Overseas Property Interest Rates v Rental Yields

Hello and welcome to the Someplace Else Blog.

I’m writing this weeks note from Romania, and with property prices in Ireland, UK, Spain and the US all falling, it’s a relief to spend a few days in a country where the market is booming and locals are full of optimism for the future.

This week I’m going to briefly discuss the relationship between capital appreciation, interest rates and rental yields. Many of those reading this will be experienced investors who won’t learn anything new from this note and who may even disagree with me (the blog is up there if you want to do so publicly), but perhaps others might appreciate a couple of paragraphs cutting through the hype and spelling out the fundamental investment factors in plain English.

Basic factors to consider
At the risk of sounding like a simpleton – if your annual rental income is higher than your annual mortgage repayments, management fees and property taxes, then your property won’t cost you anything to maintain and you can sell it whenever you think it has reached a point where the equity can be better spent elsewhere and you have found a buyer to take it off your hands. Needless to say, you should always independently verify facts and figures on the above given to you by agents and developers.

Rental Income
For some properties annual rental income means income received during the summer holidays from local or foreign tourists, with little or nothing outside peak season and for others, you may have a long-term contract with a tenant paying a fixed monthly amount. The amount of rental income you will receive mainly depends on the market demand versus market supply of your particular property. For an person who feels cash flow is very important, my advice would be to purchase in a city and rent to a local paying all year round where the present and future supply and demand can be more accurately forecast than a seasonal resort.

Mortgage Repayments
The amount of your annual mortgage repayments depends on the value of your loan, the term of the loan and the interest rate. Value of loan varies from bank to bank and country to country. In Romania foreigners can get up to 75% (of the value on completion, not purchase cost), in Bulgaria it is about 70%, in Germany its difficult to get more than 60%, in Montenegro 50%. The term of the loan mostly depends on the purchasers’ age. Banks generally don’t want people over the age of 70 owing them money. If their net income is sufficient, a 35 year old shouldn’t have a problem getting a 30-year mortgage, but a 50 old would not get more than a 15 or 20-year mortgage. Of course, the monthly payments on a 15-year mortgage will be a lot higher than those of an equal 30-year mortgage.

Interest Rates
Interest rates are more complicated and you could fill a 3-bed villa from floor to ceiling with books on how the various types of them function (there are 3 types that affect the euro area). However the interest rates of your overseas mortgage will mostly depend on what their central bank fixes the rates at. Some central banks are worried about a possible recession and will lower interest rates dramatically to encourage consumer spending (like the Federal Reserve), while others are more concerned with inflation and are therefore extremely reluctant to lower interest rates at all (like the European Central Bank).

Bear in mind that a high interest rate will only be a problem for an investor if it is proportionally higher than their rental yield i.e. a 5% mortgage interest rate with a 4% rental yield is worse than a 7% interest rate with an 8% rental yield.

Capital Appreciation
Owning an apartment with a positive cash flow makes it easier for you to save up for a deposit to buy another one, and so present and future rental income needs to be carefully considered. However your long-term focus as an investor should always be capital appreciation. We sell in a very diverse range of emerging markets (you’ll see two very different ones described below) some of which provide great rental income and others which provide little or none. Either way, the first factor we as a company always look for when researching our next project is potential capital appreciation.

Finally…
Sometimes your personal circumstances will mean you can only purchase a product that that generates a steady income (city apartment), while others will have cash savings that they would like to invest in a pure capital growth product (land).

In conclusion, buying a property that suits your specific circumstances isn’t always as simple as estate agents make it out to be. However, we have products that suit investors of all types and we’re always happy to discuss further with those who’d like to learn more.

Kind Regards

Colin Murphy
www.someplaceelse.ie
investments@someplaceelse.ie