First – buy in a rising market.
Try to select a country or region where property prices are rising. A totally obvious statement, but this underpins most successful investment plans. It just makes everything easier.
People who buy in flat markets to make money have to work a lot harder to find property that is valued below the market price because it is less visible and so has been overlooked.
People who buy in falling markets must have motives other than making money.
Rising markets are driven upwards by demand exceeding supply. This usually happens in the early stages of the market’s development where builders cannot ‘tool up’ as quickly as the buyers rush in. When they do ‘tool up’, unless inhibited by restrictive planning laws, supply will ultimately match demand making for a flat market. After that supply will exceed demand for a while making for a collapse in prices and a period of stagnation before demand and supply rebalance.
We are seeing this over supply happen in some areas of Spain at the moment, most obviously on the Costa del Sol but in other areas property prices are still rising e.g. Costa Calida property Murcia.
Second – know when to sell.
Having decided to invest an exit strategy is needed. You need to be able to sell the property at a profit. This can be done in a rising market. If you purchased early in the rising market you can sell in a flat market and still profit. You can’t purchase in a flat market and sell in the same flat market and make a profit without first adding some value to the property, perhaps by refurbishment or building an extension, etc.
You must also take into consideration the selling costs although there are an increasing number of web sites offering free property sales services under the banner of “for sale by owner”.
The difficulty is in knowing when the market is going to turn flat. This can only be known with hind sight. The last year of a rising market is also the first year of a flat market if the year following turns out to be the same as its predecessor. This gives rise to the TWO YEAR rule – If you purchased within 2 years of the market going flat you purchased too late and into a flat market.
Third – recognise the market cycles.
A typical market cycle of ten years might be four years rising, two years flat, four years falling. The problem is that you don’t know that the market has turned until year six, when it is too late.
The answer is to be an ‘early bird’ investor. In a ten year market cycle you have just the first three years to stake a profitable claim and no more than the three following years to exit with your profits. This is the ONE THIRD RULE. Buy in the first third of a rising market.
Fourth – investing for the long term.
Some people invest for say twenty years ahead. The logic might be that although they miss out on the first market upswing, the following one will start from a higher base and the top of the second upswing will be even higher. The issue then becomes how can the property investment earn its keep in the years before it is sold?
The usual answer is to ‘rent it out’; buy-to-let investing has become very popular over recent years. This is also the plan of many investors who don’t have the capital to put down and finance the purchase on borrowings. There is a very simple calculation that tests the validity of this approach.
Start by ascertaining the realistic rental potential of the property. If it is a holiday property and it will only rent during the holiday season you will usually get a maximum of 90 days rent per year. From this you have to deduct any fees agents might charge. Good examples of this type of property are coastal holiday apartments in Bulgaria.
If it is a holiday property with added attractions e.g. golf, sailing, winter sports, theme parks and or a long or year round season; then the property can be rented out for longer, perhaps 60 – 80% of the time or more. Good examples of this type of property are Bulgarian apartments in the mountain ski resorts, property in the Canary Islands and property in Southern Spain.
If it is a year round rent it will be being offered in the local market at lower rates. Whichever is appropriate you will have a net figure to count as income. However, also remember that in most countries income is subject to tax and property taxes also apply, so the net figure has to be carefully considered.
Fifth – What constitutes a rising market?
Basically when people are willing to pay more for a property than it was worth yesterday. Local people can drive up values within their own communities if their living standards are rising. However, as often as not it is richer ‘outsiders’ descending onto less prosperous regions that kick start a property boom.
For the ‘early birds’ buying in at local prices even before two tier markets emerge is the objective.
Sixth – Finally check out the Income and Property Taxes
Each country has its own rules on tax. Some levy capital gains tax and some don’t. You might be an ‘early bird’ investor, you might do all the right things, you might be showing a huge profit on your property but the taxman might want his slice too. In the UK capital gains tax is 40%; in Spain it is 35%; in Turkey it is zero after 4 years.
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