Leaseback Investment Property

Leaseback schemes have been in operation for the past twenty years and more recently they have become an increasingly popular method of financing property ownership. Find out about the general principles of leaseback property below.

Leaseback Investment Property

Overview

Particularly popular in France and growing in Spain, the leaseback system of property ownership has caught on and is currently well known as a trouble-free and cost effective method of investing in property.

The concept of leaseback property purchase is simple: a purchaser buys the freehold of a property outright and then leases it back to a management company for renewable periods of up to 10 years. In return, the property owner receives a guaranteed rental return, irrespective of occupancy, at a fixed annual amount, which often offsets the cost of their mortgage payments. The rental return is net of all community fees, running and maintenance costs while these are covered by the management company for an initial fee. Leaseback owners also benefit from a substantial government-backed VAT-refund system.

The attraction to most investors is the ability to buy a dream holiday-home within a development they could otherwise ill afford. It is a freehold investment while most or all associated costs are covered by the guaranteed rental income. Most leaseback properties are located in the best locations with free pools, gyms and other tourist facilities, making them high-demand holiday locations and therefore easy to rent.

The Leaseback Agreement provides great peace of mind for many investors who constantly receive annual rental payments, meaning they are not exposed to fluctuations in the tourist market as returns are guaranteed, irrelevant of occupancy. It also means owners have no worries about day-to-day management responsibilities such as looking for a rental agent, paying utilities, dealing with maintenance issues or insurance.

At the end of the lease period, the owner has the option either to live in the property or simply sign a new leaseback contract with the management company for another fixed period of guaranteed income.

The Process of Leaseback Purchase

Once you have decided on the property you wish to purchase, you will normally need to supply the developer with the following signed original documents in order to secure the property as soon as possible:

1. the leaseback contract
2. the reservation contract
3. the technical description of the building
4. the furniture list
5. the floor plans

Meanwhile, you will need to send a deposit payment to the notary and proof of transfer to the developer. At this stage the property will be secured as yours until the eventual official signing of the Deed of Sale at the notary’s office. Developers are obliged to give you up to two months before completing in order to raise the appropriate finance for your property.

Frequently Asked Questions – Leaseback Purchase

Is leaseback like timeshare?

No, leaseback is not like timeshare. Leaseback schemes involve the full purchase of freehold property. Timeshare however, is the purchase of specific periods of time within a property. Unlike timeshare, with leaseback property, although you are leasing back your property to the property management company for a fixed period, when the contract comes to an end the property is still owned by you.

When will I receive my rental income?

This depends on the property management company and the lease you have. Payments can vary from quarterly to once a year. This is a detail you will need to check with the management company concerned on your particular development.

What taxes are involved?

VAT is payable on all new build properties at a rate applicable to the country in which you invest. The government agrees to offset the VAT payable on the purchase price against the rental charged to the short let customers of the rental management company. In addition to the rental, other services such as cleaning and breakfasts qualify the letting business as being like a hotel letting. Therefore the rentals charged by the management firm are also subject to VAT. In most cases you pay the VAT upon purchase and receive a rebate from the government within 5 months of the purchase. However sometimes the developer advances the VAT and the purchaser later reimburses the developer on the day they receive the rebate from the government.

As you receive rental income on your overseas property, you will need to fill in an annual tax return in the country in question. The management company can often help you with filling this in and will provide you with an accountant, often free of charge.

Are there any more costs?

The owner is responsible for some costs, such as land/buildings tax and often a portion of the shared facilities costs, depending on the amount of weeks that are used personally. You are also responsible for any building or repair costs that fall outside the guarantees of the builder and the responsibilities of the management company, so check your Leaseback Agreement.

If I purchase leaseback, can I sell it whenever I want?

Yes. As the freehold owner of the property you are entitled to do as you wish with your property. However, if you decide to capitalise on your investment before the end of your lease contract, then the person to whom you are selling will be obliged to see through the remaining time on the lease contract.

If an appliance in my property breaks, who will organise and pay for its repair?

Under the leaseback system, the management company is completely responsible for the upkeep and maintenance of your property and will ensure everything is in full working order. If you do not renew your lease when it comes to an end however, you will be responsible for all maintenance costs and upkeep.

Who pays the bills during the leaseback period?

During the leaseback period the property management company is responsible for paying the bills relating to your property.

Can I go on holiday to my property?

You can take holidays in your property at no additional cost providing your leaseback contract allows some personal occupation. The time you can stay in your property during the lease varies, but generally the maximum period is 8 weeks per year is permitted. The owners usually have first choice on which weeks to spend at the property and is required to state their preferences at the beginning of each year.