Property investment strategies
To achieve and maintain a successful financial plan, it is essential that you continue to diversify your asset classes throughout your lifetime. One of the most common and favourable ways to do this is via property investment. Property is a long-term asset and can be good for both capital growth and generating ongoing income if purchased as buy-to-let. But as it comes to investment, there a couple of property investment strategies that you can choose from; here are some of the most common ones.
Property investment strategies
There are several strategies in which you can invest in property, making it an attractive proposition no matter what your attitude to risk is, timeline and ultimate conversion of assets to income or capital in the future. The decision-making process in deciding whether any given property investment strategy is a good option for you should concentrate primarily on the commercial terms and benefits. Let’s take a closer look at three common property investment strategies available to expatriate investors.
Property as your home – a place you can always return to
It is undoubtedly a sensible thing to own your home. Most people like the touch and feel of the physical asset and the sense that they have something tangible they can call their own. There are also advantages where you can reshape your house or apartment into the home you most desire without reference to anyone else whilst adding intrinsic value to the asset. At a point in time in the future, you can sell this valuable asset if you wish to move to a different country or simply because circumstances warrant a change.
Some expats buy homes in their counties of residence for rent, allowing them to receive income to cover running costs and benefit from the eventual capital appreciation. This is an excellent idea because you can convert your property into cash in the future and hopefully realise a reasonable price.
Property as an investment: buy-to-let
As well as leaving homes behind when moving on, some invest in property specifically as an investment venture in an attempt to create meaningful income and capital appreciation over time. This is called a buy-to-let investment strategy. Buy to let investors usually have a portfolio where property makes up the vast majority of their wealth. When buying a buy-to-let investment property as an overseas investor, it can be a good idea to speak with a real estate broker or a tax advisor to understand how this may impact your tax, as well as the market in which you are planning to buy.
Buying off-plan property investments
Buying a new, not yet built property, known as off-plan, can be especially advantageous if you buy it in a rising property market location, with little risk of oversupply. A consultation with an experienced property investment expert can help you decide which off-plan property might be the right choice for you and familiarise yourself with all the pros and cons of buying an off-plan property.
The upside of buying a new build property is that you can often negotiate some discounts and enjoy tax incentives – depending on the investment location. Also, when you buy not yet built property, you are locking in today’s price – and property prices tend to go up. Buying off-plan also gives you time to prepare financially; with only paying the down payment, you can have more time to shop around for a mortgage.
Related reading: What to look in buy-to-let property
Property as an investment: capital appreciation
Capital appreciation is the main way people make money from property, and as such is vital for a successful property investment strategy, buying a property in a high capital growth location is a very good idea. However, you need to be mindful if the net rental yield does not cover all the expenses associated with the property, such as ongoing costs and mortgage, and as such, you may need to make a larger downpayment or take the mortgage on an interest-only basis to ensure that the rent can cover costs.
Property investment strategy: hold it for future capital/equity release
Let’s consider the example of Mike. Mike decides to invest in a property in London to use it to pay for his two daughter’s university fees in 15 year’s time. He is budgeting on three years of university for each child at a total cost today of £28,000 pa. That means a total of £28,000 x 3 years x 2 children = £168,000 in today’s value. Forward projecting this at an inflation rate of 5%pa, it will eventually become a total requirement of more than £360,000.
Related reading: Is buying a property in London a good investment?
He chooses a London apartment for £350,000. Mike secures a mortgage on this property of 70% of the purchase price, or £227,500 over twenty years. The mortgage is interest-only and, at the rate of 5% pa, payments come to £948 per month. Whilst lower rates can be secured for an owner-occupier, generally higher interest rates will apply when you buy to let. There will be sufficient rental income to cover the mortgage payments.
If we fast forward for fifteen years, the property will have increased in value, at say, a modest rate of 5% pa to £637,100. It could be more than that and traditionally has been. Mike has input a total of nil along the way and has an asset which he can sell for a net gain of £637,100 less £227,500 mortgage principal, making an apparent gain of £409,600. In addition, he has a surplus of the rental income, which has now grown to more than £100,000, and so in this example, he clears nearly £509,600, which is more than four times his initial investment of £122,500.
From that, a clear annual compounded gain of 9.54% has been achieved. Mike is also now able to buy an unencumbered property with his net gains, and the gains from London’s property will pay for the children’s university educations. He can liquidate this when markets are favourable or even just continue to enjoy the income.
Investment property financing
Mortgages are relatively commonplace these days, with low interest rates and a relaxing of criteria, a mortgage makes sense and you benefit from the power of sensible leverage. Because these are long-term investments with finance gearing, it is best to consider a purchase as soon as sufficient reserves allow you to place a meaningful deposit and secure the finance.
Equity Release / Leveraging
Do you own a property? Such property is usually financed by a mortgage which means that you are leveraging the property to assist with the purchase of your home. Equity release is just another way to leverage your existing property to release a lump sum for further investments, such as a down payment for another property. This type of property financing is quite complex, and we recommend you consult a specialist mortgage broker before making any decision.
What’s your property investment strategy?
If you don’t know the answer to this question, it might be time to get in touch with experts from Lifestyle Property International. We can help you navigate through different property investment strategies and advise you on the best choice to meet your goals. By sharing your specific goals, as in Mike’s example, we can better understand your specific circumstances and include in the conversation our mortgage broker specialists from www.lfsbrokers.com and tax and retirement planning specialists from Soteria Trusts.
*This article was originally published by Andrew Wood and was recently updated in May 2021 by Elwira Skrybus from the Team at Lifestyle Property International*