The Top 10 Potential Pitfalls of the Fly-to-Let Investor

The Top 10 Potential Pitfalls of the Fly-to-Let Investor

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easy-jet-fly-to-let At the beginning of last year fly-to-let was all the rage, as it had been for the 2 years previous. For those who don’t know, fly-to-let is a play on the words buy-to-let. Buy-to-let is buying a property with the sole intention of letting it out for a profit, and fly-to-let is doing this abroad. Look here for a more detailed explanation of Buy to Let.

In most buy and fly-to-let transactions the aim is that the income from the rentals of the property will cover some or all of the mortgage repayments. Buy-to-let landlords who buy properties in their own country will want all the repayments covered, whilst fly-to-let owners can balance how much of the repayments are covered with how much they want to use the property for their own holidays.

That said: many fly-to-let buyers do buy with the intention that the property will cover the repayments on the finance used to buy it, some even expect a profit, and many more cash-buyers expect that the investment will bring substantial rental income.

There are many things that can affect the rental income, and how much of that rental income is either profit or can be used for mortgage repayments. Unfortunately these things are often not considered at the buying stage.

Below are some of the pitfalls to avoid when buying a property abroad to let, note: these have come from property investors and are based on first-hand-experience, so remember; this can actually happen to you.

1. Be Aware of Rental Zones

In Florida areas are zoned for rental; you can’t do holiday rentals in long term rental zones and vice versa. This is a doozy, because in my years working in the overseas property industry I had never heard of it. In my defence none of the companies have ever covered Florida, but still it’s a big thing not to have heard of.

2. Rental Rules Vary!

Rental Rules vary across the US states. You might gain possession after two weeks for non payment of rent in others it could be several months. In some states you go via the courts in others the local sheriff turns up. This is important with many people being seduced by ‘cheap’ US properties.

Thanks to Lisa Orme @lisaorme for pitfalls 1 and 2.

3. Get an INDEPENDENT Conveyance Solicitor

Never EVER get a conveyance solicitor recommended by the property vendor or developer. Get an independent – and one with a reputation/accreditation to maintain. There is a book about this subject alone – and it’s burned some people very badly indeed.

4. Research, Research, Research

Warned Richard Francis @richardjfrancis, he said: I’ll confess we didn’t do enough and it’s taken 2+ years to re-engineer our portfolio in the light of this disastrous oversight. Lesson learned for all time. Things to research include: Local letting rates / costs / seasonality / crime / proximity to infrastructure / local services / banks willingness to be flexible / taxation & laws locally etc.

5. Don’t stretch to the Wire Financially

Setting up holiday-lets always costs more & takes longer than you think – and it’s NOT armchair investment – it’s damned hard work if you want to be good at it and get repeat bookings.

6. Get a Reliable Local Letting Agent/Agency

Get good local letting services & trades-people that can sort out problems in your absence. This is another potential pitfall from Richard Francis, he said: Some vendors throw this in and they are very good. Some don’t. Ours were middling at best. We’ve got VERY hands-on in the last 2 years putting it together. We now have people who can fix renters problems immediately and satisfactorily. Remember the internet has made everyone’s business absolutely 100% transparent – there are no more hiding places in cyber-land.

Thanks to @richardjfrancis for tips 3-6.

7. Rents Go Up and Can Come Down

Rents are very exposed to the local economy, be aware that rents can go down as easily as they can go up. This is a potential pitfall from the personal experience of Samantha Collet m=@virtualLetz, she said: My big learning has been the fall in rental values which we did not factor in [well not to the drop we have experienced].

We own a little 2 bed villa on a complex in Corralejo, Fuerteventura, Canary islands – ticks all the boxes in terms of year round sun, overlooking large pool, gardens, close to amenities, beach etc and we didn’t pay too much – luckily!

Our rent [long term rentals not holiday] started at €750 5 years ago – now we are renting it at €380. Never in my wildest dreams did I expect a recession to hit an island so much that we would be renting it so cheap – oh and for the record you pay the electric there as well.

8. Educate Yourself on Building Regulations

Building regulations are not as strict in every country as they are in the UK, and builders can call a home finished at varying degrees of what we would call finished. This is a potential pitfall from Louise Reynolds @propertyventure, she said:

“Build finish standards can differ. In Poland apartments are usually finished to ‘black standard’, which means the building is plastered, but not supplied with flooring, kitchen or bathroom. This is similar in Bulgaria too, where builders finish to ‘Bulgarian Standard’, especially in the capital, Sofia. If people are unaware they might think they are getting a bargain price but not realise that they may have to pay more for a kitchen etc.”

9. Budgeting is Crucial!

Not doing enough homework when it comes to working out and budgeting for all the additional costs involved in buying and setting the property up to be let out. Louise Reynolds @propertyventure also highlighted this potential pitfall, she said:

“[People don’t] always properly budget for costs related to the purchasing process. These can differ significantly from buying in the UK. Not only in terms of direct transaction costs but also indirect costs like travel and translation costs. And then they might try to make false economies and cut corners e.g. not getting a key document translated or checked.”

10. Always do Escrow

Insist that your deposit(s) are held in Escrow, otherwise, warns Vanessa Warwick @4_Walls, “your deposit may be spent on a new Aston Martin”.

There was one more from Lisa Orme that I felt was worth including, but because most people buy in Spain for holiday lets, and this applies to residential lets I didn’t want to put it in the general list. Lisa said: “In Spain tenants who have rented a property for two years are entitled to buy the property even if the owner doesn’t want to sell!”

However, as I said most people buying property in Spain as a buy to let investment are doing so for holiday, and not residential letting, so this does not apply in most cases. I have included it because some people may be tempted to go residential if holiday letting is not profiting them, in which case this is something they need to know.

Article written by Liam Bailey of Property

Photo credits: Bernardo via Flickr