A place in the sun with potential rental income

A holiday home is an enduring dream for many. A place to escape, for children to enjoy or for a future retirement, a second home can fulfil a number of romantic ambitions. It can also be practical – a source of income for those who are willing to get involved in the complexities of letting.

It would be better if judgements on a second home were made after lengthy, rational contemplation, careful consideration of professional advice and research, but buying is often a romantic, emotional decision, taken after a long lunch in the sun, rather than a clear appraisal of the local property market. While that is not an unreasonable approach – after all, you need to buy somewhere you love – it is worth considering a few key points before you buy.

A house for all seasons – most houses look beautiful in the sunshine, with cicadas chirping and the smells of summer. However, second homes need a life beyond a few short weeks in the year’s hottest months.

Location, location, location

Is there enough to do in autumn and winter? It can be worth looking for property at unseasonal times of the year; there may be less competition so prices are keener, and you may get better access. Most importantly, you can see what a property looks like without the flattering sheen of the sun.

Is it in the right area? Satellite mapping has made it a lot easier to judge a property’s location. This can help determine, for example, whether there is a well-disguised nuisance, such as a sewage works, in the vicinity.

Local taxes also need to be taken into consideration. Taxes can creep up: there may be land taxes, local authority taxes or local maintenance fees.

Consider how important it is for you to be near shops, bars or restaurants. You will also need to consider access from your normal place of residence. A couple of hours travelling to an airport can make the difference between a home being accessible for the weekend or only for longer trips. And can you be sure that the budget airline serving a small nearby airport will continue to do so over the long term?

Local taxes also need to be taken into consideration Taxes can creep up: there may be land taxes, local authority taxes or local maintenance fees.

Wealth and inheritance tax traps

Beware, also, of wealth taxes, which are payable on the domicile of assets rather than a person’s country of residence. In some countries a second home by itself may be enough to push you into wealth tax liability. In such cases, it can be worth reorganising your financial affairs in order to have a mortgage on one’s second home rather than a main residence.

If you are within the EU, you can elect to have inheritance tax according to the rules of your country of residence, but different rules can apply in countries outside the union. In some countries these can be onerous, particularly if assets are being passed to a person who is not a close relative.

Forced heirship also needs to be considered. In countries such as France and Luxembourg, direct family members cannot be disinherited, so ownership of a second home may be divided up between children and spouses, potentially creating significant complexity and the possibility of discord.

Generating rental income

Renting out a property can be a useful source of additional income, particularly if the property would sit idle during periods when you’re not using it. If you intend to let your property, first make sure this is permissible.

Even if you are the full owner of a property, regulations may exist to prevent it being used it for seasonal rentals. At particular risk are top-end apartment blocks where other residents may not be keen about unknown parties using shared facilities.

Potential rental income can be easily checked; websites such as Homeaway.com or Booking.com will provide indicative rental prices. If you are willing to do a little more work, or to travel there more frequently, you might consider shorter-term letting arrangements via sites such as Airbnb.

Check the local rules – there may be regulations governing deposits, including the maximum that can be demanded, how far in advance you can request it, and under what circumstances you can keep some back. Many countries impose a legal requirement for a written contract for all rentals.

Tax and authorisation

A rental agreement will need to include information such as a description of the property, the names of the clients, and the dates of arrival and departure. You will also need an inventory of furniture and fittings and their state of repair. Depending on the local rules, rental agreements may require the provision of certain equipment or fittings, such as furniture, bed linen or a cooker. Owners can be required to demonstrate certification of gas and electricity safety.

Most countries require owners of rental property to pay tax on the income in that country, rather than the country where the income is received or where you are legally resident, irrespective of any double taxation or other agreements.

Most countries require owners of rental property to pay tax on the income in that country, rather than the country where the income is received or where you are legally resident, irrespective of any double taxation or other agreements. This can be complicated and require the services of a local accountant, which should be factored into your costs. At the same time, you will be able to deduct expenses from the taxable income.

Different rules usually apply if you are letting out part of your primary residence. Be wary of conducting more expensive rentals; in France, for example, individuals receiving some specific rental income exceeding €23,000 a year are considered to be conducting a professional letting business and need to register as self-employed.

Is an agent necessary?

A rented property may require more maintenance than one’s own primary residence, and you will need someone on hand to carry out any repairs during a rental period. This may require the services of a letting agent, unless you have particularly helpful neighbours. They can save the time and cost of advertising, protect you to some extent from rogue tenants, and may even be able to help with accounting.

They will also be on hand to meet and greet new tenants, but you should expect 20% and 40% of the rental income to go on their fees. In addition, using an agent may restrict the periods when you can use the property – they may require owners to leave the property free for letting at peak times, such as in July and August.

You will need to ensure that the property is insured, both for your own use and for lettings; if you don’t inform your insurer about rental, it can invalidate the policy. In addition, tenants may be able to sue if they suffer an accident on the premises, and, again, you will need cover for this.

Potential homeowners need to tread carefully if they want to ensure a steady rental stream from their second home and not fall foul of the local tax authorities. However, with authorisation in place and careful selection, a second home can be a significant source of income as well as the fulfilment of a dream.

It can be worth looking for property at unseasonal times of the year; there may be less competition so prices are keener, and you may get better access.