Investment Strategy Is KeyPosted on: 17 July 2008 by Gareth Hargreaves
Our overseas property expert shares his strategies for successfully investing in property abroad.
When investing in property, it is vital you have a strategy that provides you with a clear idea of what you are looking to achieve over a given period of time.
Too many investors buy without having a clear investment strategy. They either do not know specifically why they are buying, or buy the wrong type of investment for their needs. They buy because someone tells them the property will go up in value, or they will be given a perceived discount - but not because it will help them achieve their specific goals.
It is vital that you plan your strategy before you start investing. The alternative is that you will probably not achieve the optimum results from your property investment, and it can also be very costly to unravel the wrong investment decisions.
Factors Affecting Strategy
Each of us is different and we all have different goals in life. When it comes to investing in property, different factors will affect the choices we make. Some of the factors that will affect your property investment decisions are:
- Your age
- Your financial position
- Funds available for investment
- Your attitude to risk
- Is your primary aim capital growth or rental return?
- How much time you can devote to your property portfolio?
The answers to these amongst other questions will affect what type of property you buy, where you buy and how many you buy.
Once you have established a strategy you must focus on it. However, be aware that over time, your strategy may vary to reflect changes in the property market.
In producing a strategy you will need to decide whether you are seeking short term gains, with the aim of producing cash flow, or whether you are looking to adopt a buy and hold policy for the medium to long term.
Short Term Investment Strategy
This strategy generally involves one of two methods:
1. Purchasing a property requiring refurbishment at a price sufficiently below market level to allow you to carry out refurbishment and then sell at a profit, or
2. Buy an off-plan unit - that is a property that has either not commenced construction or is currently under construction - and sell or ‘flip’ the property prior to completion. In reality this is not a property purchase as the property has not been completed - but it is a purchase and sale of an option to purchase the property.
Typically the time period involved will be between 18 to 24 months, although this is dependent on factors such as the size of the refurbishment, the stage of construction of the development, and the time required to complete the project.
The short payback period allows the investor to recover their cash relatively quickly for re-investment in other developments.
The critical element, and therefore the highest risk element to the success of this strategy in the case of refurbishment, is the ability to sell the property at the right price, as soon as the refurbishment has been finished.
In the case of an off-plan unit it is the ability to sell the property (or option to buy) prior to completion otherwise the investor will be forced to complete on the purchase with all its associated legal and financial consequences, which may include servicing an ongoing mortgage.
Whilst the cash flow returns can be very rewarding when you adopt a short term strategy, the risks of not being able to sell must be fully considered.
Medium To Long Term Investment Strategy
This strategy involves the purchase of either an off-plan unit or resale property, completing on the purchase, and holding onto the property for a period of typically 2 to 10 years plus. During this period the property will be rented either on a holiday rental or long term rental basis in order to generate income.
When considering this strategy it is important to be clear as to whether income generation or capital appreciation is the key objective and tailor your investment accordingly.
Avoid emotional purchases, as this type of strategy is a medium to long term investment and requires careful analysis of the returns and, critically, the investor needs to be able to afford the cost of maintaining and financing the investment. Ultimately, the aim is to rent the property to provide a rental income to cover costs.
The strategy is generally to maximise capital appreciation by holding the investment, whilst generating a rental income, as property prices increase and ultimately sell at the highest possible price. Additionally the property may be available for the investor’s own holidays.
When selecting a property investment it is important that you select a property that is well located, and of the right size and type that will appeal to the highest number of potential tenants or holidaymakers.
In holding a property for a longer period it is possible to achieve more significant returns, providing the property market continues to rise.
The investor must be prepared to finance the balance of the purchase either via their own cash resources or, more commonly and more sensibly, via a mortgage.
Please be aware that some countries may not have an established mortgage market for non-residents at the time of the initial off plan contract, although they may be expected to offer mortgages to non-residents by the time the property is completed.
With this possibility in mind it is wise to be prepared to have to finance the balance of the purchase through other means, perhaps via an equity release or re-mortgage on an existing property in a different country.
Which Option Do I Choose?
Ultimately, the choice as to whether to adopt a short term or medium to long term strategy will depend on your personal situation, and perhaps more particularly your attitude to risk.
It has been said that the smartest property investors never sell. That's probably an exaggeration, as during the lifetime of a property investment there is usually an optimum time to sell, and it is important to monitor the property market in the area or country that you have bought, in order that you sell at the right time.
However, it must be remembered that every time you sell you are eating into your profits. Admittedly the selling costs, and more importantly tax incurred when selling a property may be small when compared to the appreciation in value, but they are costs none the less.
How To Maximise Your Property Investment
So what should you do to maximise the value of your property investment?
Well, astute investors will use the equity they've created in the rising property prices to borrow more and buy more.
For example, if you were fortunate enough to have bought a house for £70,000 and it is now worth £150,000, then you could borrow against the extra equity left in the house following the price rise, to buy another property. If the price of this property also rises, use the equity to buy another.
Obviously, patience is required, but if you are able to continue this pattern, you will be less stretched by each purchase and will finally be able to use some of your new wealth to improve your own lifestyle without having to sell a property.
A strategy used by many investors is to embark on a programme of planned property investment at their earliest financial convenience, which is usually when the equity in their family home reaches a reasonably high level.
If you have patience, are prepared to take some risks and are able to avoid the temptation of selling to realise your profit, then your property portfolio should eventually provide you with a very nice standard of living.
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