Property as an investment vehicle
Property. The thing people live, work and play in.
It is building or land – and people attach value to certain properties to be valued more than what the place costs to build.
I am sure I would not need to explain that we get industrial, commercial and residential property (and farms!) – and that each one comes with its own investment strategies and own pros and cons.
Please look at this article as an introduction to property investments.
Types of property investment strategies
We all know that property tends to fall in one of four categories: residential, commercial or industrial and farms.
Each one has its own pros and cons, but in general, the idea falls into one of the following categories:
- Buy to let – buying a property to rent it out to tenants – more info here.
- Buy and flip – Buy a property and sell it almost immediately. Often times some renovation is done to make the property more valuable – more info here.
- Renovate to hold – A property is bought and renovated to be rented out or used for a purpose.
- Repurposing – A house can be bought and renovated into a commune or separate flats.
- Property development (active or passive) – money can be invested in a property development, or you could be building a new development
For more details on property investments and strategy for profitability, check my other post here.
The pros and cons
As with all asset classes, real estate has some interesting pros and cons. Here is a small list of all the pros and cons:
The pros
- Property is a physical thing and not a paper asset – this means it’s not something that could easily become worthless like Steinhoff shares.
- You can leverage property – you can rent it out to someone who will pay off your bond for you. You would need to pay a minimal shortfall monthly too gain the property in its entirety
- You a lot of full control over your investment – you decide what you spend money on (e.g. upgrades)
The cons
- Property is often a hands-on type of investment. You will need to be involved in managing the block and tenants (if you don’t have a managing agent)
- You need a big ‘evil tenant fee’ in case the tenant destroys your property or is vacant for a month (or a few months)
- Property is often times undiversified – you sit with a large amount of money in a single space. This space is in the same country, in the same asset class and in the same currency. Make sure it justifies the risk!
- Property is as liquid as stone: It’s not as easy as e.g. US$ to swap your property for money, i.e. sell it.
Quick tax overview
This article is by no means tax advice
Please speak to your tax advisor for your specific needs and analysis
Tax neutrality
If your property is bonded and you are renting it out, you are often able to keep yourself tax neutral. This is achieved by the expenses and income being the same. Here’s a quick formula:
income – expenses = 0
Note that you should add all expenses for your property, including the interest you pay to the bank, levies, taxes and maintenance costs. This should make your property (especially for the first few years) be non-profit making.
You can gain a property by paying in a minimal shortfall in every month!
Payable tax
Buy to hold
If your (provable) intention is to hold the property, you would need to pay tax on your income – i.e. rental income. This is taxed on your normal income tax rate. Note that you should declare all expenses as well – it’ll save you money!
If you do decide to sell this property, you will need to pay capital gains tax on your profits.
Flipping
If your intention is to buy and sell the property with a quick turnaround time, you would need to pay tax on your profit. This is taxed on your normal income tax rate. Note that you should declare all expenses as well…!
Ways to invest
The most obvious way you can invest in property is buying one.
Many people don’t like the checklist and the admin involved. For those people I have the below section for REITs and Property ETFs.
REITs and property ETFs
If you can think about it, then there’s an ETF for it. A physical property is not the only way you can invest. You can invest in property ETFs and REITs as well.
REITs (Real Estate Investment Trust – REIT (pronounced ‘reet’)) are property companies. They have a substantial amount of properties, and you can buy ‘shares’ in their company. This will often be a bit more diversified than someone buying a few flats. Note that there will be more fees involved in managing the properties, so be sure to ask about these!
Property ETFs invest in property companies. They have certain rules to which they need to adhere to. Think of it like a basket. The rules determine which shares will be in that basket. If some rules are not adhered to, the share will be chucked out of the basket (sold) and another one that adheres to the rules will be bought.
In a follow up article about shares and ETFs I will discuss these a bit more!
Conclusion
Remember that not all property are equal.
Yet, there is no such thing as a free lunch.
Note that though there’s a lot of negativity about property on the internet, many people make serious money from property.
I personally believe it boils down to what you know – if you know a lot about something, it’s less risky for you to invest in it.