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 (which has been covered elsewhere in HPA).
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.