A place in the sun with potential rental income

A holiday home is an enduring dream for many people. As a place to escape, for children to enjoy or for a future retirement, a second home can fulfil a number of personal 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 and emotional decision, taken after a long lunch in the sun, rather than a clear-eyed 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 take that step.

Is it a house for all seasons? Most houses look beautiful in the sunshine, with cicadas chirping amid the scents of summer. However, second homes, especially those that might be a longer-term residence in the future, need to offer 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 worthwhile 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 assess a property’s location. This can help determine, for example, whether there is a well-disguised nuisance, such as an industrial plant or sewage works, in the vicinity.

Local taxes also need to be taken into consideration. Administrative costs and charges can creep up: there may be property tax, local authority utility charges or maintenance fees.

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

Local taxes also need to be taken into consideration. Administrative costs and charges can creep up: there may be property tax, local authority utility charges or maintenance fees.

Wealth and inheritance tax traps

Beware, also, of wealth tax, which tends to be payable, where it exists, on the location of assets rather than the owner’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 may be advisable to reorganise your financial affairs in order to take out a loan on the second home rather than your main residence.

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

Compulsory inheritance rules must also be considered. In countries such as France and Luxembourg, direct family members cannot be disinherited, so ownership of a second home may be divided between children and spouses, potentially creating significant complexity and the possibility of disputes.

If you do intend to let your property, first make sure this is permissible.

Generating rental income

Renting out a property can be a valuable source of additional income, particularly if the property would otherwise sit idle during periods when you’re not using it. If you do 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 on unknown parties using shared facilities.

A home’s potential rental income can be easily checked; websites such as Vrbo or Booking.com will provide indicative 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.

However, the Airbnb boom has prompted several countries and municipalities to place restrictions on short-term lets, which have been blamed for a shortage of available property on the rental market and for pushing up prices beyond the means of locals. Portugal is no longer issuing licences to let properties on Airbnb and other platforms, and restrictions are in place in cities including Vienna, Paris, Berlin, Rome, Amsterdam, Barcelona and London.

Check the local rules – there may be regulations governing deposits, including the maximum that amount can be required, how far in advance you can request it, and under what circumstances you can retain some or all of the amount. 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, as well as 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 or a cooker. Owners may be required to demonstrate certification of gas and electricity safety, or to install smoke alarms.

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 the owner is legally resident, irrespective of any double taxation or similar agreements. This can be complicated and require the services of a local accountant, which should be factored into the cost. However, such expenses can be deducted from taxable income.

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

Is an agent necessary?

A rented property may require more maintenance than a 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 they may even be able to help with accounting.

They will also be on hand to meet and greet new tenants, but you should expect between 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 – contracts may require owners to leave the property free for letting at peak times, such as in July and August.

You must ensure that the property is insured, both for your own use and for third-party lettings; if you don’t inform your insurer about the rental use, it might invalidate the policy. In addition, tenants may be able to sue if they suffer an accident on the premises, which will also require insurance coverage.

You will need to tread carefully in order to ensure a steady rental income stream from a second home without falling foul of local administrative and tax authorities. However, with careful selection and attention to legal requirements, a second home can be a significant source of income – as well as the fulfilment of a dream.