I recently read an article by a fairly prominent business commentator, who shall remain nameless, but who to my horror stated that when he was investing he truly disliked when he was pitched with the exit strategy. While I can understand his ‘disdain’ for the how to get out pitch as it shouldn’t come before the ‘why to get in’ pitch, it is nonetheless an important consideration for every property investor.
So here are our top tips to make sure you know how you can sell or trade out of your overseas property investment at any given time.
1. Know what you want from the property
When you make an investment in a property, you should know from the beginning what you want from that property. What is your goal? Will you live in it? Is it for your children to live in? Do you want to simply break even? Do you want an income and how much should it be? Do you want something to outperform other asset classes of investment? How long are you willing to tie up your capital?
2. Check for tax restrictions and benefits
Some countries prohibit sale before a certain minimum period of ownership without some levies on sale before this minimum ownership period. This is both an incentive and a penalty depending upon your ownership plan. Some examples of this include the Czech Republic where there is no capital gains tax after 5 years of ownership. If in this example you had calculated no CGT when you were establishing your exit. There are also other tax considerations of a personal nature which could impact your investment. The best solution is to consult an advisor in the country where you have invested as well as your country of residence to understand all tax implications.
3. Consider the End User
Knowing who the user of your property will be will enable you to set your strategy properly. If it will be you then you are simply considering your wants and desires and probably hoping simply not to be throwing money down the drain on rentals and probably to sell it at the end for at least what you paid for it. For those looking to make a rental income, you will need to consider who it is that will rent that property and what price you will be able to charge. For those expecting capital growth, you will need to know who will want to live in it when you sell and what they can realistically pay. If you live in a neighbourhood where properties are full of young families, for example, and you decide to add a two room extension and price young families out, you can’t be sure that you’ll have an end user for your property.
4. Establish who will buy from you
Knowing who you will sell to is probably one of the most important things when owning a home overseas. And no, I don’t mean a specific person, but rather a profile. Having multiple options is a massive plus. Now that you understand the end user, you will understand who might want to buy. This won’t necessarily be the end user themselves, it might be a developer who wants to alter and then resell the property, it may be a fly-to-let investor who wants to rent the property to holiday makers, it may be an investor looking for a long term residential rent. The strongest market for resale is a local end user market. What do I mean by this? I mean people within that country who have a need for a first, as opposed to a second home, and that the property that you own is price appropriate for this market. Here you are looking for a slight under supply in property for the market.
5. Remember your Ongoing Costs
Owning a property which you can’t sell when you decide you want to can be an expensive business. What if you can’t rent it out or you’re left without tenants for some months? What if the market crashes and you need to hold onto the property until its value steadies? In case the market doesn’t do what its supposed to and you can’t exit you need to know what your exposure is just by owning a property. This includes national and local taxes, utilities, maintenance on an empty property. Where will the money come from to cover these costs both if things are going well and if they are not.
6. Make Your Inheritance Planning
A number of investors decide to pass some or all of their property assets to their spouse or partner, children or other relatives in the event of their death rather than planning to sell them off in their lifetime. Even if this isn’t your plan, you never know when the worst might happen, so understanding it is crucial in all cases. If this is your exit strategy (no pun intended!), make sure to seek advice relating to the inheritance law and taxes in both the country of your residence and the country in which you own the property as both can have a bearing on how much your children pay in tax and indeed whether they are actually allowed to inherit. In certain countries, for example, the law automatically requires passing of assets from parent to children and not to the partner or spouse and so specific action needs to be taken should you wish to pass the asset to your partner / spouse as opposed to your children, for example.
7. Undertake Regular Valuations
Either informally or formally you should undertake regular valuations of your property. By regular we mean at least annually (or in an unstable market where property prices are experiencing fluctuation more often may be beneficial) This may be through an estate agent or through your own research, noting that often listing prices are higher than the final prices achieved for a property. If the valuation is substantially under target after adjustment perhaps you might reconsider your plan to exit.
8. Consider the Impact of Financing
Understand the impact of interest rate changes to any financing you are taking and also any early exit penalties from your lender. If you have a tracker mortgage or indeed after a certain period, the interest rate may impact what you will have to pay. Make sure that you understand what it will mean if the base rate changes. If you’re on a buy-to-let mortgage make sure you know how you will cover the costs if you have no tenants and the implications if, for example you were to live in the property. Last but not least, remember that different countries have different laws relating to payments – in Dubai for example, you can face prison if you fail to keep up with your payments. Make sure you understand all of the risks and the rewards of the financing package you are taking.
9. Determine your sales method
How will you sell the property and what will it cost? Make sure you decide how you will sell the property. Will it be through the developer with whom you brought it, a local estate agent, an international estate agent, auction, online sale, direct sale? Which option you select will all depend somewhat on who you will sell to, but you need to be sure that there is an outlet for your property and know what commission or fixed price you will pay. Will you offer ‘special’ payment terms like a private rent to buy or payment plan over a mid term period to increase the chance of sale?
Always remember, that despite the best planning for your exit things can go wrong, so always understand what your exposure will be and how you will manage it. We can help you source viable and interesting properties with excellent exit potential.
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