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Make your property pay
15 March 2009 By Diarmaid Condon
Irish people who have bought property abroad over the last number of years almost all have one thing in common, namely a need to get ongoing income from their property.
If you are in the market for an overseas property (unlikely as this may seem at the moment), or if you already have one and would like to make some income from it, then there are a few things you should keep in mind.
Firstly, if you have not yet purchased, be aware that it is very difficult to make a profit from letting property in resort locations. They are all seasonal, so for two months you will normally have excellent returns the problem is the other ten.
You will no doubt have heard that golf and ski properties have a slightly longer season than other holiday properties, which is true, but purchase and ongoing costs are normally higher so you won’t work out any better off in the long run.
Investment property
If you wish to make a reasonable profit from a rental property then it is necessary to consider long term rental in a stable city with a strong rental tradition. If you intend to manage it yourself, which is probably likely if you are investing in a small number of units, then you should consider somewhere not more than three hours flight away.
The obvious candidates at the moment are centrally located properties in cities across Britain, the Netherlands, Germany, Belgium and Sweden.
All of these countries have strong rental traditions, access is easy and cheap, and property prices in all of them have been reducing over the past couple of years. In the current market there are opportunities, but most people are just too scared to take them at the moment.
A rental management company is going to be necessary, if not vital, if you own more than two or three properties in a particular area.
Although you will pay up to 10 per cent of your rental income for rental management in holiday resorts (because short term lets require weekly cleaning, maintenance, monitoring, key collection, etc.), long term rental management is considerably cheaper as it is not nearly as labour intensive.
It is easy to underestimate how difficult it is to rent property overseas without a good rental management company. The cost and effort involved in translating documents, ensuring payments are made, paying (and not overpaying) tax, maintenance, etc. can simply be overwhelming for a non-resident.
A rental management company can also be a great source of information on areas in which there is strong demand for rental property and which areas are oversubscribed. They are worth talking to before you ever go about buying a property.
Holiday homes
Buying resort property purely for investment isn’t the greatest idea in the world to begin with, but if you’ve got such a property, it can certainly be rented. It may not cover your expenses, but at least it should help take the sting out of them.
With the explosion in internet usage across the world, the big winner in the property industry has been online property and rental listing sites. They have become particularly popular over the past year as owners who are struggling to sell via traditional means have flocked to these sites to list their properties for sale and, failing this, to let them so they can at least get some income from their purchases.
‘‘We saw an opportunity in bypassing the more traditional route of booking a package holiday through a tour operator," said Suzanne Quinn of Holiday Homes Direct.
‘‘The site offers an administration area which will assist people in managing their holiday lettings while also offering comprehensive reporting information."
The company has seen an increase in traffic from 55,000 users per month last year to 167,000 per month this year, or just over 300 per cent.
You should bear in mind that the lack of sales in the past year has meant that rental markets are considerably overpopulated, which is not good for potential lettings. For the holidaymaker though this is a great advantage, with plenty of choice and rental values dropping as competition increases dramatically.
Michael Mee of Holiday Rents Abroad said: ‘‘Before considering taking this route owners must consider all the necessary elements that should be in place prior to promoting a property for letting purposes. Management of the property, that is a company or individual who will take full responsibility for key holding, meeting and greeting renters, cleaning and laundry services, property checks, emergency call outs and maintenance, is a very important first step."
Advertising charges will vary between sites depending on size and popularity. Generally you can expect to pay anything from €5 0 to €150 per property per year. Big name sites will usually be at the top end of this scale, with smaller or more recent sites normally at the lower end.
‘‘It is worth remembering when considering which portal or website to use that densely populated websites, while more popular, have a tendency to limit exposure and therefore restrict bookings. Poorly promoted websites can have the same outcome," said Mee.
Leasebacks
French leasebacks are often considered by those looking for revenue from their overseas properties. If you want a holiday property that will offer you some income without all the hassle of having to furnish the property and deal with management companies then it is worth considering.
Just remember that, in general, a leaseback property will not pay for itself for a very long time, if at all (the time taken varies as returns on offer vary greatly).
There is also a question mark over how saleable leasebacks are if you need to move them on during your contract term.
If you are considering a leaseback you will need to take a very long term view on the purchase.
Guaranteed rental
Another common means of generating rental income is to plump for a ‘guaranteed rental’ property. Essentially the developer, or a management company organised by the developer, offers a rental guarantee for a set period after the property has been transferred.
The big problem with guaranteed rental products is that a lot of the guarantees are absolute bunkum - they are either rolled into the selling price or were never intended to be paid in the first place.
Generally, guarantees of less than five years are to be avoided as you are probably already paying for the rental income in the purchase price, which means you’re getting taxed on your own capital when you receive it back as rental. This is obviously not very tax efficient.
Whatever the term of the guarantee, you will need to make sure that it is watertight and the company offering it is one of long standing with a strong payment record. Get an independent solicitor to check out the guarantee and the company for you. If a company becomes insolvent, all guarantees are null and void.
Taxation
Income tax is payable on the net profit (profit after allowable deductions) realised on rental income arising from foreign property. Remember, just because deductions are allowable where the property is located doesn’t mean they will be allowed in Ireland. Each country has different allowable expenses.
If there is a double tax treaty in existence between Ireland and the foreign country then a portion of the tax bill will be paid in the foreign country and you will be required to pay any balance due in Ireland.
Irish tax payable is calculated in the same way as it would be for an Irish property - the same deductions and allowances are available - and a full list of these is on the Revenue’s IT 70 leaflet available on its website.
Interest on borrowed money that is used to purchase, improve or repair a rental property, wherever it is located, can be claimed as a deduction against the rental income from that property.
You must specify your intentions when borrowing the money, and the purchase of property through a company is not supported.
Ownership or property tax cannot be claimed as a credit or deduction against your Irish tax liability as there is no similar tax here yet, although it is currently being mooted as a possibility. Service charges are an allowable expense and income tax liability depends on whether the country in question has a double taxation agreement (DTA) with Ireland or not.
If there is an agreement it is normal for the tax to be paid in the foreign country and a credit for some, if not all, of the tax paid granted in Ireland.
As an Irish citizen you will be obliged to pay a minimum of your Irish tax liability in all cases. Contrary to popular belief, where there is no DTA you will be charged income tax on the foreign rental income less allowable expenses and foreign tax paid.
CONTACTS
Holiday Homes Abroad: www.HolidayHomesAbroad.ie
Holiday Rents Abroad: www.HolidayRentsAbroad.com
Diarmaid Condon is an independent overseas property consultant with significant agency experience. He can be contacted via his website at www.diarmaidcondon.com
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