Look Beyond Ownership to Unlock Investment Potential


For many people, investing in bricks and mortar when buying second or later homes makes financial sense. Property is a solid, reliable investment that retains its value, isn’t it?

Yes and no. While investing in real estate has its advantages, this approach also has significant drawbacks. Here, we compare real estate to other investment options based on some of the cornerstones of a successful investment: liquidity, risk and return, diversification and tax efficiency.

A key question to ask yourself before investing is: how easy will it be to recover your capital? This is called liquidity.

There are various reasons why you may want to “cash out” an investment. You may not be happy with the performance or have found a more attractive opportunity elsewhere. And if your circumstances change, you may need to access your money fairly quickly.

Liquidity isn’t just about how easy it is to sell, it’s also whether you can do it without incurring a loss. As a general rule, the more illiquid an asset, the greater the risk and potential returns, as you will likely be rewarded for locking in your money over the long term.

On one end of the spectrum, you have cash and bank deposits, which are easy to access but offer the lowest risk and expected returns. The property is at the other end. If you play for the long haul, you might find that your investment increases dramatically over the years. However, finding a buyer can be time consuming and you could suffer a significant loss if you sell at the wrong time.

Investment funds, on the other hand, allow you to invest in a range of different assets which may include property (or shares of real estate companies) alongside stocks, bonds, etc. Since there is an established market for the underlying assets, it is much easier to find an instant buyer. Also, unlike real estate, if you need small amounts of money you can just sell the amount you need, not the entire investment.

Risk and return
Typically, low risk means settling for low returns, while taking more risk brings potentially higher rewards.

For bank deposits, the risk / reward factor is low – you have a high degree of certainty that you will receive a fixed amount at the end of the term. However, with current interest rates still close to zero, it might struggle to keep pace with inflation.

Ownership offers less certainty and therefore greater potential for higher long-term returns. However, there is no guarantee that the property will increase in value, especially when you want to sell. You also need to factor in the ongoing costs of maintaining and renting the property – as well as the tax implications – to determine what you are getting in return versus what you have invested.

Other investment options offer the possibility of changing strategy according to the evolution of the market. For example, although the underlying assets of an investment fund are linked to market movements, the fund manager is able to fine-tune the fund’s portfolio based on what is working or not working well and where he sees risks or opportunities.

It is important not to be overexposed to an asset, including property. A good portfolio spreads risk across different types of assets, regions and market sectors in order to limit exposure in an area.

If you already own a home, buying a second home can make you overweight this asset class, especially if you don’t own a lot of stocks or bonds. When real estate prices fall, both of your properties will likely lose value, while other asset classes might do well.

Holding a range of different investments within each asset class further reduces risk. You could, for example, own stocks from a whole range of different companies and industries around the world. However, most people can only afford to buy one or two investment properties, which gives them little or no diversification.

British expats should also consider currency risk. Rather than locking in your capital in pounds sterling or euros, some investment structures allow the flexibility of holding investments in multiple currencies and converting them when it’s convenient for you.

Tax efficiency
No matter where your property is located, you are likely to be subject to some sort of housing tax, stamp duty, and capital gains tax. Those who own property in the UK may have felt the burden of recent residential property tax increases.

Portuguese property owners can also feel the impact of annual wealth taxes here.

Take into account all the assets you already own, including the house you live in, to determine the best approach for you. There may be compliant opportunities in Portugal that offer tax benefits and much better returns than ownership. Ultimately, you should aim for a balanced portfolio that will suit your unique goals and circumstances, today and in the future.

Tax rates, scope and reliefs may change. All statements regarding taxation are based on our understanding of current tax laws and practices which are subject to change. Tax information has been summarized; individuals should seek personalized advice.

Keep up to date with any financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com

By Dan Henderson
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Dan Henderson is a partner of Blevins Franks in Portugal. A highly experienced financial advisor, he holds the Diploma in Financial Planning and Advanced Qualifications in Retirement and Investment Planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com


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