CHAPTER FIVE: FINANCIAL CONSIDERATIONS

Synopsis:

Chapter Five examines the financial considerations which should be involved in a property purchase. The most obvious point here is how to calculate the final rather than the asking price, by adding considerations such as agents’ and lawyers’ fees and stamp duty. The chapter also looks at different ways of financing a property abroad – from getting an international mortgage, to developer financing, to re-mortgaging at home to finance an investment – and gives tips on the financing process.

Practical considerations to be taken into account when purchasing overseas are also discussed, with an examination of the implications of operating in a foreign currency and the different taxes which may apply – including procedures which are in place in many countries for avoiding certain taxes and fees.

Extracts:

“Part of the appeal of investing in overseas property is that it is interesting, exciting, even ‘sexy.’ However, when it comes down to it, it is the relatively dull aspects of finance which determine the success of the venture. Considerations of financing, exchange rates and taxation can make the difference between profit and serious financial headaches.

The reality is, however, that with a little forethought the financial aspects of investing abroad can be taken care of quickly and simply. The three areas that need consideration are; being aware of the additional costs involved (both in terms of upfront costs and taxation); making adequate provisions for currency risks; and selecting the best financing option.”

“Most experts advise adding 10% to your budget in order to cover taxes, fees and unexpected expenses. However, making general assumptions of the cost is dangerous. Underestimating the costs could mean that you have to find extra money for the purchase once you have committed. This could be difficult, especially if the amounts involved are in the thousands. Equally, overestimating the costs could mean that you pass up an excellent opportunity because you assumed the purchase costs were higher than they were in reality.”

“As a general rule, the more ‘emerging’ a market, the less likely it is to have a developed mortgage system. Buyers can easily borrow in order to buy in Western Europe, the US, Australia and parts of the Caribbean, but in countries outside of these areas it can often be a different story.”

“Currency markets are an investment opportunity in themselves and you should always consider the impact of currency movements when evaluating a property investment. As an example, between the beginning of 2005 and October 2005, the pound rose from 1.4050 euros to over 1.5120 euros and then back again to 1.4320. This meant that a property costing the Euro equivalent of £200,000 in January 05 fluctuated in value by almost £15,000 in less than a year, purely as a result of currency movements.”

“A future example of an opportunity lies in the Chinese currency, the RMB. For some years the RMB has been pegged to the US dollar at a rate which the US government believes has kept the value of the currency artificially low. The US government believes that the artificially low value of the RMB has made Chinese goods significantly cheaper in global markets than would otherwise be the case. As a result the US government has put pressure on the Chinese government to remove the peg and let the currency find its own true value in the market place. The Chinese government has begun to slowly remove the peg and many analysts believe that this will cause the value of the RMB to rise relative to other currencies by up to 40% in the next five to ten years. This presents an excellent opportunity to international property investors who can invest in property in China and see the value of their property rise in value by up to 40% in pound or dollar terms even if the price in RMB doesn’t change at all.”

“Taxes vary widely from country to country and unless you are planning to make a permanent move overseas, owning property abroad may have implications for your taxation liabilities at home. Tax filing dates, procedures and requirements may vary widely and penalties for making a mistake can be severe. This makes the need to seek specialist advice doubly important. Wherever you buy, you will need to take advice on local taxation and the implications for your tax status at home. The information below highlights some potential issues, but professional advice from a qualified tax expert should always be sought.”