The Finer Points of Fly to Let Investment
Posted On: 08/10/2010
The fact that you are on this site, reading this article tells us that you are interested in making a property investment; meaning you are probably already sold on the benefits of the class, but who knows, you may still learn something. Here is what's great about overseas property investment -- aka fly to let investment.
1. Property is a Good Long Term Investment
While we have all seen first-hand recently that property values can fall as rapidly as they can rise; over the long term property will always tend to rise in value.
This is why we talk about buy to let and fly to let when we talk about property investment, because while property values can sometimes be volatile in the short term, rents are more stable, thus we invest with a projection on the rental yield, while earning capital growth over the long term.
If you read stories about people being caught out on a property investment, it is usually on an off plan development that didn't get built for whatever reason, or because they bought to flip (to sell for a profit after a short period of time in rapid growth markets) and the market collapsed between buying and flipping.
Off plan is the riskiest of all investments, but, because this risk is factored into the price as a heavy discount, it is also the most lucrative (when it goes right of course). Thus, if you do proper research into the developer and the planned development, thereby minimising the risk, off plan property is a great investment opportunity.
2. Easier to Finance
While mortgage markets around the world have tightened, it is still a lot easier to get a mortgage than it is a loan for any other investment, and this truer now than ever.
The difference between the boom era and now is that during the boom you could get mortgages of 100%, now you will need at least a 10% deposit in most cases. This is because property values were growing and banks thought that taking them wouldn't be such a bad thing. Now the banks have more property than they know what to do with and worth less than they loaned against it, they are obviously being more cautious who they loan to.
Let's say we have 10,000 euros to invest, we could invest that in stocks, or we could use it as a 10% deposit on a 100,000 euro property. The long term average for property growth is 10% per annum, a 10% yielding share investment is rare but not unheard of. Comparing our 10,000 invested in a 10% yielding share, to our investment in a 100,000 euro property, here is what we would make:
| ||Stocks ||Property
You can see that the property investors has made a 600% profit, while the shares investor has made a still respectable 60%. Unfortunately this is minus interest, which is where property has its final benefit, on top of capital appreciation there is also rental income.
3. Rental Income Can be Used to Pay Mortgage Interest
During the boom it was common place for agents to recommend properties for investment that "paid for themselves", where the rental income would cover the mortgage repayments.
Because of the volume of people who came unstuck in this strategy, such statements are now frowned upon and taken as a clear sign of a dodgy agent.
However, carefully chosen overseas properties can earn good rental income, with quality properties in Turkey's popular spots earning 6%, and repossessed properties in Florida tenanted and earning 10 or even 12 percent yields. Thus, this money can be put towards the mortgage repayments, and in some cases does pay for the interest, and maybe a little bit more.
Because of the volatility of capital growth most people are now measuring the rental income as the return on investment, which means that the interest and mortgage must be taken into consideration when calculating returns.
To find out more please read our extensive guide to overseas property investment
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