ARE YOU PAYING TOO MUCH TAX ON YOUR SAVINGS?
By John Hayward
This article is published on: 12th October 2013
Offshore Spanish-tax-compliant investments
All financial planning advice provided by us is done so using and within insurance contracts that are highly tax efficient in Spain.
For residents of Spain, there is an opportunity to save thousands in tax by structuring investments in the right way. These investments need not, and through us will not, be based in Spain. However, they are recognised by the Spanish as being legitimate for Spanish tax purposes.
Under normal circumstances, if you have a bank deposit, tax will be deducted at source. This is irrespective of whether it is an onshore account, where the local savings tax will be applied, or if it is offshore, and undeclared, where the EU Savings Directive tax kicks in. However, whereas you might be paying 20% tax on the onshore account, you could be having 35% tax deducted from an undeclared offshore account.
Within a Spanish tax compliant investment, you only get taxed when you make a withdrawal. This means that you can defer paying tax for as long as you live. In addition, the rate of tax applied is capital gains tax, currently at a base of 21%.
Also, the amount of the withdrawal which is taxable is very small, especially in the early years, as it is deemed that the majority of the money you are withdrawing is your original capital.
Unlike capital gains tax in the UK, no further tax will be payable if you are a higher rate tax payer. The tax payable is based on the gain, not on your overall income.
These calculations are based on our understanding of Spanish tax law which is subject to alteration.
For more information contact your local adviser or use the contact form below.
A short guide to QROPS
By Spectrum IFA
This article is published on: 30th September 2013
Below you can find our short guide on QROPS. Please keep in mind that QROPS require careful analysis and that we always recommend to talk to one of our advisers before you proceed. Also we encourage you ta have a look at our client charter to see how we manage your investments.
Compound Interest “The Eighth Wonder of the World”
By Chris Webb
This article is published on: 27th September 2013
None other than Albert Einstein described this amazing fact about finance, compound interest, as “the Eighth Wonder of the World”.
So, what is compound interest and why is it so important?
Compound interest is, quite literally, a form of free money… and it is free money that grows over and over again. The example detailed below explains how……..
Imagine that you invested €1,000 today and that whatever you invested it in went up by 10% this year. In this case you would have €1,100 one year later, made up from your original sum, plus €100 of interest or return on investment.
Now comes the Compound Interest: Assume you reinvested that €1,100 for another year and achieved 10% again. The following year you would have €1,210. This time you have made €110 of interest simply because the 10% interest is paid on the new balance not the original investment. Essentially, €10 of that interest is free money.
It is the interest you have been paid on your interest or, put another way, the return on your return.
At first glance this may not seem particularly exciting but over time the effect is incredibly powerful. Let’s look more closely at some examples to see just how:
The power of compounding
Let us say you decided to start investing some of your surplus income. For the sake of the argument, you wanted to invest €1,000 each year.
These might seem like numbers to small to make a difference but are they?
The two tables below detail the difference between non compound interest and compound interest.
I have illustrated at 5%, 7% and 9% growth annually, realistic expected rates of return.
These return figures are on top of your original investment !
NON COMPOUND
| Year No. | Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 100 | 140 | 180 |
| Year 3 | 1,000 | 3,000 | 150 | 210 | 270 |
| Year 4 | 1,000 | 4,000 | 200 | 280 | 360 |
| Year 5 | 1,000 | 5,000 | 250 | 350 | 450 |
| Year 6 | 1,000 | 6,000 | 300 | 420 | 540 |
| Year 7 | 1,000 | 7,000 | 350 | 490 | 630 |
| Year 8 | 1,000 | 8,000 | 400 | 560 | 720 |
| Year 9 | 1,000 | 9,000 | 450 | 630 | 810 |
| Year 10 | 1,000 | 10,000 | 500 | 700 | 900 |
| Year 15 | 1,000 | 15,000 | 750 | 1,050 | 1,350 |
| Year 20 | 1,000 | 20,000 | 1,000 | 1,400 | 1,800 |
| Interest Earned |
4,500 | 6,300 | 8,100 |
COMPOUND
| Year No. |
Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 102.5 | 144.9 | 188.10 |
| Year 3 | 1,000 | 3,000 | 157.63 | 225.04 | 295.03 |
| Year 4 | 1,000 | 4,000 | 215.28 | 310.80 | 411.58 |
| Year 5 | 1,000 | 5,000 | 276.28 | 402.55 | 538.62 |
| Year 6 | 1,000 | 6,000 | 340.10 | 500.73 | 677.10 |
| Year 7 | 1,000 | 7,000 | 407.10 | 605.78 | 828.04 |
| Year 8 | 1,000 | 8,000 | 477.46 | 718.19 | 992.56 |
| Year 9 | 1,000 | 9,000 | 551.33 | 838.46 | 1,171.89 |
| Year 10 | 1,000 | 10,000 | 628.89 | 967.15 | 1,367.36 |
| Year 15 | 1,000 | 15,000 | 1,078.93 | 1,759.03 | 2,642.48 |
| Year 20 | 1,000 | 20,000 | 1,653.30 | 2,869.68 | 4,604.41 |
| Interest Earned |
5939.03 | 9412.31 | 13807.17 |
We can immediately see a meaningful difference between what the saver has managed to achieve after a year versus the investor. Of far more interest is what happens over a number of years.
It is clear to see the big difference between keeping your money in a savings account and investing your money, potentially life changing, even if the amounts you start with are what you describe as “small”. Imagine, the impact can be huge depending on the amount you choose to save.
Just imagine the difference if you were saving €5000 per annum or if you transferred the cash savings you hold now and not later in life.
When Compound Interest works against you…….
It is just as important to understand that if you borrow money, the power of compounding hits you in reverse:
Over time you end up paying more and more to whoever you are borrowing from.
Luke Johnson, the man behind the Pizza Express Chain and ex Chairman of Channel 4 refers to this as “…the gruesome mathematics of leverage in reverse.” This is why you must eliminate debt and get invested as soon as you can. We all know that the majority of debt is expensive. It is challenging to make a 15-20% return on your investments but almost certain you will pay at least this on your debt.
In summary
So we can see from the power of compound interest that if you can achieve a half decent return on your money, even a relatively small amount can become a very large amount in time…
This is probably the most important thing you will ever learn about money.
Get your nest egg working harder
By Charles Hutchinson
This article is published on: 1st August 2013
Returns from bank savings accounts are at an all-time low, and savers are becoming increasingly frustrated. Expatriate financial advice expert Charles Hutchinson, of the Spectrum IFA Group, explains how expats can get their ‘nest-egg’ working harder.
Most of us know by now that interest rates in the western world are at extremely low levels, with the Euro base rate at 0.75%. In the UK it is even lower, at 0.5%. While helps some people such as mortgage holders with tracker rates, savers are being punished as banks have continually cut the interest rates paid on savings accounts. Retirees drawing a pension, or looking to buy an annuity have also been hit hard in this low-interest rate environment.
Low Interest Rates Here to Stay
First, it doesn‘t look like this will change for quite some time yet. The prevailing policy of central banks has been to increase money supply (quantitative easing, also known as QE), maintain liquidity in the banking system and keep interest rates low. Even a slight increase in the base rate over the next couple of years is unlikely to result in decent interest rates on savings.
Second, inflation is running at around 2-3% depending on which part of Europe you live. It just feels like everything is getting more expensive, especially food and energy costs. The end result is that we are effectively losing money by leaving it in the bank!
Of course, we all need to leave some cash in the bank, as our emergency fund. Most financial planners would recommend that you leave at least 6 months income as your emergency fund.
It is the ‘nest egg’ money (the savings that we don’t really need in the short-term) that we can do something about.
How Can You Get Your Nest Egg Working Harder?
With the objective of ‘beating the bank‘ over the longer-term, a diversified portfolio of investments can be built. In plain English this means spreading your money across different types of ‘assets’ and not having ‘all of your eggs in one basket’. Assets primarily fall into one of the following categories; equities (shares in companies), fixed-interest bonds, property, cash or commodities.
Lifestyle Investing
You need to be clear about your ‘Risk Profile’. At Spectrum, we carry out a ‘Risk Profiler’ exercise which aims to establish the level of risk you are comfortable with and helps you understand the relationship between risk and reward. We then employ a forward-looking ‘Life-styling Process’ which means building a portfolio to match your own personal situation and objectives.
The eventual portfolio should therefore match your risk profile, usually measured from ‘cautious’ at the lower end of the scale, ‘balanced’ and then ‘adventurous’ at the higher end. The investment strategy should therefore be appropriate for your stage of life.
What assets to invest in
There are literally thousands of investments funds and vehicles to choose from. At Spectrum, we filter these by using strict criteria when choosing clients‘ investments. For example we only use;
- UCITS compliant, EU regulated funds, ensuring maximum client protection and highest levels of reporting.
- Daily priced funds, providing clients with daily liquidity, so that clients do not get ‚locked-in‘.
- Financially strong and secure investment houses.
- Funds which are highly rated by at least two independent research companies.
Multi-asset funds
Multi-asset funds are popular with clients as they are managed by experienced asset managers who, through active daily management, can offer access to all asset classes within a single fund. Their job is to capture capital growth while also protecting investors when markets suffer a downturn. Some fund managers have a great track record of doing this, for example Jupiter Asset Management’s Merlin International Balanced Portfolio, which has returned +35% (Euro share class) since launch in Sept 2008, with relatively low volatility.
Multi-asset funds can be used as a ‘core‘ holding within a portfolio, with more specialised and sector-focussed funds making up the rest of the portfolio.
Equities (shares)
Many blue-chip companies have very strong balance sheets and pay dividends of around 4%, which is higher than current interest rates. This dividend income can be re-invested into your capital (unless you need the income). The capital value of course will fluctuate but if you are investing for the longer-term you have time to ‘ride out‘ any volatility.
Equity funds can be global in nature, regionally specific (for example focussing on emerging market countries) or even country specific. Other types of equity funds focus on smaller ‘growth-orientated’ companies rather than those blue-chip, dividend paying stocks.
Ethical Investing
Ethical funds are also an interesting option. These are funds which only invest in ‘ethical’ companies. They are screened and assessed on criteria such as environment, military involvement or animal welfare.
Fixed-interest bonds
This includes government bonds and corporate bonds. Western government bonds were traditionally seen as ‘safe havens‘ however yields are now currently as low as cash. It may be wiser to look at corporate bonds, and these are categorised in terms of risk (higher-yielding bonds means higher capital risk). Emerging market bond funds (with exposure to local currencies) could also be considered.
May investors like to get exposure to bonds via a fund, which is a diversified mixture of bonds. One good option may be Kames Capital’s Strategic Bond Fund, with a return of +57% (Euro share class) since launch in Nov 2007.
Commodities
Commodity-focussed funds can be volatile and would normally make up only a small part of a portfolio. However there is potential for long-term growth by investing in companies with exposure to precious metals and resources (gold, silver, iron ore, copper) as well as other ‘soft’ commodities such as agricultural resources and the food sector.
Property
Collective property funds or property-related shares could also form a small part of your portfolio. Physical property by its nature is illiquid but by using a property fund you can obtain exposure to shares in property companies, keeping your money liquid.
Review Your Portfolio Regularly
It is vitally important that your portfolio is regularly reviewed. One reason why people do not get the most from their finances is the lack of regular attention paid to their arrangements. Consider using a regulated, independent adviser who should offer regular reviews as part of their ongoing service.
At Spectrum we have an in-house Portfolio Management team, who help advisers and clients monitor their portfolios regularly for performance and suitability. One aspect of our regular reviews is ‘profit-take alerts’; when one area of your portfolio has out-performed then why not take some profits? Investors can really benefit from such regular service.
Charles Hutchinson has been with The Spectrum IFA Group since inception and is one of the founding partners. He helps expats in Southern Spain with their financial planning. The Spectrum IFA Group is a pan-European group of independent financial advisers. Feel free to contact Charles at charles.hutchinson@spectrum-ifa.com or call him on 952797923
A smart strategy borrowed from the Chinese – BBC.com
By Peter Brooke
This article is published on: 29th July 2013
Smart investment strategies borrowed from the Chinese. An article from BBC.com with comments from The Spectrum IFA Group
Peter Brook comments on an article from BBC.com
To read the full article please click here
What is risk? – Precious Metals…
By Peter Brooke
This article is published on: 16th July 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
All that shines. There are many very attractive metals and jewels and most of them are pretty good investments. There are also many different ways to invest in these sorts of assets and each of these has their own risk factors. When buying into metals it is very important to decide whether you are buying as a pure investment or as a useable investment as this will affect performance and risk.
The main ways to buy into metal and jewel prices are:
Direct – bullion, coins, jewellery etc. Even within this sector there is a huge range of choice. If you want pure investment then buy as close to the raw materials as you can… there are many different mints of coins but some are as collectables and some as investment.
Indirect – this is an exposure to the price of the underlying metal. Many people buy into precious metals via Exchange Traded Funds (ETFs) but these are not ALL what they seem to be.
So what risks are you taking by investing in the shiny stuff?
Asset risk – as with all investable assets; if they are out of favour with the general market, then the price will fall and the value of your holding will too. Sometimes these movements are not based on the fundamentals of supply and demand and can be due to the global political or economic background (or normally both).
Theft/security risk – if you decide to buy directly then you must consider the security of your coins or bullion. This will normally come at a cost which must be taken into account from a cash flow and overall performance point of view. You probably don’t want to have $3000 worth of gold coins under your mattress (especially if you are living on a yacht).
Liquidity Risk – selling directly held coins can take time, normally if they are highly traded newly minted then liquidity should be good but collectable coins could take time to find a buyer, or suffer a price fall.
Fashion risk – collectable coins and jewelry come in out of fashion, which is not directly linked to the price of the material they are made from – be careful when selecting these sorts of investments, as they normally trade at a big discount or premium to the underlying material. #
ETF – real or synthetic – some ETFs actually buy the underlying commodity and hold it in trust for the investors in the ETF. If you sell your holding, generally, the ETF will sell the actual metal. Other ETFs use rolling forward contracts or other derivatives on the underlying commodity via an investment bank. This means that most of the time the price will move with the underlying metal price but not always and can over react big movements in the price. This was seen recently with the ‘paper’ gold price falling dramatically but the real gold price continued to trade above the paper price.
Counterparty risk – synthetic ETFs are collateralized by an investment bank, if this collateral is of low quality (and as we have seen this is very possible) then you may be taking risk that the bank cannot return your money if something goes wrong.
On the whole precious metals either directly held or indirectly (through a real ETF) are excellent additions to a portfolio for a small proportion. We have seen huge volatility in prices in the last couple of years and so it is important not to be over exposed to metals and to be aware of the above risks. Also, like all investments, have a strict profit taking discipline when the values look good.
This article is for information only and should not be considered as advice.
French U-turn on tax grab spells good news for expats
By Graham Keysell
This article is published on: 2nd July 2013
Expats in France can breathe a sigh of relief after the French government backed down on its tax grab on second homes.
From September 1, those owning a second home in the country for more than 22 years will have complete exemption from capital gains tax (CGT).
Graham Keysell comments in The Daily Telegraph personal finance section. Read more here
Give your investment portfolio the ‘Lip’ Service it deserves
By Spectrum IFA
This article is published on: 1st July 2013
During the last few months, I am finding more and more people, who have always considered that they are averse to investment risk, are prepared to take a little more risk.
Typically, these people would have kept their savings on bank deposit. However, due to the lack of any decent rate of interest being earned over recent years, they have found that their savings are no longer maintaining ‘real’ purchasing power. Even worse, if they are dependent upon supplementing other income (for example, pensions) from savings, in many cases their capital has been seriously reduced. Combine this with the general feeling that people now feel that their capital is less secure with a bank (particularly after the Cyprus issues), it is no surprise that they are seeking a different way of protecting their wealth.
One of the problems for those people who wish to change direction, however, is that they may have little understanding or knowledge about how to do this. So where do they begin?
Seeking professional advice is, of course, a good starting point. Investment professionals will usually build portfolios for their clients by using a concept known as ‘asset allocation’ investing. Subsequently, the portfolio is invested across a range of investment sectors, in varying proportions, with the objective of finding the best investment return for the least amount of risk, according to the investor’s objective (for example, income or capital growth).
In the past, it was not too difficult to find the right asset allocation because the correlation of assets classes – which can simply be explained as the direction of that one asset class (for example, equities) moves in relation to another (for example, fixed interest) – was well understood and had not changed for many years. It was often said that as equity markets went up, bond markets would go down! However,the world has changed and it is not as easy to predict what assets classes may do in the future. Diversification remains a key part of a good investment strategy and so asset allocation is still a very important part of putting together an investment portfolio. It is vital for improving long-term returns and reducing investment risk (volatility), however, it is no longer the ‘be all and end all’ of good investment management.
When people are saving, they usually have a particular objective in mind. Depending upon your timescale, this will impact upon the investment strategy to be implemented. Added to this is the need to take into account your own particular attitude to investment risk.
At The Spectrum IFA Group, we use a Lifestyle Investment Planning (LIP) approach. This takes into account the period over which you wish to reach your goal and consideration is given to what the world might look like at the time that you want to use your capital, or draw income from it. Then a portfolio is built today to take advantages of the likely changes – to the extent that they can be predicted – over the time frame ahead. In other words, it is forward looking, keeping an eye on the future and not just on the past.
More information on our approach to investment advice can be found on our website at http://www.spectrum-.com/investment_advice.html.
Because different investment themes, stories and strategies will be appropriate to different people at different stages of their lives, using a Lifestyle Investment Planning approach can be very powerful, as it provides the opportunity to check where you are today (in relation to your objective) and then to consider the investment ideas, stories and strategies that are likely to affect you. It is also very important that the portfolio is reviewed periodically, in effect, an ‘audit check’ to see if you are on target to reach your goal (for example, income during retirement). The easiest way to understand this concept is to start at the point of retirement and work backwards.
Income Portfolio – In retirement, we all need a decent and growing level of income. Professional income declines or stops entirely, as we enter the ‘spending only’ phase of our lives. Various strategies to maximize income and beat inflation should be adopted. It is also important to consider cash flow and not just to concentrate on short-term capital security. By necessity, some capital volatility may have to be tolerated to achieve the level of income required. In addition, as it is important to beat inflation over the longer term, some growth strategies should also be employed, with the aim of ensuring that the capital maintains its real purchasing power throughout your retirement years. Since people are living a lot longer, this could be a very long time.
Pre-Retirement Portfolio – Before reaching the income stage of life, but as you start to plan for retirement, the last thing you need is for your portfolio to fall in value just before you want to start to draw an income, as this can dramatically reduce the income that you can sensibly take, if you wish your capital to last through your retirement years. At this stage of life, it is likely that you will have accumulated the majority of your assets. Your income may still be high, but the timescale for taking advantage of investment opportunities is short. You may have even started planning things to do early on in your retirement, the first ten years often being the most expensive. You will probably be looking forward to having more time available for new hobbies and travel. During this phase capital protection is paramount and active management of the transition from growth to income will take place. Portfolios should include some deposit based accounts and funds with capital protection or defined/absolute returns.This may reduce investment returns but it substantially reduces the investment risk. Many investors fail to make this most important change within the last five years before retirement, often switching from pure growth portfolios to income at the point of retirement. If this happens to be at a time when the markets have fallen significantly, then the income available, and hence your lifestyle in retirement, could be dramatically affected. If you are further from retirement, have planned well and have a pension or savings fund available to you, you can consider the type of investments that may do well from now until the point at which your retire.
Consolidation Portfolio – If you are within fifteen years or so of retirement, you may not be comfortable with the idea of having your capital very exposed to the more volatile investment sectors. Your primary objective may be to beat inflation with lower volatility than during the accumulation stage, over a medium time scale.The types of strategies you may elect to use could be emerging market bonds, rather than emerging market equities; high yield bonds (with income reinvested) can also offer good returns currently, but with lower volatility than shares; and equity income offers a growing income stream, together with a good chance for capital appreciation. During this phase, you should also have a good ‘profit taking’ strategy, where profits are transferred into lower risk investments to help the transition to Pre-Retirement.
Accumulation Portfolio – If you are a very long way from retirement (say 20 to 30years), then you should consider the long term growth stories and invest in sectors such as infrastructure and consumer spending. Currently, there is a huge and increasing demand for commodities, which will continue to push up prices. The growth in emerging markets is changing the world order, such that mature western economies will be outpaced by burgeoning new ones. Volatility is likely to remain for some time, although at this stage of your life cycle, you have the timeframe to ride out the peaks and troughs of the investment markets. Again, you should employ a good profit taking strategy to further diversify your spread of investments.
For all of the above strategies, asset allocation is still very relevant and it is still vital to have a well-diversified portfolio invested across many asset classes. It is also important to have geographical and sector diversification within the asset classes used. However, in reality, this is insufficient; applying the stories and strategies is equally important. As a European expatriate, it is also important to overlay your whole portfolio with currency considerations and even have in place an agreed strategy to move, fore example, Sterling or USD investments into Euro investments, over time, to match future income liabilities.
Of course taking expert, qualified and regulated investment advice is very important to ensure you have the best ideas to secure your future lifestyle aspirations. Ongoing monitoring of portfolios is vital to correctly manage the changes explained above, over your lifetime. Sadly, I come across too many cases where people have never had their portfolios reviewed by the person or company that provided the initial investment advice and as a consequence, their objectives are not being met.
What is risk? – Equities
By Peter Brooke
This article is published on: 12th June 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
What are equities? – known as stocks or shares they are a ‘share’ in a company. As a part owner of that company we must therefore SHARE in its profits (and losses). If the company goes bust we cannot expect not to share in this and lose (normally) everything we put in! Likewise if it is very profitable then we would hope to be rewarded as owners should be (by dividend or share price growth… or both); the performance of shares is well documented and on average they outperform most other assets over the long term but do we really understand all of the different types of RISK we take as investors in shares?
Asset risk – if equities themselves, as an asset class, are out of favour then they tend to all fall together if concerns about future growth (and therefore profits) are prevalent, this can be irrelevant of the market or sector you are looking at, which may have robust fundamental reasons to invest in it but is still knocked by the market selling off all equities.
Market or Correlation risk – many major stock markets are very highly correlated, so even if you have a diverse portfolio of European, US and UK stocks, for example, you can lose on all of them if they are highly correlated.
Sector Risk – companies all do different things, provide different services and make different goods, but sometimes a whole sector will be out of favour so losing value in what is a good company may still happen if the sector it is in is not loved.
Company specific risk – this is primarily down to the quality of the board of the company and the vast majority of company directors want their companies to do well; but their share price can also be affected by regulatory changes, legal actions, competitors, patents etc. no matter how good a company may be it is not bullet proof and so different companies will perform better in different parts of the market cycle.
Liquidity Risk – if you decide to buy smaller companies which aren’t very well known then there may be a minimal ‘market’ for them… this means that if you can’t find a buyer then you either can’t sell them at all, or you accept a lower price. Most shares are traded on regulated stock exchanges and so liquidity of all but the smallest companies tends to be good.
‘Shares are the only things we don’t buy on sale’ so all of the above risks, like with most assets, can create buying opportunities. It is often best to access shares via funds as the daily choices and control are managed by a professional manager, you can then also access many different sectors and markets with relatively small portfolios.
It is vital to understand the different types of risk so your overall asset base is not over exposed to one type of risk. For example someone with a large property portfolio (liquidity risk) shouldn’t then invest in small companies but should have more money in cash (inflation risk), high quality bonds (interest rate risk) and ‘blue chip’ shares (market risk).
This article is for information only and should not be considered as advice.
What is risk? – Property
By Peter Brooke
This article is published on: 20th May 2013
In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.
We, as Anglo Saxon and Northern European types tend to have a bit of an obsession with owning property; it is an important part of our culture and we feel secure in the knowledge we own real estate.
It is very understandable, especially for an Englishman, why owning your own home is a very good idea (control of what it looks and feels like, feeling of “home”, long term outlook etc) but I believe that many people will tend not to look at ALL of the basic investment factors when selecting a property to buy (to live in or as a pure investment)… including risk.
Of course, location (location, location), price, quality, taxes and running maintenance costs are normally considered to some extent but for some reason many investors tend to believe that property is in some way risk free; . Like all investments we should “buy with our heads” and “sell with our hearts”, too many of us get this the wrong way round and ignore some of the issues that can really cost us dearly. Let’s look more closely at the property specific risks.
Liquidity Risk – the biggest single risk when buying property! Can you get your money out if you need it (or if something better comes along)? On the whole the answer is ‘no’ – or at least not quickly. If you find a buyer tomorrow you are unlikely to have your money back within 3 months; if you are looking for a quick sale then you can seriously damage your return by taking a low offer.
Interest rate risk – if you are borrowing to buy, as most people do (and probably should) then there is a risk that your cash flow will be affected and the total cost of your property over its life could go up dramatically, if interest rates move.
Market/Investment risk – as we saw in 2008 the price of property can fall as well as increase…. Again many investors feel that property is in some way a sure fire investment guaranteed to make money – like all other forms of investment asset this is only true if you buy the right property, in the right place at the right price. When property markets crash they tend to do so heavily and take a longer time to recover than more liquid markets.
Tax/Governmental Risk – one of the easiest assets to tax more in times of economic strife are properties, especially those owned by investors (as they tend to be easy political targets). Increases in local rates and taxes on property are easy to push through and raise a significant sum for government.
This article is for information only and should not be considered as advice. This article is written by Peter Brooke The Spectrum IFA Group