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Property Pitfalls In Paradise: Boxing Clever When Buying A Holiday Home

June 4, 2018

As the old song says, “everybody needs a little time away”. This is especially true for Mums. While it’s the most amazing and rewarding occupation on the planet, it’s one from which we can never truly clock off. Moreover, it’s one where we’re not remunerated for our efforts, no matter how much experience we acquire. It’s one that offers very poor pay and very few leave says. It’s also one that most of us run alongside full time day jobs and many of us even find time to work a side hustle in those sparse moments of spare time the week affords them.

Is it any wonder that when the sun decides to grace us with its presence, we all feel a familiar yearning. We want a moment’s reprieve from the enormity of our duties. An opportunity to sit and relax on the beach with a good book while the tide laps away before us and our toes dig into the powdery sand. An opportunity to sun ourselves, enjoy a cool refreshing drink and enjoy some guilt free fine dining. When the kids’ bags are packed, all the passports have been dug out from under the avalanche of paperwork under which they’ve been resting and you’ve finally managed to talk hubby out of bringing that Godawful Hawaiian shirt, you know that everything is (at least for the next week or two) easy street for you. You will be able to relax and spend some quality time with your significant other, the kids will be entertained and engaged (and they might just learn a little something too) and the whole family will be brought closer together for the experience.

 

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But what if your annual outing was a little more than that?


While a holiday is an essential opportunity for busy Mums to relax and unwind and recharge her batteries before she wades in once again to take the whole world on single handedly, it can also represent a profitable investment opportunity. If you find yourself falling in love with a location and travelling there regularly it may be worth dropping anchor in that area financially. Investing in a property in your most beloved holiday destination can not only relieve you of the lottery that is finding out what the hotel will be like when you arrive at your destination and offer you the opportunity of a home away from home… It can also be a lucrative money spinner when you’re not using it. One in ten Brits now owns a second home abroad and while you may think that this is the preserve of the idle rich, many of them are working parents just like you. People who are wary of the caprices of the stock market, wouldn’t know where to begin with Forex and find cryptocurrency just a little too cryptic and want a stable investment to grow their money. If you and your partner have substantial savings but you’re increasingly frustrated by your savings accounts’ inability to grow your money in any meaningful way, you have likely thought about investing in property on a buy-to-let basis. However, despite legal loopholes which may allow you to sidestep stamp duties they can still quash the capacity for return on your investment. There’s a good reason why many consider holiday homes the new buy to let. Here we’ll look at the advantages of buying overseas property as well as discussing some of the pitfalls that could scupper your investment and how to overcome them.

 

Why buy abroad?

 

The prospect of buying property overseas may (understandably) be a little disconcerting to new investors. This is a good sign. It means you take your investment seriously. Too many would be investors have bought into the notion of passive income and expect their investment to pay off abundantly and immediately with little input from themselves. A good landlady understands that her duties and responsibilities don’t end with buying a property and paying a letting agent to handle the logistical stuff. She understands that she is always on call to ensure that the property is safe, clean, habitable and well maintained and that her tenants are living up to their side of the tenancy agreement. And that’s hard to do when you’re on another continent.

 

However, while you may not be able to get on-site all that often, the digital age offers you numerous platforms through which you can stay in touch with the letting agent and the tenants themselves and respond to their needs with the professionalism upon which you pride yourself. Besides, buying abroad has some inherent advantages. Firstly, depending on location you’re likely to get a whole lot more for your money overseas than you’re likely to make buying a second property in  blighty. Just look at some of these luxurious yet eminently affordable homes in Indonesia; https://www.rumah.com/properti-sewa. There’s more potential for great capital growth and high yield rental income. Moreover buying abroad has certain tax advantages too. Holiday lets are viewed by HMRC as a trade, not as an investment. Therefore, not only are all mortgage payments and maintenance costs tax deductible, there are also capital allowances available that are more generous than the wear-and-tear allowances on domestic buy-to-let properties ever was. Plus, you have the opportunity to roll over any capital gains. If you sell a holiday home and buy another commercial property, any gain from the first property will be deferred until you sell the second.

 

Yet while a holiday home may be a money spinner it can easily turn into a money pit. The first pitfall of which you’ll need to steer clear is failing to fulfill HMRC’s criteria for a holiday let which will prohibit you from the tax advantages and set your profit margins on the back foot.

 

Fulfilling the criteria for a holiday let

 

Fortunately, when you know what HMRC are looking for, fulfilling this criteria is relatively straightforward. You simply need to let the property for at least 105 days and you can’t have any periods of longer-term accommodation (more than 31 days at a time) that add up to more than 155 days. HMRC have put these impositions in place to prevent investors from disguising buy to let properties as holiday lets and using tax advantages not intended for them. While this is the first potential pitfall to your long term profits, there are some others you’ll need to watch out for.

 

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Getting the location / cost ratio wrong

 

Needless to say, when buying any property location is important. Buying in the right location will allow you to charge higher rental fees and ensure that your property gets a steady stream of demand throughout the year. However, the best locations come at a premium and you can easily find yourself paying over the odds for prime real estate that nobody can afford to stay in. You’ll be forced to increase your rental rates to cover your overheads. Unfortunately, this can deter holidaymakers who are simply looking for the best value for money.  

 

Buying a property that’s surplus to requirements

 

Likewise, you don’t want to overspend on a property that’s so large or opulent that it scares away all but the highest of high rollers. Avoid anything that’s too large or idiosyncratic in design. Even if you fall in love with it, it’s important to remember that it’s not just your holiday home. While you must certainly like the property and feel that you’d enjoy spending time there, it’s also vital that you look for something with broad appeal that will keep tenants coming all year round.

 

Not understanding the legal ins and outs

 

Different countries have different rules and tax laws regarding foreigners buying, letting and selling their properties. As such, it behoves you to invest in an English speaking lawyer in your chosen destination who will be able to help you navigate the legalities and ensure that you don’t incur the ire of local authorities in your transaction. Failing to do this could incur fines which will seriously hinder your profits. Decline offers of recommendations of estate agents or developers as they be unlikely to have your best interests at heart. Instead, source your own lawyer. A lawyer will also help you to budget by making you aware of additional charges like legal fees or land registry fees.

Image by Pixabay

 

Failing to account for currency fluctuations

 

Whenever international purchases are made, fluctuations in currencies can affect the real terms value of the purchase. What seems like a great deal on the day of negotiation can quickly sour in the weeks or months it takes for the deal to go through. Thus, it’s a good idea to buy somewhere you’ve been travelling to for years as you will have a rough idea not only of the historical exchange rates but how they have fluctuated over the years.

 

If you steer clear of these pitfalls you will not only enjoy a beautiful place to visit every time you take your family on holiday, but a good little earner which will bolster your income from your day job and hopefully allow you to reduce your working hours and claw back a little much needed work / life balance.

 

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