Property and the F.R.E.S.H investment strategy
Property investment has many benefits if you are planning for retirement. However there are also dangers that can lead to disappointing performance unless the challenges are recognised and allowed for during acquisition.
In this article I start to explore why property investment presents such a good investment choice for retirement planning. You’ll also get to understand the F.R.E.S.H investment strategy that I’ve developed as a simple but effective approach for investment in property, whether you choose to invest directly or within a regulated pension scheme.
Property investment; five major benefits for retirement investors
Above almost all else, the concept of having land or property as security for your investment is an exceptional benefit. If you buy shares, there is no security and your investment can end up worthless.
Many investment sectors suffer from massive volatility. Even the FTSE 100 share index has fallen at times 50% from peak values. That means that shares have to double in value just to get back to where they were before. A tough job which takes years. This is reflected in the FTSE 100 index going back around 20 years. You can see that losses sustained in typically 1-3 years take 5-8 years to recover from.
Property investment demonstrates far lower volatility. This is particularly important if you want to turn your investment into cash. Suppose it is at a time when the stock market is at a low point? You could end up losing a lot of money. This is relatively unlikely to happen – and certainly not to the same degree – with investment property.
You would think that share investment could be relied on for increasing returns over time. But today in mid 2014 the FTSE 100 index has still not reached the level that it was at the end of 1999. That means ZERO real growth in 15 years.
This is unheard of in property investment. You potentially stand to benefit from both increasing income and capital growth, sometimes both.
Level of income
The average return on capital, from dividend income, in the stockmarket is something around 3% pa. Choose the right property-backed investment and you could be enjoying 8%-12% net income pa. For investors in retirement, relying on income either from direct investments or within their pension, then the right property investment could be providing three to four hundred percent more income than from a share portfolio or investment in ISA’s.
One of the most important ways to reduce risk in an investment portfolio is to ensure that your investments are non-correlated. Property-backed investment allows you to do that. You can choose different sectors of the property market, in different locations and even countries. But in general the entire stockmarket goes up and down together – it’s more difficult to achieve a non-correlated portfolio with quoted shares.
Property investment and the dubious benefit of leverage
What’s missing from this list? One element of investment that most property investors would claim is the single biggest benefit of property investment – the concept of leverage, or borrowing money to finance your portfolio.
I teach people how to use leverage to increase returns from their portfolio, but I have deliberately excluded it from my primary list for this reason; it is very important for young investors seeking maximum return and not needing income. Also those investors prepared to increase the risk profile in search of potentially bigger gains.
Leverage is not such a benefit for investors seeking income, or those wishing to reduce risk. Typically older investors seek to reduce risk and improve their income – precisely the opposite of a leveraged investment.
Introducing the F.R.E.S.H investment strategy for property-backed investments
The benefits listed above are very powerful. But there are still risks that can be reduced further if we refine the investment strategy. That’s what I’ve done with F.R.E.S.H. – focus down the property investment strategy to minimize risks and increase certainty in as many ways as we can achieve.
Here’s what F.R.E.S.H stands for:
F – Fixed income
Select investments that provide fixed income known in advance. That’s better than the uncertainty of having an income expectation which may or may not be met.
R – Regular income
Know when the income is coming. Monthly / Quarterly / Annually or whatever. A contractual requirement to pay income on a regular basis is better than an investment with no pre-determined timescale.
E – Exit pre-determined
One of the big issues with investing in property is the lack of liquidity and the relatively long time it can take to realise your investment if you need the cash. And if the market is not buoyant when you want to sell then it may take a very long time to achieve the price you want.
Select and investment which allows you to exit at a pre-determined time, and for a pre-determined amount, and risk considerably reduces.
S – Security
We love, just like banks, the security of land or property. In general that is common to all property-backed investments, but it is important to know that the value of the security stacks up.
H – Hands-off
Many investors, particularly those with busy lives and regular jobs, do not want to have investments which require considerable time and involvement. So the last part of our F.R.E.S.H investment strategy is to find property-backed investments for the portfolio that are truly hands-off.
In summary, property investment offers many benefits for medium to long term investors but also carries significant risks. Adopting the F.R.E.S.H investment strategy can help to reduce risk and maximize your returns whilst spending little or no time managing your investments.
Do you like the F.R.E.S.H investment strategy? Do you have an alternative approach that has worked for you? Leave a comment below.