Property – An Essential Portfolio Element
To achieve and maintain successful financial planning, asset diversification is essential throughout your life. One most common and favourable method is via property.
Property is a long term asset, good for capital growth and income generation. Despite limited liquidity, managed carefully it can be a good addition to your net worth.
There are a number of ways to invest in property, making the proposition attractive no matter your attitude to risk and time horizon.
1. Physical property as your home
Many like the touch and feel of physical assets, something real they can call their own. Often expats buy homes during postings and let them when they move on, allowing the income to cover running costs and benefitting from future capital appreciation. Converting their property into future cash will hopefully realise good returns. Beware: resale markets have a habit of being disadvantageous when you wish to sell.
2. Physical property as an investment
“Buy to let investors” purchase investment properties attempting to create income and capital appreciation over time. They frequently hold a portfolio accounting for most of their wealth. However, some pitfalls can ruin such ventures. Scarcity of tenants, declines in rental markets and difficult resale markets are some.
For either types of purchase you should leverage off the property value raising sufficient purchase capital. Mortgages are commonplace today although in the last few years borrower criteria have tightened on loan funds.
3. Property investment funds
There are many mutual funds available specialising in property investments, diversified by geography and type.
An advantage of these funds is their liquidity. Although redemptions can be restricted, you are not attempting to sell a specific property so your wait should be relatively short.
Real Estate Investment Trusts (REITs) are another possibility, specialising in income creation from certain types of property.
Specialised student accommodation funds are relatively new. These exclusively hold units in university towns and their success is based on rental yields. There are virtually no bad rental debts and currently no shortage of students wishing to rent.
4. Fractional ownership
These are particularly useful to investors who prefer to make personal use of their asset as a second or holiday home. Unlike old fashioned time shares you actually buy a share in a physical property rather than just the use of a pool of properties.
One criticism has been the difficulty of easily selling a unit when you wish to exit. This has been overcome by payment of an investment premium over the initial price which converts to a guaranteed buy back at the original purchase price after a fixed term. This factor makes the asset class more attractive because you get accommodation virtually cost free and a secure exit strategy at the end of the investment period.
5. Direct student accommodation ownership
Launched last year this new class of property investment is particularly attractive, allowing you to own physical property, currently in the UK, without the hassle of engaging an agent, arranging tenants, landlord legislation compliance, collecting rent and arranging insurance. Instead, properties are managed by the specific universities where the units are situated. Attractive relatively low entry cost, at around £30,000 per unit, generates net returns around 8% pa.
Any property generating income with an upward capital value trend is essential to your asset diversification. Rents tend to increase in line with inflation, as does the capital value. This is certainly a win, win situation for most expats.
Getting the right mix can be difficult and expats often slip up with type and geography. It is thus important that proper planning be carried out so that your assets work for you rather than you struggling to fit them properly into your overall strategy.
Questions for Andrew can be directed to PFS International on +662-653-1971 or email via enquiriesthailand@fsplatinum.com
You can also connect with Andrew on Linkedin here
Andrew Wood has been an expat in Asia for 32 years and is Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers upon request.
