Author: Stephen Phillips, 07 May 2007.
Owning a second home overseas, whether for your own use or as an
investment – more likely as a combination of the two – can be highly attractive, but it brings with it some downsides.
Not least of these is that you will have all the expenses associated with home ownership doubled! Relying on rental income to cover some or all of the expenses – especially any additional
mortgage commitments you may have taken on to help pay for the purchase – is not necessarily a good idea because there is no certainty that the income will actually be forthcoming, at least at the levels expected. Indeed, as has recently been reported in the press, some new developments in Spain have spectacularly failed to generate the “guaranteed” amounts of rent.
This can be particularly relevant if you are buying “off plan” where the property may not be completed for a year or more after you have paid a substantial deposit. You will probably be paying interest immediately, but have no rental income for some time.
There are, however, some important considerations before you get started. Firstly, you will probably be buying in a language – and under laws – other than English. Property ownership is never simple and the rules in overseas territories can differ dramatically. For example in some countries, debts go with the property, rather than the owner. So if there is an outstanding
mortgage, you could inherit this along with the home for which you have paid the full price. Potentially an instant negative equity trap.
The rule must be, never to sign anything you do not fully understand and to appoint your own English speaking lawyer to represent your interests.
Secondly, there are frequently tax implications. In some cases there will be both local and national taxes for which you are liable. These can include income tax on rental income and capital gains tax on growth in the value of your home. What is more, you could find yourself liable to the equivalent of inheritance tax when you die, possibly in more than one country, in respect of the same assets (if there is no double taxation relief agreement). Again expert advice should be sought.
Thirdly, the price you agree may not be all that you have to pay. In addition to estate agents fees (which are frequently your responsibility rather than the vendor’s) you may have to pay a local purchase tax and legal expenses. In some countries this can add as much as 10% to the cost of the property.
One additional point worth considering is that if you are borrowing money to fund your purchase, it may be better to do so in the currency of the country concerned, since this could be the currency in which rental income is received (especially if you use a local managing agent). You will also need to consider
specialist holiday home insurance, especially if you are letting the property, as this must include liability to third parties (and possibly employees such as gardeners and cleaners).
Don’t be put off, this can be a good
investment; but it is not one for the unwary. House prices can fall as well as rise, particularly if prices have recently been inflated by high demand, as recently.
Alan Boswell Insurance Brokers Limited, Alan Boswell Insurance Services Limited and Alan Boswell & Company Limited are authorised and regulated by the
Financial Services Authority.
