Paying the rent
Banking on the long-term stability of the market, many investors are choosing property over pensions. Samantha Wong looks into buying-to-let overseas
Forget pension funds and equities, overseas property investment is an increasingly popular way to invest for the future. Aside from plain-old buy-to-let, you can opt for any number of guaranteed rental schemes, including French leaseback, or to really reduce costs, for fractional ownership. So if you are looking into buying overseas in order to cash in on rental returns, how do you ensure that it makes long-term financial sense?
Getting the right advice is essential, and by logging onto the web you can find numerous dedicated brokers offering to take you through the whole process: sourcing, analysis, purchase, legal and financial.
Overseas buy-to-let (or fly-to-let) property is experiencing strong growth: investors are looking for a holiday or retirement property that finances itself, and they hope to achieve better returns than they would at home.
With fly-to-let, you are in the optimum situation to achieve high yields and capital appreciation. But bear in mind that you will be personally responsible for your property even if it is tens of thousands of miles from your home base. This option is far from hassle free: you will need to hire a rental agent, pay utilities, and deal with maintenance issues and insurance. You should also budget for the possibility of void periods, when you cannot find a tenant, and mortgage and maintenance costs may outstrip rental income.
French leaseback
A guaranteed rental scheme is a great alternative, as the management company is responsible for finding tenants and caretaking your home. Importantly too, this type of scheme provides you with peace of mind, you are safe in the knowledge that you will receive a fixed income for an agreed period of time. In all likelihood, the guaranteed rental income received will cover your mortgage costs.
If you are interested in this type of investment French leaseback property also known as LMNP (Loué Meublé Non-Professionnel) is a great option. France is the number one tourist destination in the world attracting over 79 million tourists per year, and French leaseback property was introduced in the early 1980s by the French government to increase the quantity of holiday accommodation available.
Relatively low risk, hassle-free, long term and steady, French leaseback property is principally bought for investment purposes. As an added incentive, the government refunds the VAT (up to 19.6 percent) on your property. The leaders in the industry, such as Pierre & Vacances (P&V), upfront the VAT refund and then deal directly with the French Government providing investors with immediate savings of amounts that in most cases cover the required initial downpayment.
Leaseback property, which is 100 percent freehold, is "leased back" to a pre-selected property management company for a fixed term of nine years, renewable once or twice depending on the management company. The provider furnishes and lets the property, covering all management responsibility and maintenance costs, and providing a guaranteed rental income, ranging from 2.5 percent to 6 percent.
The guaranteed rental income is net of all maintenance charges and, if the investment is structured appropriately, it can be net of income tax, immediately increasing your return.
"Leaseback gives great peace of mind and provides you with regular and reliable rental payments, at a fixed annual amount, which increases on average 3 percent each year," says Damien de Verneuil director of Hong Kong-based French leaseback provider V&D Property Investments Ltd (V&D), the exclusive partner of P&V in Asia. "You are not exposed to fluctuations in the tourist market as returns are guaranteed, irrelevant of occupancy."
"With V&D, you can also add a holiday option to your investment and either vacation in your property for a few weeks a year, or vacation in any of the 200+ destinations in the P&V group."
Flexible mortgages and financing packages with low down- payments are available from the major providers, as is a resale service. Most companies encourage medium- to long-term investments but, at the end of the initial fixed term and depending on the contract, you can either exit the lease or renew it.
Buyer beware
Given that the management company is your only tenant for the term of your lease, it is important that you ensure that you are working with a credible management company with the necessary experience and financial background to ensure your guaranteed rent and the overall appreciation of your property. The better managed your property is, the higher the resale value will be.
Be aware too, that some so-called guaranteed schemes are not genuine: dodgy developers will mark up the selling price in order to cover their ongoing costs. It is also important to know what the rental market expectation is: once the guaranteed rental scheme expires, will you be able to find tenants?
Leisure Invest, a UK-based agency specialising in the sale of French property, points out that is important to invest in properties that are popular with the locals and not the ones developers believe are "suitable" for non-residents. In terms of capital growth the ultimate success or otherwise of your investment will be largely based on the future demand from the domestic market.
Fractional property ownership
Fractional property ownership will appeal if you want to own a second home but cannot afford outright ownership. It's a cost-effective ownership alternative that allows you to use your second home for up to 12 weeks a year, whilst sharing the costs associated with year-round ownership. If you choose not to use any of your allotted "holiday" time, the property can be rented out with any income split with the management company.
With fractional ownership you have outright title to a portion of a freehold property, the contents and the rights of occupation. All annual running costs are divided equally among the owners while a fund provides for refurbishment and ongoing maintenance.
A fractional ownership property is usually in a luxury resort that has a host of impressive facilities and personalised services such as a clubhouse and spa, plus five-star hotel services. Everything is included in the price and taken care of by the professional management company. Just like any other type of freehold property you can sell or transfer fractional property at any time.
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