Property Investment Strategies

Traditionally property investors have operated under the premise of the following two approaches.

1) Short term - (18 – 24 months) Also known as a "flip" strategy.

2) Medium term - (3-5 years) Also known as a "buy to let" strategy or "buy and hold" strategy.

When one is seeking to invest in property, one must be mindful of the following:

• Investment objectives
• Time Frame
• Risks

As an example, if one’s objective is to attempt double one’s investment within 2 years, then a Flip strategy would be favoured. Provided the investment has been chosen wisely, it is more likely to produce the expected return than a buy and hold strategy in the chosen time period.

Experienced investors are accustomed to look at portfolio investments possibly geographically disbursed across different regions and/or countries in order to diversify the investment risk and achieve a balanced return.

In order to attempt to maximise the opportunity and minimize risk, it is IPIN’s approach that the following factors are accounted for:

Project Specifics

• What type of asset is the respective project - residential vs hotel vs office?
• Competitive Analysis - what are the competitive projects/properties in the respective region?
• How many new projects in the respective product type are currently under construction and what impact will it have on your prospective investment option?
• What are the current trends associated with the region?  Are prices trending upward or downward?

Economy

The economic condition of the country should be taken into account because a country or region that relies more heavily on tourism will be prepared to invest more into the infrastructure of the area to promote construction and tourism. The down side may be that too much planning consent may be allowed.

Political

The stability of the country is important. A consistent and stable political environment will lead to continual support of economic policies and investment, perhaps even encouraging foreign investment through tax advantages.

A constantly changing environment will at best lead to a de-stabilisation in the real estate market through uncertainty of economic support and at worst civil unrest.

Purpose

Needless to say that if the investment is primarily for summer holiday makers then the climate needs to be warm and sunny. If the investment is primarily for skiers then good prolonged snow fall is needed.

Do not forget investments for businesses. Currently there are some emerging areas which have significant business attraction. E.g. Businesses seeking to invest in an area by relocating production facilities due to lower labour costs etc. In these areas, buy and hold strategies may be very rewarding.

Transportation

To be attractive the area must be easy to reach! Look out for new low cost airline routes, nearby airports and good road infrastructure.

Short Term Investment Strategy

This strategy involves purchasing an off-plan unit i.e. a property that has either not commenced construction or is currently under construction and then reselling the property prior to completion. In reality, this is not a property purchase as the property has not been completed but is a purchase and sale of an option to purchase the property. A key factor is the time taken to identify the investment opportunity as this is critical to the strategy's success.

Key Opportunity

The opportunity to purchase a property at a low initial price or in the case of a new country, at potentially an extremely low initial price before market forces lead to significant capital appreciation, then sell the option whilst demand is increasing, taking advantage of conventional supply and demand economics which means the price is increasing as more people want to buy.

Timescale

Typically the time period involved will be between 18 to 36 months, although this is dependent on factors such as the stage of construction of the development, the speed of construction for that particular country, etc...

Level of Complexity

This strategy is attractive to the investor because of its simplicity, the low initial investment typically 10% to 30% of the purchase price and some basic legal fees. The short payback period allows the investor to recover their cash relatively quickly for reinvestment in other developments.  In addition, the investor has not been left with a long term liability that needs to be serviced such as mortgage payments.

Key Risks

The critical element and therefore the highest risk associated with the success of this strategy is the sale of the property prior to completion otherwise the investor will be forced to complete on the purchase with all its associated legal and financial consequences. The investor must be clear on the mechanisms available to resell the option, whether that be privately through an existing database of buyers, a private advertisement, a website or through more commercial means such as estate agents, website portals etc.

Return

This type of investment is a speculation of capital appreciation and therefore returns can fluctuate greatly dependent on how popular the country, the area and even the development becomes. A good investment based on an annual growth rate of 10% could lead to returns in excess of 50%.

Please see the example below:

• An off plan investment is made at a purchase price of EUR 150,000
• The deposit required is EUR 30,000 with expected legal costs of EUR 500.
• Completion is expected to be in 24 months.
• The area has shown a growth rate of 10% pa.
• The initial investment will be (EUR 30,000+ EUR 500) = EUR 30,500.
• When the option is sold in say, 18 months (i.e. prior to actual completion) the price is (EUR 150,000 * 10% growth pa) = EUR 173,250.
• Therefore the gross profit is (EUR 173,250 - EUR 150,000) = EUR 23,250.
• Gross Return EUR 23,250/EUR 30,500 = 76%

Financing

As the property is under construction and has not yet been completed, it therefore cannot be legally registered. It has still to pass all the relevant planning directives and license requirements and as such does not provide adequate security for the lenders and therefore it is not possible to raise a mortgage upon it. The initial investment will have to be raised from the investor's own sources be it cash funds or by releasing equity from an existing property by way of a further advance or re-mortgage or alternatively bridging facilities may be available.

Taxation

Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject. Although the option to purchase the property is a legally binding contract, in itself it is not a property purchase therefore will not be treated as a property transaction with the associated registration procedures and taxation such as stamp duty or the vat equivalent.
As the transaction is a private contract which will most probably take place outside of the country the investment is in, the resale of the option to a third party and will probably not incur any taxation unless you choose to declare the gain in that country. Please remember there is an obligation to declare all income and gains to the relevant tax authorities.

Due Diligence Process

In addition to assessing the issues above, it is critical to obtain the following information when evaluating an off-plan investment opportunity:

• Does the Developer own the land or does the Developer strictly have the land under contract?
• May the Developer access the deposits for the purposes of construction?  In the event of developer default, what is the investor’s recourse?
• Has the Developer obtained the applicable permitting to commence construction?
• Has the Developer secured construction financing?
• What is the applicable construction period?
• Has the Developer procured a General Contractor?
• What measures has the Developer taken to hedge against the possible rise of construction costs?
• Type of property?
• Residential
• What form of mortgage financing is available for the end user?
• Floor Plans and renderings – is there an end user market for the completed product?
• Leisure
• Who is the Hotel Operator?
• For non-US hotels*, what is the projected Net Operating Income (non-US)?
• What Average Daily Rate (ADR) does the NOI forecast?
• How does the ADR compare with existing competitive hotels in its same class?
• Does the NOI account for a ramp up period, meaning a lower occupancy level during the first three years?
• In the event of unsuccessful resale prior to project completion, what form of mortgage financing programs are available?

The questions are amongst the few questions that one must request answers for prior to ever making an off plan investment.  IPIN specializes in researching the items above on behalf on our members so our members are not overwhelmed with the conventional uncertainties associated with off-plan property investment.

For the risk adverse investors, IPIN’s Secured Exit Strategy is a means by which the Off Plan investor can invest in off plan property without the typical pitfalls associated with off plan investment.  IPIN and its affiliates have consummated over $440,000,000 in off plan property investment globally and with over 1,500 real estate trades, IPIN maintain a 100% capital preservation record of every transaction.  For more information on how to invest in off plan real estate without the market risk (SES), click here.

Medium Term Investment Strategy

This strategy involves the purchase of either an off-plan unit or resale property, completing on the purchase and holding the property for a period of 2 to 5 years (although it could be longer), before ultimately selling. During this period, the property is 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. Although possible, it is extremely difficult to achieve a high return for both income generation and capital appreciation with the result often leading to average or below average returns. It is usually better to focus on one specific objective in order to maximize the return. Typically investors look for capital appreciation and use any rental income to negate the cost of financing and maintenance.

Avoid emotional purchases as this type of strategy is a medium to long term investment which requires careful analysis of the returns and the investor needs to be able to afford the cost of maintaining and financing the investment.

Key Opportunity

The strategy is to either maximize the possible capital appreciation by holding the investment until market conditions change, i.e. sell at the highest possible price. Alternatively, maximize the income generated by the investment via rental means at perhaps the expense of capital appreciation. Additionally, the property may be available for the investor's own holidays.

Timescale

The time period for holding the property is typically 2 to 5 years in order to ensure there is sufficient capital growth to cover the initial purchase expenses, such as taxation, legal costs etc.

Level of Complexity

Fundamentally this is a normal property purchase therefore a very simple concept; however please bear in mind the need to maintain a second property in another country involves more management than a property close to home. There will be physical, economic and legal requirements to adhere to, ranging from basic maintenance of gardens, pools etc, rental administration, perhaps financing mortgage payments, community charges, annual legal returns and taxes.

Key Risks

Depending on whether income generation or capital appreciation is chosen one of the two key factors is the identification of a property which will be attractive for that particular strategy.

As an example, if the rental strategy is selected, the type of property will determine the type of tenant. One bedroom apartments will typically appeal to younger singles and couples.  Therefore, such properties should be located within close proximity to lively nightlife locations, bars, nightclubs, etc. The rental for this type of property will be lower than a three bedroom property attracting families but they require different facilities such as proximity to beaches, supermarkets, children's amusements, etc. In addition, the type of tenant will become a factor when considering the quality of furnishings to be purchased and the condition the property is left in following a rental.

The location of the property is obviously important as it will determine the amount of rent achievable and the level of capital appreciation achievable.  However, remember that the initial price of the property will impact the unit’s annual yield.

Second, one must approach the investment with flexibility and patience.  Much can happen in two to five years.  A mid-term strategy can quickly evolve into a long-term strategy if the market is to experience a downturn like the one that we are currently experiencing.  Unless one is able to purchase the property on a distressed basis (for more information on foreclosures and distressed properties, click here), one must remember to continually monitor the market to ensure that when you are prepared to resell the property, it does not happen during a market downturn which would of course reduce the sale price.  Bear in mind that this is more difficult to achieve when the investment is in a different country unless you have partnered with the right type of asset management partner whose interests are aligned with yours financially.

In holding a property for a longer period, it is possible to achieve higher returns, as the example below demonstrates. This of course assumes that the market growth rate remains constant. In the example below, capital appreciation is the objective therefore the rental income is designed to cover the annual finance and maintenance costs.

Please see the example below:

• An off plan investment is made at a purchase price of EUR 200,000 with completion in 24 months.
• The deposit required is EUR 40,000 with expected legal costs and taxes of EUR 24,000. A mortgage can be arranged for 80% i.e. EUR 160,000. The total cash investment is (EUR 40,000 + EUR 24,000) = EUR 64,000
• The area has shown a growth rate of 10% pa. Rental income is expected to cover at least the mortgage expense and annual maintenance costs When the property is sold in 4 years after completion i.e. 6 years after the initial contract to purchase, the price is (EUR 200,000 * 10% growth * 6 years) = EUR 354,312.
• Therefore the gross profit is (EUR 354,312 - EUR 200,000) = EUR 154,312.
• Gross Return EUR 154,312/EUR 64,000 = 141%

Financing

The investor must be prepared to finance the balance of the purchase either via their cash resources or more commonly and more sensibly via a mortgage - if mortgage financing is available.

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 be offering 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.

The rental opportunity is highly dependent on location and may be seasonal in nature leading to high rental yields during the summer months and little or no rental during the winter months. Some developments offer guaranteed rental schemes that alleviate this problem and more importantly remove the worry of finding tenants in the first place (for more information on guarenteed rental investments click here). If no guaranteed rental scheme exists there are often specialist rental companies that will contract to rent suitable properties for at least 6 months of the year.

Taxation

Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject. Taxes will be payable upon the initial purchase of the property and is usually the most significant expense that needs to be recouped. Expect to declare and pay tax on the rental income generated, particularly if you use a rental agency in the country that the investment is situated.

As the investor is the legally registered owner expect to have to pay capital gains on the profit upon sale. Please remember there is an obligation to declare all income and gains to the relevant tax authorities.