highest rate of increase since 2003.
The average UK house price is up to £292,000 (£312,000 in England), its highest ever, leaping £39,000 compared to this time last year. Few other countries have seen such fast rises and the UK now has among the most unaffordable property in the world, with property prices rising roughly 10% ahead of income rises. If prices become any more unaffordable they are likely to fall over the longer term.
The Global Property Guide, which compares rental returns in all major global cities says that at an average of 2.76%, returns in London are “very poor”. In comparison, Madrid property returns around 4%, Lisbon 5.5% and Rome nearly 4% and Cyprus at approaching 5%..
The highest returns are on the edges of Europe, such as Dublin (7%), the coast of Montenegro (7.5%) and Egypt (9.5%).
While the UK has a visa available for investors in the £millions, many other countries have residency-by-investment schemes that not only allow for a much smaller investment, but also one that can be in property. So, buying the house to live in allows you to live there, bypassing post-Brexit limits on freedom of movement.
Most insist that you spend a minimum amount of time in the country per year, but that can be as little as five days. Others allow for a wider range of family members to come too, including parents.
The most popular in recent years have been in Portugal, Cyprus and Malta. There have been criticisms that they allow high-spending people to bypass the usual checks, and that they push up prices. Portugal now limits the choice of properties to less popular areas – which don’t include most of the Algarve, for example. Greece has raised the lower investment from €250,000 to €500,000.
Working from home, abroad
In a survey of its readers, Property Guides found that of those buying a holiday home abroad, almost 50% said they would, or might, use it to “work from home”. Furthermore, even though it was meant as a holiday home, some 40% were planning to be there at least 60 days of the year. Some holiday!
The fact is that post-Covid, many people able to work from home, freed from the daily commute, can set their sights a little further than suburbia.
Under the Schengen area’s 90-days rule, it is perfectly feasible to spend your winters somewhere warm and sunny, such as Cyprus, the Canary Islands or Algarve, then rent the property out for profitable short-term rentals in the summer.
You might not want to out all your wealth into one asset class. That covers property markets too. While global property does tend to move up and down in tandem, there will certainly be risks associated with certain types, For example, the office market post pandemic is suffering while residential has boomed.
Shortage of affordable housing in the UK – caused by a lack of building, rather than landlords – has led to buy-to-let landlords being scapegoated. While Conservative governments for have raised taxes on them, it is possible that a Labour or coalition government could raise taxes further and put in more legal controls. Certainly it seems unlikely the next few years will get easier for UK landlords.
So fly to let offers not just a steady income stream, but a hedge against political and economic challenges too. However, beware currency movements!