According to the International Monetary Fund (IMF), Global Housing Watch, property prices in most countries increased over the previous twelve months. Whilst still not back to 2007 levels, global prices increased by around 2% overall. Even after including the last financial crisis, residential property prices have increased by about 3.5% per year over the last 15 years, not too bad in such a low-interest rate world.
Property is in most portfolios.
So it’s not surprising that property normally forms part of most international investment portfolios, either as a residence or as one or more rental properties. So many people working overseas spend at least some time thinking about property investment. However, before jumping into a market to buy an investment property, it’s very important to give careful thought to a number of factors, especially your current life stage and your total investment portfolio contents. We’ve already discussed investment portfolio review in a previous article, so let’s assume that you have taken the decision to invest in property, so what should you do next?
Direct or indirect?
It’s worth spending some time thinking about the kind of property investment you wish to make, namely direct (buy one or more actual property) or indirectly (buy a financial product such as shares, funds or investment trusts that invest in property). Property investment is a massive subject and we can’t consider every individual circumstance, but let’s look at some of the advantages and disadvantages of each, from your perspective.
Buying direct – one or more properties
- Could provide family accommodation either immediately or at some time in the future, i.e. you could live in it!
- A tangible asset that normally won’t disappear!
- Normal to buy using finance, so it’s possible to “buy” more property using a deposit.
- Property values are usually not related to movements in the stock market, providing a useful asset when stock markets crash.
- Expats often buy property in their home country or away from their posted country, this can make the property difficult and expensive to maintain/rent out.
- Illiquid – Slow, difficult and expensive to buy and sell.
- Not very diverse unless you own multiple properties in multiple locations.
- Ownership and rental risks are solely your own.
Indirect Property Investment – buying financial products that invest in property.
- Little to do once you have bought the product, managers are employed to take care of the properties that the product owns.
- It’s usually fast, easy and cheap to buy and sell products that invest in property.
- Normally very diverse, a share of a property financial product often means you own a tiny share of many properties.
- Ownership risk is spread amongst all the product hold
- You rely on the company and the managers of the financial product that you own. If they do a bad job, your investment may suffer badly.
- If the financial product goes really badly you could even lose ALL of your investment!
- You can rarely buy shares or bonds using finance, in the same way, that you can get a mortgage to buy a house.
- Property shares, funds or investment trusts often go down with everything else when the market crashes.
Don’t forget your taxes!
As governments try to increase their tax revenues, capital gains taxes, especially on property, are increasingly commonplace around the world. Expats may find that the property they owned for ten years in the UK (for example), may well be subject to a large tax bill if they sell it, whether or not they return to the UK before selling. This would not usually be the case for non-residents owning property financial products with significant gains, as long as they were sold before becoming a UK tax resident. Of course, this is a generalisation, actual taxes are always dependant on the individual’s circumstances and the country concerned.
No “right” way to invest in property.
We are certainly not going to suggest either direct or indirect property investment is best in this or any other article. As mentioned earlier, property investment, as with ANY investment, MUST be related to each individual’s personal circumstances. However, we do find that many ex-pats buy property directly, without first considering the alternative, indirect, route to this asset class. Although we can assist people to invest directly or indirectly, we do feel that the lack of consideration to the indirect route is perhaps a missed opportunity. In either case, we’d love to hear your own views about property investment, do get in touch and let us know.
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