What is Real Estate

Writen by David Wiltshire

I have been an IFA for over 20 years in Europe and Asia. I have met hundreds of clients with different portfolio's of assets, different expectations and different views. Throughout the 20 plus years I have experienced a number of property crashes and booms in the UK, Europe and in Asia. It is interesting to note that those clients with exposure to property are the ones that in general, have seen the best overall returns over the longer term and therefore have been in a position to retire earlier! My experience has shown me that:

You have to live somewhere.

We all need somewhere to live. The simple choice is whether to rent or buy. Renting offers none of the potential capital gains that can be made from owning your home. If you are an expat I would still advise purchasing a property simply as a hedge against future movements in the property market. This investment would make up part of your total asset portfolio but not your investment portfolio. It's important to make the distinction between property brought to live in versus investment property. But still buy it! It is still an investment even if you want to keep it for your own use in the medium to long term.

They don't make land anymore.

With growing populations the demand for housing continues to grow. The demographics indicate that land will continue to increase in value. So the upside potential for freehold or long term leasehold land / property as a long term investment look good. This is a generality take a look at my article on what and where to buy for more information.

Leverage your money.

Due to the relatively secure nature of property/land assets, Banks and lending Institutions are willing to offer finance The process is generally painless and it is normally easy to gear an investment at attractive rates of interest. In fact in many cases the banks do not insist on regular repayments of capital being made. Consequently the yields that can be achieved based on the capital invested can be very attractive and in many cases can be in excess of 10%pa. There are also potential tax benefits in financing a property investment.

An income producing asset

A major attraction of a property investment is that you can turn it into an income producing asset by renting it out. This provides for a regular income as well as the potential for capital growth.. For many retirees the rentals can provide a retirement income whilst the capital growth can provide a hedge against future inflation. All of this makes property an attractive medium to long term investment.

Inflation proof and you can touch it!

Historically property has outperformed inflation. It can be said that stock market investments have outperformed property but in many cases this has only been achieved by an substantial increase in the annual volatility of the asset and therefore an increase in risk. Timing of property acquisition is important but may not be as crucial as many other asset classes. Another major benefit of property investment, unlike stock and Bond investments, is that you can actually physically see it, which gives a certain amount of emotional security that you often don't get with other forms of investment.

Low risk long term investment that you can enjoy.

If you can hold onto a property through the downtimes the good times will come back. Property has been a cyclical market that normally outperforms it's previous highs (barring pivotal events such as war or storms!) A good long term investment that, in the case of holiday properties, you can also enjoy.

So property should be part of your portfolio here is a check list of key items to consider when investing:

How much do you invest into property?

Asses the % of your portfolio you want to have in property. The % changes depending on your risk profile, your age, your income, your wealth. My broad advice would be at least own one property, either the one you live in or the "hedge" for where you may want to live. Maximum make it 50% of your gross assets. If you want to retire early then get close to this level.

Think liquidity

Property takes time to sell. You should view it as an illiquid asset. In some cases this won't be the case but better to look on it this way. The people who loose in property are the forced sellers. It is not always possible to time the market so make sure you have the cash to wait out any market downturns. It will come back!

Think Currency hedging and gear it!

I would suggest gearing any property investment with a mortgage or where mortgages are not available then using other securities. This hedges against currency movements if you are buying abroad.

Work out expenses

You will need money for the expenses involved in the purchase. Initial purchase costs, maintenance, covering void periods. be realistic about these cost and make sure you have the liquidity to cover these and the income to cover interest payments etc.

Keep focused on your goals

If you are buying for investment purposes then try and keep focused on this. The key is to get good yields and occupancy. Also have an eye for the opportunity for capital appreciation.

So I would conclude that you need to get property into your portfolio, it's generally a low risk but higher yielding asset and offers the security of income. If you get the where to and what to buy equation right then it will lead to good gains and that early retirement.

Where to buy and what to buy are the other key issues? I deal with this in other articles.

Good investing!

Copyright 2005© Dave Wiltshire. All rights reserved.

David Wiltshire has been an Independent Financial Adviser (IFA) for over 20 years, running successful practices in both Europe and Hong Kong. He has worked on property financing and purchasing. He is a Director of VestaLand a boutique property developer focused on emerging European markets. http://vestaland.com/