Inspired by listening to a successful investor, Terry Smith of Fundsmith at the recent 2014 UK Investor Show, I thought his style of stockmarket investing, warranted further exploration in a property investment context.
Terry advocates a non-meddle, investment strategy, spending time evaluating the opportunity, buying and then keeping, not forever trading and switching.
Now this feels partly counter-intuitive, in as much as if you have made a mistake, you are then stuck with that mistake for years. However, as we know, sometimes performance blips can rectify themselves and come good. The buy-to-keep strategy offers many benefits, which are also applicable to property investing.
Property investor expenses vs stockmarket investor costs
For property investment there are buying costs which vary from country to country and you could be paying 5-14% in purchase costs, dependent on whether you are buying in Poland or Spain, or the UK for that matter. Constantly buying and selling property with these % expenses is seriously going to eat away at your net profit.
Ok I hear you say, property is far less liquid as an asset class compared with stocks and shares and so your are less likely to turnover property stock as quickly. Well there are strategies aimed at fast turnover, remember ‘flipping’ property in the heady off-plan days? A way of buying low in a rising market and selling on, or trading, before completion to avoid stamp duty or completion taxes.
And then there is buy-to-sell, a proactive strategy of turning property stock around quickly. Either restoring and repairing a property which generally falls within revenue and expenses for tax purposes, or new works and improvement which generally attracts capital cost tax treatment. So there are some tax advantages dependent on the manner in which it is done, but there are still buying costs involved, which are usually greater than the selling costs.
Timing a property purchase vs stock timing
There is always an argument for drip feeding money into the stockmarket so that if the market rises or falls, then an investor spreads their risk. The modern, instant streaming of information can be an investor’s enemy, because of the temptation to meddle, which often leads to doing things which are most likely to be wrong. Terry reckons, action every 5 years leads to better portfolio performance (as long as some decent decisions have been taken at the outset of course).
As a rule of thumb, property is said to double in value over a ten year period. Regular buying and selling means if the timing is out of kilter, you could be buying at the wrong time and selling during a dip. If your strategy is one of a fast turnaround, measured in months, there isn’t much leeway for delaying the sell, if the business model relies on recycling funds and profits. If your investment horizon is longer term, it means planning a sale ahead of time, maximises the chance to sell a property at the right time.
Property portfolio diversification – good or bad?
A generally-held tenet is that diversification helps profits, but there is a threshold of diminishing returns. Terry Smith reckons investing in about 20-25 companies is the maximum, beyond which there is no gain.
In some respects this is the same for property, benefits are gained from having focus. For example if a property investor were to buy several high-yielding properties in Warsaw or Krakow, then there are the time-efficiencies of visiting one location, using one rental or management agency, one mortgage broker, one lawyer as well as financial efficiencies. If an investor were to buy an apartment on the Costa del Sol, one in Krakow and another in Istanbul, then these time and financial efficiencies are lessened significantly.
The caveat to buying-to-hold, is that you should only invest in good companies. For property purchasing, make sure you are buying value-for-money, not necessarily what is cheap. Don’t overpay, as this will compound in value over time.
In essence for the property investor it pays to take a measured approach and not necessarily buy investment property in one fail swoop (as many came a cropper buying lots just before the 2007/8 crash), weighing up your strategy and the type of properties which represent value.
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Featured or Mentioned in: Sunday Times, Times Online, Daily Mail, Mail on Sunday, Independent on Sunday, Homes Magazine, HSBC Liquid Magazine, Easyjet Magazine, London Homes & Property, A Place in the Sun, The Telegraph, Buy AssociationTags: Buy to let, foreign buy-to-let, investment property, Istanbul, Kraków, off-plan, overseas property, property strategy, Risk & Reward, Warsaw