Find a property hot spot without getting burnt

Many of us dream of a place in the sun, but if it's an investment, take precautions to make sure you're not left out of pocket.

THE attractions of owning a place in the sun are all too apparent at this time of the year. In 2004 Irish people splashed out an estimated €6 billion on overseas properties. Tempted by relative affordability, increased spending power, attractive investment prospects and the likelihood of capital appreciation, Irish investors have increasingly forsaken the traditionally favoured destinations in the Iberian peninsula for the near-virgin territories of eastern Europe and the Balkans.

There is a world of difference between buying an overseas property for investment purposes rather than pure enjoyment. And raising the initial finance may be the least of the potential pitfalls that could turn a dream of paradise into a foreign financial millstone.

"When it comes to buying property overseas, the rule of thumb is to allow about 10% of the purchase price on top for legal expenses, taxes and other extras," said Noreen Hynes, the managing director of Aquarius Properties. "Make sure you go to an Irish agent with a good reputation. I wouldn't recommend anyone to deal directly with a developer and I would also tell them that seeking independent legal advice is a must."

At the annual Homes Overseas Exhibition in the RDS in 2003, property journalists gushed about the spending power on display from eager punters. About 400 investors were prepared to pay deposits of between €15,000 and €50,000 for apartments off plan in a resort many of them couldn't even locate on the map. They certainly know where it is now. Work stopped on the Pomorie hotel and apartment complex on Bulgaria's Black Sea coast in July 2004 when the builders walked off the job after the Dutch developer failed to pay them. The company is still trying to reassure investors that their money is safe. Instead of looking forward to the completion of a spanking new apartment in March and profits of up to 30% on the price of the property, investors are trying to get their money back. Hynes says there is additional risk for investors in going to countries such as Bulgaria and Turkey but says it is more than offset by the huge potential, provided the proper precautions are taken. As with all investments abroad, she says customers must protect themselves as much as possible.

"It is common sense: there will inevitably be higher risks in any new market because there are a lot of unknowns. What you are looking for is that window of opportunity and that's why people who have maybe missed the boat in Spain and even Croatia are now going further afield where there is real value still to be had," she said. About 25,000 Irish people have bought second homes in Spain over the past five years and analysts say the traditional markets of Costa del Sol and Costa Blanca are reaching saturation point.

Prices in Spain have risen dramatically and investors are displaying increasing nervousness about the possibility of a market collapse. As it is now difficult to buy an apartment within miles of a beach near Malaga or Alicante for less than €200,000, purchasing in Spain for investment purposes is considered to have limited upside compared with similar properties in other destinations. The rule is still location, location, location.

"The Costa del Sol certainly wouldn't be flavour of the month," said Stephanie Patterson, Hamilton Osborne King's international sales negotiator. "In fact, if anything there is negative demand because of overcrowding, a 'honky tonk' image and a glutted market.

"However, we continue to like Spain, and Murcia in particular, which has just become a Ryanair destination." The focus of many investors has switched to cities over the past few years. Direct flights from Dublin to Cape Town, Budapest, Warsaw, Nice and Girona (near Barcelona) have made it easier for investors to inspect properties and meet agents. They are prepared to sacrifice rental returns in underdeveloped economies for near-certain capital appreciation in the medium to longer term.

America has also become popular because of the weaker dollar and Florida appears to be a favourite with many. However, analysts say there is no such thing as a quick buck to be earned in America and investors should be taking at least a 10-year view.

Regardless of the location, when it comes to taking the plunge abroad there are plenty of considerations. Ownership rights, capital gains tax, inheritance laws, the possibility of a local mortgage to offset any currency fluctuations, and management services should all figure. Every country is different and there are few hard and fast rules, particularly if you decide to venture outside the eurozone.

There are some universal potential pitfalls. It is important to build in a bit of comfort for interest-rate rises - not just in the market where your investment property happens to be, but also at home. The likelihood is that you will be leveraging your home to take a mortgage on a second property and when interest rates rise the For Sale signs tend to go up quickly as speculators exit the market. This depresses prices, bringing down your potential profit. Potential tenants may also choose to stay at home because of a reduction in spending power, thus leaving your apartment empty.

Finally, if you are more of a homebird, analysts say there is still value to be had in Britain, in spite of the expected downturn in the market. The smart money appears to be heading north. You may not know too much about Burnley but rejuvenated towns in the former industrial heartland of northern England are finding favour with investors because of the traditional shortage of rental properties in these areas and a youthful populace that is no longer forced to go south for work.