Property is an investment asset class that needs little explanation to Irish investors, who have backed property, both home and abroad for many years. Despite recent stress to property capital values, over the longer term property provides gains comparable to equities. The key difference between the two is that debt is traditionally more readily available for property investment than equity investment.
Whether investing in residential or commercial property, the most important thing for the property investor is to have a tenant who provides a rental income stream. To achieve this, the property chosen has to be attractive to tenants, this is the case for both residential and commercial property. An investor needs to verify the quality of the actual property and of course the property location.
One of the main reasons why property is seen as an attractive investment asset, is that it is reasonably easy to get borrowings to leverage the investment. By leveraging the purchase with borrowed capital, the investor increases the potential for greater gains when the property is rising in value. The reverse occurs when the property is decreasing in value, i.e. amplifying the capital loss.
During the investment term, the rental income from the properties purchased should be sufficient to repay the interest and perhaps some of the capital balance on the borrowings.
At the end of the term the bank debt will be repaid and the investor reaps the remaining gains (subject to capital gains tax).
Residential Investment Property
Most professional residential investors seek properties for which there is a large rental market and are easily sold onwards if required. There is no point investing in a detached 16 room property in the midlands of Ireland for €1M, for which there is no rental demand. Urban areas with high population densities and a young growing population are a far better proposition.
Due to the fact that property is not a liquid asset it minimises risks if the property is in a mature market, that has good rental prospects and where the property can easily be sold on if required.
Many investors who started investing in residential property in the 1990’s have traded up to commercial property. Due to the high entry cost associated with commercial property investment, most investors purchase commercial property through syndicated schemes. Non recourse borrowings can be structured through a trust which is set up to hold the investment assets on behalf of the investors. A shareholder agreement outlines how the syndicate will be run and how decisions will be made.
Property for Pension
Within certain revenue restrictions, property can be a suitable investment for self directed or self administered pension schemes. This is typically suitable for the self employed or owner director who is making reasonably large regular pension contributions.
The pension investor makes a pension contribution to his / her pension, or perhaps transfers accumulated pension funds out of other investments into a pension account earmarked for property investment. The accumulated funds would need to be in the region of at least €100,000 to allow for the purchase of even a modest apartment. In addition annual contributions will need to be sufficient to help balance rental income inwards and mortgage repayments outwards.
The pension fund borrows the remaining funds to acquire the property. The property is placed within the pension account and all income and gains are tax free while contained within the pension account.
Although this a very tax efficient way of investing in property, individual pension portfolios should be balanced with other asset classes such as equities, bonds, commodities and cash.