Pros and cons of buying-to-let in UAE

QUESTION: I am just starting to get a sense that things are bottoming out in the property market in Dubai. I am considering buy-to-let. Is this a good time, or should I sit on my money for a bit longer?

ANSWER: Buy-to-let is where you purchase a property and then rent it out to a tenant. This is a good way of obtaining a second income, or facilitates someone else paying off the mortgage on your property. You can also benefit from any capital growth in the value of the property.

While all of that sounds wonderful, there are many pitfalls to avoid when deciding to go into buy-to-let, especially in a fragile housing market. Buy-to-let is a relatively young market in the UAE, so you need to exercise caution, especially with recent fluctuations in the property prices.

Remember that it will be you putting the money up for the property through either a mortgage, or your own investments. If you are unable to rent the property at a price which pays off the debt, you will have to make up the shortfall. Some investors are currently in this situation, as rental prices throughout the country have fallen in line with property prices.

If you have reviewed the market, and feel that now is the time to look at investment, there are a number of factors which you should consider with your independent financial advisor before rushing into the purchase of your first buy-to-let investment.

Firstly, you need to draw up a plan for the worst case scenario. Would you be able to continue paying for the property if prices continue to fall and you're unable to rent the property at a profitable price? If prices of property continue to decline are you sure you will be able to cover the negative equity if you need to sell it ? This should be your starting point, and you should not rely on rental income as guaranteed.

It is always a good idea to make enquiries with letting agencies in the UAE to get their advice on which areas are currently renting well, and assess the potential return on your investment. It is very difficult to calculate exactly your return, with prices of rent fluctuating. You also have to consider the changes in the house price, and allow for a couple of months each year for the property to be empty.

When seeking a property, always keep in mind that you will be buying the property to rent out to another family, therefore try to remove your own personal emotion from the decision-making process and think solely about which areas in the UAE offer the best long-term rental income.

One big cost, which will take a percentage of your rental return, is the management of the property. If you do not intend to find your own tenants, collect rent, fix simple repairs, then you will need to pay a third-party company to handle this work for you.

Finally, but importantly, another area to also consider in the UAE is that the Real Estate Regulatory Authority must ratify the tenancy agreement, and all freehold owners will need permission before leasing a property.

The attractions of buy-to-let are obvious, but it would be highly recommend for you to spend some time doing your research on the market and discussing your best options with an independent financial adviser.

- Gurnos Stonuary is business services manager at Nexus, a financial adviser. You can find more advice at www.nexusadvice.com.