If you tread carefully when investing in properties outside the UK, says Stuart Law, the returns can be very sunny

International property investment sounds exciting but can be risky. Two things have attracted people into it over the last year or so. The first is the slowdown in UK property price growth, prompting people to search for better returns elsewhere, and the second is that investors want to diversify their portfolios away from purely UK buy-to-let.

Deciding which countries to buy in depends on whether you are a short-term or long-term investor, and also whether you will be using the overseas property yourself.

Short-term investors should be primarily concerned with finding a country that has:

• Low costs when purchasing. The higher the costs, the more you need a big capital gain just to break even.
• Low costs when selling. We grumble about agents’ fees in the UK, but agents in most countries will charge you from 5–10% when you come to sell your investment, again eating into gains.
• Capital gains tax of under 40%. Some countries, like Dubai, have a nil rate. However, if you are a UK tax resident, you will owe the balance of 40% on your UK tax return, so it does not matter which country you invest in, as long as it has a rate no more than 40%.
• A good resale market. To ‘flip’ the property requires a steady resale market, but in many countries there is a supply of new properties with powerful marketing to compete with.
• Fast growing property prices.

Probably the most important factor is that overseas property purchase costs are a bigger percentage of the purchase price than in the UK.

Here, you can get a buy-to-let mortgage with a 15% deposit and incur legal costs and Stamp Duty of, say, another 2%. In France, with new property you can still get a deposit level of 15%, but legal costs and Stamp Duty add another 3%.

In most other countries you will see total purchase costs of around 7–15% of the purchase price plus deposits of 30% or more.

Capital gains

For an investor looking for capital gains, the most important factors are the size of deposit required and the rate of house price increases.

Crudely, a 15% deposit combined with house prices increasing at 15% gives a 100% return, whereas a 50% deposit combined with house price increases of 10% gives a 20% return.

Long-term investors should be looking for high rents, as they are looking to pay off the mortgage using the rental income.

There is significant variation in overseas property yields by type, location and size of property. You may achieve 10% yield on local lets in small towns, for example, but a large villa let on a short-term holiday basis may only achieve a 5% return.

Generally, for holiday lets in mature markets, two-bedroom apartments or town houses near the hot-spot tourist locations tend to produce the best yields, as the prices can be reasonable and the proximity to a tourist centre lifts the rent.

Toe in the Water

In Southern Cyprus, Bulgaria or Turkey, you can still buy detached villas for prices that should produce 8% rental yields, but these days are numbered as prices rise fast.

For investors preferring corporate city lets, the best yields are on studios and one-bed apartments. In France there are suburban Paris studios which come with a ten-year rental contract.

In emerging countries the investor needs to look carefully at the choice between ski or beach holiday lets, and city property for corporate lets. There is a big difference. Corporate long-term lets in cities can be easily delegated to a management company, whereas holiday lets need a lot more direct involvement by the investor to achieve high returns.

For this extra time commitment, investors would expect a higher yield, but in some holiday destinations they may not see a better yield than that of a city flat, and the latter would be a lot less hassle.

Rental demand

Rental demand in established countries, such as France, Spain and Portugal, can give the investor a lot of confidence that they will rent out their property profitably.

In emerging countries, however, the appeal is normally lower costs, and while rental guarantee schemes exist, be aware that your rental income may not be reliable until the country becomes established as a holiday destination. Generally, holiday lets work for investors where the property will be used by the family as well holidaymakers, whilst city lets work better for ‘buy and forget’ investors.

The competition for holiday lets is fierce, and if you do not buy a property with a long-term guaranteed rental income, you need to have your marketing plan in place before diving in too deep.

Speak to others who enjoy rental success in your chosen area, and get a realistic idea where to advertise, the likely income and the work required to make the investment work.

Property investment overseas offers rewards, but only to those who do the research and put in the effort to succeed.

Stuart Law is managing director of Assetz (www.assetz.co.uk), a consultancy advising UK property investors on buying abroad