Assuming the bank lends 80% of
the property value, an investor can gear his own money by up to five times,
thus multiplying his potential return by five times. Whilst this can also
be done for other investments, property has one huge advantage as a
leveraged investment, banks will lend more money for longer periods at
lower interest rates for property than for almost any other asset. This
considered, even if shares or other investments do perform significantly
better than property, the higher interest rates that apply to them may well
cancel out any advantage.
Leveraging of course involves taking out some kind of loan, and for most
assets the loan repayments are due on a monthly basis. With a property,
rental income is received monthly and so can conveniently be used to
service the loan. With other investments, this is seldom the case. Shares,
for example, would yield income in the form of dividends usually just once
or twice a year, leaving many of the repayments to come direct from the
investor’s own pocket. Quite often the dividends on shares can be lower
than the rents on property, too.
The key here is control. A landlord has control over the property he has
bought but the shareholder, unless a major one, does not have control over
the company in which he has invested. Some people may be concerned about
the day-to-day management of the property investment especially if they are
living overseas, but in most cases it is easy to arrange a management agent
who will deal with letting, maintenance and other aspects of the management
of the property. Obviously the investor himself can decide which tenant to
choose, how much rent to charge and what lease terms to ask for, but the
agent will be able to advise on all of this. And if good advice and service
isn’t forthcoming, the landlord can simply switch agents.
There is no denying that property is less liquid than many other
investments, but it is this very lack of liquidity that protects property
from the kind of volatility and swings in market sentiment that cause
potentially harmful price fluctuations in other markets. It takes a matter
of minutes to sell shares, for example, as compared to a minimum of four to
six weeks for a home. The property investor therefore does not need to
monitor the market daily for fear of being caught out if sentiment turns
against his investment.
Why should today’s investor, with a huge range of sophisticated,
advanced investment products arrayed before him, bother with property?
After all, doesn’t he need a small fortune just to get started? How
is he going to avoid the psycho-tenant who turns his place into a
post-holocaust disaster area? Won’t his returns be a lot more
incremental than incredible, and his property time-consuming to sell? And
won’t he have to wait half a lifetime to reap the rewards?
Let us dispel some of these concerns and show why property should have its
place in any balanced investment portfolio.
As for the question of returns, property price rises may seem modest
against those occurring in the stock market, especially in the short term,
but when leveraging is used the percentage returns become much higher. It
is often true that shares can provide superior growth when an investor uses
his own funds. But as already discussed, until dividend income is paid
monthly and finance is offered on comparable terms to property, property
will remain the best investment when leveraging is being used.
While shares can offer some tremendous opportunities is the short term,
property comes into its own over the medium to long term. The timing of a
property investment is far less crucial than that for share investments,
because in the property market values increase steadily over time. The
underlying reason for this is simple: there is always a need for shelter
and accommodation.
This considered there are however other concerns when it come to taxation,
having property in a country may mean that you are liable for local taxes,
in the UK having property available for your use may make it difficult for
a non working spouse to obtain non-resident for tax purposes status, this
could result in tax liabilities on joint accounts for example. In many
jurisdictions there may be a liability for inheritance taxes or wealth
taxes and forced heirship rules may apply.
There are good reasons therefore to consider the form that ownership should
take – perhaps an offshore company or a trust is advisable.
Ross
Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills,
tax registration services, home, health and car insurance and tax planning, including Inheritance Tax Planning, together
with full accounting services.
Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or
e-mail ross@rosspays.com
Initial consultations are free and no obligation and
fee quotations will be provided in advance for all services.
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