Why property should be part of a Holistic Investment Portfolio?
Property is a type of asset class and should always form an aspect of all investment portfolios. The percentage, size, type and location of a client’s property investments will depend on a client’s risk profile, investment objectives and other elements of their portfolio.
Holding property as part of your overall wealth portfolio will provide you with diversification, exposure to capital appreciation from the purchase price to the sale price, rental income and a “bricks and mortar” investment.
However not all property investment is created equal and it’s important that the property/properties you choose to invest in are well researched and suitable for your investment objectives.
Another point to consider is the risk of not investing and therefore allowing your savings to be subject to inflation. For every $100 which is put into the bank, Capital Adequacy rules allow banks to use $97, meaning they can invest your cash for their gain and pay very minimal if anything in return. 2022 inflation rates in the UK in February hit 6.22% meaning that if you had $100,000 cash in the bank in 2021, in 2022 it would need to grow to $106,220 to be worth the same amount today.
Ways to Purchasing Property as an Asset Class
There are a few main ways to purchase property as an asset class:
- Do it yourself
- Work with a partner firm
- Use a Buyers Agent
The advantages of working with a partner firm include due diligence on the area, analyst forecast on capital growth, occupancy levels and turnkey solutions for armchair investing, including helping with rental and property management post-sale.
Without conducting the proper due diligence, you may find yourself not achieving your investment goals.
How much money do you need to purchase an Investment Property?
Different countries and indeed banks have different regulations when it comes to deposit requirements and may also vary depending on whether you are an ex-pat, whether the property is bought to let or for investment.
In general, most properties will require a cash deposit of 10-25% of the total value of the property. You should also incorporate stamp duty, legal fees, potential agency fees, and exchange rate fluctuations and clarify what size of mortgage you are eligible for.
Before looking into purchasing an investment property, you should first speak with a holistic financial adviser to look at your overall wealth portfolio, a mortgage broker to ascertain how much you could borrow, and an accountant to check the tax implications of your investment.
The power of leverage and how it works
Property allows you to leverage from the capital that you are holding (ie your investment house or apartment), meaning your initial capital risk to the purchase of a building as a whole is reduced when purchasing with a mortgage. The bank uses your investment property as collateral and assumes the risk of up to 80% of the investment property in some cases, to provide you with a loan. This means you can potentially buy a higher-priced ticket asset without the total amount to buy outright.
How does the power of leverage play out in practice?
- Imagine you have £100,000 to put towards a property, which could be used in the following ways:
- Option 1: Buy a £100,000 property for cash using no leverage.
- Option 2: Put the £100,000 toward the purchase of a £200,000 property, using a mortgage to cover the other £100,000. Using 50% leverage.
- Option 3: Put the £100,000 toward the purchase of two £200,000 properties, again using financing to cover the remainder of the purchase price. This produces 75% leverage and spreads your potential gains and risks over two properties.
- If property values increase 6%, you will achieve these gains based on appreciation alone:
- Option 1: £106,000 property value for a £6,000 gain on the cash invested.
- Option 2: £212,000 property value for a £12,000 gain on the cash invested.
- Option 3: £424,000 property value for a £24,000 gain on the cash invested.
Top tips when buying an investment property
- Review your existing wealth portfolio and speak to a financial advisor to see if an investment property would add to your wealth portfolio.
- Decide on your investment objectives, time frame and strategy eg higher capital appreciation, higher rental income etc, how long will you hold it for etc.
- Research property prices, rental prices, stock availability, developer profiles, upcoming developments and infrastructure and rental demand in your target areas
- Speak to a mortgage broker to see what your options are
- Don’t buy with the heart, by with the head and do the due diligence
- Speak with an account to understand your tax position when purchasing & selling a property
- Speak to a financial adviser such as Finsbury Associates and a property expert that understands all aspects of your situation they can usually provide you with all the key professionals to make your investment into this asset class.
- Look into property management agencies (unless you are planning to do this yourself or it’s available through your sales agent) and ensure this is factored into your rental returns.