How to reduce maintenance costs of overseas property
On April 11, 2018, for the first time in over two years, the Russian ruble fell below 80 to the euro. The weakening of the ruble has come as an unpleasant surprise for owners of foreign holiday homes, as their property maintenance costs have been growing along with the exchange rate of foreign currencies. Unlike the collapse of the ruble in 2014, which caused many Russians to sell off their foreign properties, in the current, less dramatic situation, giving up foreign property seems to be too extreme. However, to cut expenses, many owners are trying lower their property maintenance costs.
Maintenance includes taxes (0.1–1% of the property’s cadastral value), utility fees (about 1% of the property’s market value) and, in some cases, insurance. In total, they make up 1-3% of the property price. Buyers of overseas property often tend to underestimate how much they will spend to maintain their property. One of Tranio’s clients, who bought a house with five bedrooms and a swimming pool in Cabrils, Spain, was surprised to find out that maintenance fees would cost him about €1,000 per month.
Before purchasing a property
Those who do not want to spend too much on property maintenance should choose a smaller house or flat. Buyers should also take into account the maintenance costs for outdoor areas. For example, in Spain, the upkeep of a private swimming pool costs about €800 annually, while a gardener or cleaner cost €15 per hour on average.
It is worthwhile to look for newly built real estate – new buildings and renovated housing in which wiring and pipelines have been redone, and whose walls and roof have been insulated have lower maintenance costs compared to older buildings (at least in the first few years). In many countries, construction companies have a guarantee against defects found in new housing. In Germany, this typically lasts for five years after the completion of construction, while it ranges from 1 to 10 years in Spain, depending on the type of defect.
Possible repair costs should also be considered. Some buyers intentionally buy flats and houses in a poor condition at a lower price and repair them at their own expense, but this is risky if the buyer does not speak the local language. However, there are some positive examples in our portfolio, such as a businessman from Kiev, who bought a flat in Portugal in poor condition in 2015. Besides minor renovation works, he had to replace its sewer system and household appliances including the water heater, electric stove and a washing machine.
His friend recommended him a team of Russian-speaking builders (in Portugal there are many construction companies owned by Russians), which he managed remotely. The “no-frills” renovation took only a month and cost just over €8,000, excluding household appliances and kitchen cabinets. As such, the repairs – about €200–300 per square meter of living space – cost almost the same as in Kiev.
How to save on utility bills
In the Western and Northern Europe, heating is one of the major cost items. Up to 40% of heat is lost due to old windows, so it is often better to replace windows to save on heating costs in the long-term. Temperature control can help as well. A chief manager of a property management company said in an interview to the German web portal Wunderweib that indoor temperature should not exceed
To save on electricity costs, unplug unused appliances. Computers, printers, audio systems and televisions consume a lot of power. Sometimes a change of tariff or energy supplier helps to reduce costs. For example, Germany has more than a thousand energy suppliers and over 12,500 tariffs (they can be compared using www.check24.de or https://www.verivox.de). In Portugal a time-of-day rate is popular: consumed kilowatts are billed differently depending on the time of the day. As such, many Portuguese do their laundry after midnight, when it is cheaper. In Greece, there are electric relays that automatically turn off boilers in case of electricity overconsumption.
In some areas, solar panels can be considered, as they annually "pay off" up to 15% of their cost. For example, according to Time magazine, in Massachusetts, this investment will pay off in 10 years in Massachusetts and in 20 years in Kentucky because of differences in energy costs.
There are different ways to save on water consumption. For example, water flow regulators can reduce consumption by up to 70 % (according to manufacturers). Leaking taps should also be repaired as soon as possible, as a slowly dripping tap can lose about 5,000 litres of water annually. According to US web portal Reviewed, automatic dishwashers use 3.5 times less water than hand washing. Taking shorter showers also helps – The UK Energy Saving Trust says that a five-minute shower taken instead of a bath once a week can save up to £45 per year for a family of four people.
The most obvious way to alleviate the cost of a vacant property is to rent it out. a short-term lease has a higher yield (5-7%) than a long-term one (2-3%), but this requires more time and effort from the owner. if you do not want to do it yourself, hire a management company, which typically charges 20–25% of the rental income.
Suppose you purchased a studio flat on the coast of Tenerife for €150,000. If the flat is unused, you will spend almost €2,000 on its maintenance each year, which includes taxes (€250), utilities (€1,200) and minor repairs (€500). However, considering the average occupancy rate of local hotels is 85%, renting out the flat to tourists would bring a net profit of €9,000 per year after maintenance, weekly cleaning (€1,600) and management company charges (20%).
There are also ways for landlords to lower their tax base. For example, in Germany, investing in several flats above €1 million in total can be more profitable if they are registered to a company, as companies have a fixed income tax rate (15.825%) while individuals are subject to a progressive rate (from 14.77% to 47.475%).
Owners should also deduct the costs associated with purchase, ownership and management of the property from the taxable base. These include:
- bank loan interest;
- property depreciation;
- repair costs;
- transaction costs;
- property tax; and
- property management and maintenance costs.
An additional way to compensate for foreign property ownership costs is to mortgage the property to a bank and use the loan to buy commercial real estate. The revenues generated will cover maintenance costs for both assets and also bring in a stable income in foreign currency.