Lincom Real Estate

Investment Strategies

Property Investment Strategies

There are a great number of potential investment strategies available dependent on the property investors' objectives be it short, medium or long term, differing levels of complexity, as well as the investor's attitude to risk. This page provides information regarding the strategies available.

 

 

 

 

 

For illustrative purposes the two most common strategies are described below.

  • Short term - (18 – 24 months (this is also known as a Flip strategy)
  • Medium term - (3-5 years (also known as a buy to let strategy or buy and hold strategy)

It is important to be clear what the investment is trying to achieve AND by when it must be achieved. In this way it helps focus the investment decision. For example if the objective is to double the investment within 2 years then a flip strategy would be favoured. Provided the investment has been chosen wisely it is more likely to produce the expected return than a buy and hold strategy in the chosen time period. More experienced investors may start to look at portfolio investments across different areas or countries in order to spread the investment risk and achieve a more balanced return.

  

Short Term Investment Strategy

This strategy involves purchasing an off-plan unit i.e. a property that has either not commenced construction or is currently under construction and then selling the property prior to completion. In reality this is not a property purchase as the property has not been completed but is a purchase and sale of an option to purchase the property. A key factor is the time taken to identify the investment opportunity as this is critical to the strategy's success.

Key Opportunity

The opportunity to purchase a property at a low initial price or in the case of a new country at potentially an extremely low initial price before market forces lead to significant capital appreciation. Then sell the option whilst demand is increasing, taking advantage of normal supply and demand economics which means the price is increasing as more people want to buy.

Timescale

Typically the time period involved will be between 18 to 24 months, although this is dependent on factors such as the stage of construction of the development, the speed of construction for that particular country, etc... Level of Complexity This strategy is attractive to the investor because of its simplicity, the low initial investment typically 10% to 20% of the purchase price and some basic legal fees. The short payback period allows the investor to recover their cash relatively quickly for reinvestment in other developments. In addition the investor has not been left with a long term liability that needs to be serviced such as mortgage payments.

Key Risks

The critical element and therefore the highest risk element to the success of this strategy is the sale of the property prior to completion otherwise the investor will be forced to complete on the purchase with all its associated legal and financial consequences. The investor must be clear on the mechanisms available to resell the option, whether that be privately through an existing database of buyers, a private advertisement, a website or through more commercial means such as estate agents, website portals etc.

Return

This type of investment is a speculation of capital appreciation and therefore returns can fluctuate greatly dependent on how popular the country, the area and even the development becomes. A good investment based on an annual growth rate of 10% could lead to returns of in excess of 50%.

Case Study:

  • An off plan investment is made at a purchase price of $150,000
  • The deposit required is $30,000 with expected legal costs of $500.
  • Completion is expected to be in 24 months.
  • The area has shown a growth rate of 10% pa.
  • The initial investment will be ($30,000+ $500) = $30,500.
  • When the option is sold in say, 18 months (i.e. prior to actual completion) the price is ($150,000 * 10% growth) = $173,250.
  • Therefore the gross profit is ($173,250 - $150,000) = $23,250.
  • Gross Return $23,250/$30,500 = 76%

As the property is under construction and has not yet been completed, it therefore cannot be legally registered. It has still to pass all the relevant planning directives and licence requirements and as such does not provide adequate security for the lenders and therefore it is not possible to raise a mortgage upon it. The initial investment will have to be raised from the investor's own sources be it cash funds or by releasing equity from an existing property by way of a further advance or re-mortgage or alternatively bridging facilities may be available. Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject.

  

Medium Term Investment Strategy

This strategy involves the purchase of either an off-plan unit or resale property, completing on the purchase and holding onto the property for a period of typically 2 to 5 years although it could be longer, before ultimately selling. During this period the property is rented either on a holiday rental or long term rental basis in order to generate income. When considering this strategy it is important to be clear as to whether income generation or capital appreciation is the key objective and tailor your investment accordingly.

Although possible, it is extremely difficult to achieve a high return for both income generation and capital appreciation with the result often leading to average or below average returns. It is usually better to focus on one specific objective in order to maximise the return. Typically investors look for capital appreciation and use any rental income to negate the cost of financing and maintenance. Avoid emotional purchases as this type of strategy is a medium to long term investment which requires careful analysis of the returns and critically the investor needs to be able to afford the cost of maintaining and financing the investment.

Key Opportunity

The strategy is to either maximise the possible capital appreciation by holding the investment until market conditions change, i.e. sell at the highest possible price. Alternatively, maximise the income generated by the investment via rental means at perhaps the expense of capital appreciation. Additionally the property may be available for the investors own holidays!

Timescale

The time period for holding the property is typically 2 to 5 years in order to ensure there is sufficient capital growth to cover the initial purchase expenses, such as taxation, legal costs etc.

Level of Complexity

Fundamentally this is a normal property purchase therefore a very simple concept; however please bear in mind the need to maintain a second property in another country involves more management than a property close to home. There will be physical, economic and legal requirements to adhere to, ranging from basic maintenance of gardens, pools etc, rental administration, perhaps financing mortgage payments, community charges, annual legal returns and taxes.

Key Risks

Depending on whether income generation or capital appreciation is chosen one of the two key factors is the identification of a property which will be attractive for that particular strategy.

For example if the rental strategy is chosen then the type of property will determine the type of tenant. One bedroom apartments will appeal to younger singles or couples, should be located near to lively nightlife locations, bars, nightclubs etc. The rental for this type of property will be lower than a three bedroom property attracting families but they require different facilities such a proximity to beaches, supermarkets, children's amusements etc. Also the type of tenant will become a factor when considering the quality of furnishings to be purchased and importantly the condition the property is left in following a rental. The location of the property is always important as it will determine the amount of rent achievable and the level of capital appreciation achievable, however please remember that the initial price of the property will also reflect this.

Secondly is to continually monitor the market to ensure that when the property is sold it does not happen during a market downturn such as a change from a sellers market to a buyers market, which would of course reduce the sale price. Please bear in mind this is more difficult to achieve when the investment is in a different country.

Return

In holding a property for a longer period it is possible to achieve more significant returns as the example below demonstrates. This of course assumes that the market growth rate remains constant. In the example below capital appreciation is the objective therefore the rental income is designed to cover the annual finance and maintenance costs. Please see the example below.

  • An off plan investment is made at a purchase price of $200,000 with completion in 24 months.
  • The deposit required is $40,000 with expected legal costs and taxes of $24,000. A mortgage can be arranged for 80% i.e. $160,000. The total cash investment is ($40,000 + $24,000) = $64,000
  • The area has shown a growth rate of 10% pa. Rental income is expected to cover at least the mortgage expense and annual maintenance costs When the property is sold in 4 years after completion i.e. 6 years after the initial contract to purchase, the price is ($200,000 * 10% growth * 6 years) = $354,312.
  • Therefore the gross profit is ($354,312 - $200,000) = $154,312.
  • Gross Return $154,312 / $64,000 = 141%

  

Financing

The investor must be prepared to finance the balance of the purchase either via their own cash resources or more commonly and more sensibly via a mortgage. Please be aware that some countries may not have an established mortgage market for non residents at the time of the initial off plan contract, although they may be expected to be offering mortgages to non-residents by the time the property is completed.

With this possibility in mind it is wise to be prepared to have to finance the balance of the purchase through other means, perhaps via an equity release or re-mortgage on an existing property in a different country.

The rental opportunity is highly dependent on location and may be seasonal in nature leading to high rental yields during the summer months and little or no rental during the winter months.

Some developments offer guaranteed rental schemes that alleviate this problem and more importantly remove the worry of finding tenants in the first place. If no guaranteed rental scheme exists there are specialist rental companies that will contract to rent suitable properties for at least 6 months of the year.

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