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Short, Medium and Long Term Investment Strategies
A key dimension to successful investment strategy is deciding how long to let your money work for you. It is reasonable to assume that a short term property investment will cover a 18 to 24 month turn around period and a medium term 3 to 4 years and long term possibly 5 to 10 years or more.
It is also key to think through if you are looking to retain properties, thereby growing a portfolio or whether you are happy with one or two investments, which turn over regularly.
As for location, is this to be one country only, where there may be the possibility of reaping the rewards of economies of scale, or spreading the rewards and risk among several countries?
Short Term Investment
A short term strategy usually involves purchasing off-plan units – which technically means buying a contract with a developer (as opposed to a property), which stipulates that by a certain date a property will be built and completed. As the building work progresses towards completion, then more money in staged payments will be required. It is essential that in this type of contract there is the right to re-assign the contract, or sell it on. This is where there is a strong likelihood of making a positive return on the initial investment. As the builder releases the phases of his development he will have increased the prices.
An angle on this is to consider buying off-plan in emerging markets, where capital appreciation is likely to be higher than in more mature property markets.Returns in this market are hard to define as so many factors have to be taken into account, but for a typical example:
- An off plan investment is made at a purchase price of €175,000
- The deposit required is €30,000 with expected legal costs of €900
- Completion is expected to be in 24 months
- The area has shown a growth rate of 9% pa
- The initial investment will be (€30,000+ €900) = €30,900
- When the option is sold 18 months down the line (i.e. prior to actual completion) the price is €175,000 x 9% growth pa) = €199,334
- Therefore the gross profit is (€199,334 - €175,000) = €24,334
- Gross Return €24,334 / €30,900 = 78%
Investing in land could form part of a short term strategy, which could either be sold on to a builder or developer, or value added by gaining outline planning permission or full planning permission.
Medium to Long Term Investment This could involve the purchase of either an off-plan unit, new or resale property, completing on the purchase and holding onto the property for a period of time, typically up to 5 or 6 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.
It is important to be clear as to whether income generation or capital appreciation is the key objective and tailor the 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 maximise the return. Typically investors look for capital appreciation and use any rental income to negate the cost of financing and maintenance.
A typical example of return:
can be arranged for 80% i.e. €160,000. The total cash investment is (€40,000 + €24,000) = €64,000
expense and annual maintenance costs. When the property is sold 4 years later, post completion i.e.
6 years after the initial contract to purchase, the price is (€200,000 x 10% compound growth x 6 years)
= €354,312
Taxation: In all cases, you must be aware and take advice on all legal and taxation issues in the country of purchase and your country of domicile.
