Buying for investment

Essential advice

Bulgaria is growing in popularity as a holiday destination and many people believe that property values, which are as yet low compared with those in other western European countries, will rise as rapidly as they have done in Spain over the past two or three decades.

This makes Bulgarian property a canny investment. As a result, many people are buying to invest, particularly along the coastal areas and near the mountain resorts.

Before buying for investment, however, you must be clear as to what exactly you expect to obtain in terms of ‘return’ as well as of the risks involved. There are various kinds of property investment. Your family home itself is an investment, because it provides you with rent-free accommodation and can also yield a return in terms of increased value (a capital gain), although it can be difficult to profit from this unless you trade down or move to an area or country where property is cheaper.

In addition, there are the following types of investment property which might give you a more tangible return:

• A holiday home, which can provide your family and friends with rent-free accommodation while (hopefully) maintaining or increasing its value; you may be able to let it when you aren’t using it to generate supplementary income.
• A home for your children or relatives, which may increase in value and could also be let when not in use to provide an income.
• A business property, which could be anything from a private home with bed and breakfast or guest accommodation to a shop or office.
• A property purchased purely for investment, which could be a capital investment or provide a regular income from letting, or both. In recent years, many people have invested in property to provide an income after they retire.

A property investment should be considered over the medium to long term, i.e. a minimum of five years and, realistically in the case of Bulgaria, 10 to 20 years. In some areas, property has increased in value substantially while in others it has remained static. You also need to take into account income tax if a property is and capital gains tax when you sell a second home.

WARNING
Bear in mind that property isn’t always ‘as safe as houses’ and property investments can be risky over the short to medium term.

When buying to let, you must ensure that the rent will cover the mortgage (if applicable), running costs and periods when the property isn’t let. Keep in mind that rental rates and ‘lettability’ vary according to the region and town, some areas having far more properties than demand, leading to low prices and/or occupancy, while ‘in-demand’ areas have higher rates, although property costs are also higher.

Gross rental yields (the annual rent as a percentage of a property’s value) of around 12 per cent are possible in ski resort areas, while on the coast 6 to 8 per cent is more usual; net yields (after expenses have been deducted) are 2 to 3 per cent lower.

Before deciding to invest in property, you should ask yourself the following questions:

• Can I afford to tie up capital for at least five years?
• How likely is it that the value of the property will rise during this period, and will it outstrip inflation?
• Can I rely on a regular income from my investment? If so, how easy will it be to generate that income, i.e. to find tenants? Will I be able to pay the mortgage and running costs if the property is empty and, if so, for how long?
• Am I aware of all the risks involved and how comfortable am I with taking those risks?
• Do I have enough information to make an objective decision?

This article is an extract from Buying a Home in Bulgaria from Survival Books.