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7 Options To Buy Investment Property
by Nick Shinner
Did you know there are a number of different
ways to invest in property, and the level of effort required can vary wildly
between them? Nick Shinner from Where on Earth compares seven options.
As well as the whole world to choose from for location, there are a number
of different ways to directly invest in property. What is a little daunting
is the number of variables this creates – 175 by my reckoning! (7 ways to
invest multiplied by at least 25 countries). So, once you have decided what
to invest in, you can then get on to deciding where to invest.
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There are really three key factors to consider when deciding how and where
to invest – risk, reward and effort involved. How you invest is important
because it affects all three key factors; where you invest only really
affects risk and reward. The reality is that many people only concentrate on
the (potential) reward, and often become blind to the risk involved. Even
more frequently though, people do not factor in the effort required for
certain types of investment. This can then lead to frustration, despondency
or panic, and at worst, a desire to stop investing completely.
I have ranked each of the 7 in terms of the level of effort required (The
Hassle Index!). Coming in with the lowest ranking is Guaranteed Return
Investments. These are simply a cash investment in to a project or scheme,
you receive a monthly, quarterly or annual fixed return on your investment.
As an example, a scheme investing in UK buy to lets has been delivering a
32% return for over 3 years now, paid monthly. Another in Turkey is
delivering a 25% annual return. The risk element is high with these types of
investments, especially when your cash does not secure you title on an
actual property (as with the UK scheme). But the effort involved is simply
to sign a contract and hand over your cash, after copious amounts of due
diligence though! I know of an innovative company that is going to
‘re-package’ these schemes and offer a lower return but with an insurance
scheme bolted on, protecting your cash and reducing the risk element.
These investments appeal to cash rich/time poor individuals willing to place
a percentage of their cash for a high return, especially if they are unable
to obtain mortgages enabling them to gear up.
The second lowest ranking in the ‘Hassle Index’ is Syndicate Investments.
Here again you invest cash along with a number of other individuals, which
is then invested and managed on everyone’s behalf. You are rewarded with a
return based on the level of success of the whole scheme. The timing and
level of returns are not guaranteed. The structure of these schemes varies;
at one end you have the hugely popular schemes run by Ready2Invest, which
are fully regulated and offered via a prospectus, investing in Montenegro,
Bulgaria and Croatia. Alternatively Alan Forsyth runs excellent syndicates
focussed in the emerging markets of Estonia and Latvia. These are smaller
schemes and you are buying shares in a listed company and effectively
becoming a ‘mini developer’. The current scheme aims to deliver 30% p.a.
returns with initial payment after only 18 months.
These investments appeal to a similar type of investor as the Guaranteed
Returns, but the risk is reduced because the syndicates spread their
investments across a number of projects and the set up of them is often far
more structured and professional.
A potential downside of the Guaranteed Returns and Syndicates is that your
growth does not have the benefit of leverage. As an example, if you invested
£100,000 and achieved 30% return in one year, you’ve made £30,000! If you
invested the same £100,000 and with an 80% mortgage bought a £500,000
property, you only need 6% growth to equal the £30,000. Anything above that
and you are ahead.
Now the ‘Hassle Index’ moves on to the area of off-plan purchases, which I
have split in to 3 different types. Next on the ‘Hassle Index’ is Off-plan
‘flip’ investments. This is a high risk strategy that involves an individual
placing a deposit on one or more properties that have yet to be built, in
the hope of selling (or ‘flipping’) at a higher price prior to final
completion. The obvious risk is where you cannot re-sell because the market
has shifted and you have to complete on the purchase(s) or lose the deposit
and face potential legal action. There are numerous distress sales in parts
of Spain and Bulgaria now as a result of this practice (creating perhaps an
eighth way to invest for buyers willing to purchase these distress sales at
below market value!) This is a growing sector and warrants a separate
article. These purchases have been particularly popular with Irish buyers,
but if you don’t have the means to comfortably hold on to your purchases
should the market change, you do need a strong constitution!
In some markets the shift in the market actually creates opportunities for
‘flipping’ for buyers who in fact intended to complete. We are seeing this
in Perth, Western Australia at the moment where demand has increased so much
buyers who paid deposits last year are achieving offers prior to completion
of 30%+ more than the original off-plan price.
Number 4 on the ‘Hassle Index’ is Off-plan Managed Investments. Here again
you pay a deposit before the development is built, but you know that it will
be fully managed for you, with some offering the attraction of fixed
returns. The hassle is higher than if you ‘flip’, because you have to
complete on the property and arrange finance etc, but once you have gone
through that your level of involvement is minimised. These can fall in to
the category of ‘apart-hotels’, essentially fully serviced apartments, or
you can even just buy a hotel room. Capital growth can be less than pure
residential apartments, because the value is more closely tied to the rental
return from the investment (often less susceptible to investment hype and
bubbles); more akin to commercial property. Consequently these type of
investments tend to appeal to buyers more interested in rental return than
all out capital growth.
A prime example is a development in Chiang Mai, Thailand, which will be
managed as a 5* complex by Pan Pacific, delivering a guaranteed 10% Nett
return for 3 years and expected to rise from there. Evidence elsewhere
(mainly in the U.S.) suggests that if the rental demand is strong and the
location in demand, capital growth on these investments can still be very
good, beyond what the fundamentals would be expected to deliver.
Number 5 is your straight forward Off-plan to keep. You will go through the
sale process completely and then probably have to get more involved in the
rental process at the other end. This is where you need to be really up on
your due diligence, because if you miss with the location (fundamental
supply and demand), you may find yourself with a property you are unable to
rent or re-sell. This is the most popular method of purchase for investors
though, because you are initially buying with only a deposit, hopefully at a
reduced price because it is off-plan, achieving capital growth on the whole
property during the build period (and then beyond). In addition, investors
look to ensure that the projected rental returns will at least cover all
costs of finance and ownership.
Buying Second-hand property is traditionally what most people are familiar
within the UK market. It does come with some advantages that should lower
the risk; you know what you are buying, you can see it, touch it and get it
well and truly surveyed. In addition, you should be able to better estimate
the rental return as agents can again see and touch, or there is already a
tenant in place. In certain respects it does come with a little more hassle,
because unless you find a good sourcing agent, you are ‘on your own’ to find
the right property. With off-plan, you can tap in to the research and
resources of several investment clubs and buy knowing that they have taken
an element of the risk and effort away. In reality this means that the
majority of investors can buy ‘sight-unseen’, although I would always
recommend you visit a potential site if at all practical.
Finally, you could undertake a Renovation. Certainly the highest ‘hassle’,
but if you have the stomach and time for it, potentially the most personally
and financially rewarding. A quick viewing of daytime telly property
programs shows how easily these can go wrong and money can be lost; you
really need to know what you are doing.
So, briefly returning to the initial point about risk, reward and effort,
the table is my opinion on how each of the 7 rate. What’s interesting is how
the scores all fall within a close range (14-17 points out of a total of
30). This is based on placing equal importance on all three variables. If
you were to conduct the analysis yourself, perhaps using real examples (so
you will also be taking in to account which countries you are looking at)
for each category, you should weight the three variables (risk, reward, and
effort) based on your personal preference or level of importance. You may
consider reward to be far more important than effort, or the risk averse
will add extra weight to that category. At the very least, ask yourself
which of the three is most important to you and use that to help assess your
future investment decisions.
Further research: Where on Earth can advise you where in the world to invest
as well as what to invest in, based on your personal circumstances. The
service is currently free.
About the author
Visit
http://www.whereonearth.biz email sales@whereonearth.biz or telephone
+44 (0)8456 343 151
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