Property investment can be one of the most rewarding forms of financial investment, offering a tangible asset with a functional purpose, whilst simultaneously offering opportunity for strong growth. With the correct advice, property is a strong inflation hedge and will complement other asset classes.
However, problems can arise when people get emotionally attached to their properties, or get caught out by foreign legal and financial systems and the potential to lose money can be just as great. To help avoid likely pitfalls, I have put together a ‘Top Ten’ guide on top tips to remember when embarking on a property purchase:
1. Understand the legalities
First and foremost, don’t get into something if you don’t fully understand the legal ramifications. Expats who snap up property in boom times under the assumption that the law would protect them, or the law was similar to that of their home country are often the ones that face the biggest challenges.
In many developed markets, you can get a complete transaction history online which will help you ascertain whether the property has a re-sale value. Remember, you’re not purchasing this property to live in yourself, it’s a financial investment purchased for the specific purpose of creating a long-term financial return.
3. Make sure you have access to funds
You must understand the leverage system; verbal approval for mortgage finance isn’t the same as a firm commitment. If you’ve already put down a deposit, Make sure you get an offer in principle from your bank and negotiate the best finance rate possible. Get your calculations right and weigh up what you’ll be paying in interest over the lifetime of the loan against the long term return or rental yield of the property.
4. Make sure you’re diversified
You wouldn’t invest all your money in one asset class, and it doesn’t make sense to invest all your property eggs in one basket, but to spread the risk globally.
5. The liquidity question – can you exit easily?
If you’re looking at a property investment, your number one question must be ‘who will buy this from me when I sell?’ If the answer to that question is another investor, you probably shouldn’t buy. You’ve got to buy the stock that locals want to buy, sell and rent.
6. Understand tenancy and yield
What are you going to get in terms of a real tenant and what is your yield going to be? Do some thorough research and year on year comparisons for a realistic forecast of potential rental yield.
7. Get a handle on taxation and fees
People often get into international property purchases without understanding the taxation implications. Some countries may be seen as attractive destinations because they are tax free, but legal issues surrounding ownership by foreign nationals must be explored very carefully.
8. Look for high quality buildings backed by quality developers
When you’re investing, make sure that your bricks and mortar are quite literally safe as houses. As a rule of thumb, well-built properties will maintain their value longer and will therefore be safer bets for a quick rental or sale.
9. Invest for the medium term
The principles of sound property investment are aimed at offering a medium to long-term return on investment. However, you will need patience; those who expect to flip properties in a matter of months are playing a risky game, and it is likely that they could come unstuck.
10. Work with partners you can trust
Don’t try and go it alone; you must work with people that you feel comfortable with, and who have a proven track record, whether consultants, property managers or tax experts.
James Thomas is the regional director at Acuma Independent Financial Advice, Dubai. Views expressed here are his own and do not necessarily reflect that of Gulf News.