10 Core Principles of Real Estate Investment

Podcast

The first episode of our new podcast – The International People – covers this very subject.

So, to hear John elaborate on the points below, give it a listen – below or on Stitcher or Pocket Casts.

Introduction

Real estate investment is a business – even if it’s not your full-time job – and it should be treated like one.

An important exercise for any business owner is working out the core principles and aims at the heart of their business. Writing down your core beliefs of real estate investment – your investment philosophy, if you want to be pretentious – makes you focus.

My own principles – outlined below – have been simmering nicely for nearly 40 years. Many of them were deeply unpopular for many years.

These days, I would venture to say that most of my ten key points are quickly recognised as ‘plain common sense’ by savvy property investors and real estate professionals. (Common sense, incidentally, is something that is startlingly rare in the world of real estate investment. Subscribing to it will put you ahead of the masses from the start.)

They relate mainly to the world of international property investment, but they are relevant to any real estate investor – and many of them will be relevant to any investor.

1. You have to invest. Nobody else is going to look after you in your old age.

This is now widely accepted, especially in the wake of the global financial crisis. You cannot rely on your State or company pension unless you want to risk living in poverty.

2. Your investments should be diversified

Many of my clients and contacts invest heavily in real estate, both domestically and abroad. This is not surprising. They don’t trust the stock market. They don’t trust the banks.

They believe (in my view, rightly) that real estate has been reliably profitable in the long-term and they recognise its big advantage: it never goes bust on you. In bad times it will lose value but (providing you have bought wisely, taken legal advice and insisted on due diligence) it will not turn into a puff of smoke.

This does not mean that real estate should be your only investment. Many people I have worked with have been too exposed to the property sector,especially to higher risk locations.

There is a dizzying amount of investment types to choose from. Stocks, bonds, cash, real estate, works of art, gold, diamonds, race horses… only you (guided by your financial advisers) can decide which mix of investments is right for you.

This ideal mix of investments will change with your age, your financial position and your family situation. It should therefore be reviewed on a regular basis.

Bear in mind that simple is usually best.

3. Making an investment plan is a science – not an art

Of course, there is some skill and subjectivity in interpreting information you receive.

But there are some basic principles behind property investment (watch this space).

If you do your analysis properly and follow the rules, your investments are far more likely to be profitable.

4. A bargain is only a bargain if you can sell it at a profit.

A home for £5,000 sounds like a bargain. It will be presented to you as such. Often, it is nota bargain.

This might just be the local market price in a region where there is no indication that prices are likely to rise anytime soon. More likely, it is more than the local market price! You have been identified as a gullible foreigner and you are paying a ‘tourist tax’.

Even if £5,000 is the correct price for the property, and you can see it rising by 20%, will you still make money after taking into account (often high) transaction costs associated with both the purchase and the sale?

5. Buy in haste, repent at leisure

Sellers and estate agents always want you to commit now.

The price is going up!

There is another buyer!

The rules allowing foreigners to buy property are going to change next Tuesday! 

Don’t listen.

Take your time. Take advice. Take a reality check.

6. Choosing the best property is much easier with professional advice

Real estate – especially international real estate – is not a simple investment.

There are too many markets, too many types of property, too many legal and tax issues, too many ‘opportunities’ and – frankly– too many dodgy characters out there waiting to separate you from your money.

Unless you have the time and inclination to do a huge amount of research, and unless you are confident in your ability to identify the bargains from the avalanche of rubbish, you are probably best off taking some independent advice about your property investment plans.

Investment advice is not expensive and will, almost always, make or save you far more than it cost you.

7. There is no point in making money and then giving it all to the taxman

When you invest in international property, you will be subject to the tax systems of (at least) two countries: the country where you live, and the property where the property is located.

Both countries are likely to have laws and loopholes that will, quite legally, allow you to reduce or eliminate your tax bills. This can save you a huge amount of money.

Again, take advice from a specialist who knows the rules in all of the countries concerned. Make a tax plan.

This planning needs to be done before you agree to buy the property. Once you’ve agreed, most of the best opportunities to save money will have already passed you by.

The advice might even make you decide to invest in a different country!  

8. Property needs to be looked after

You will almost always need some form of property management.

Working out what kind of property management you need, and where you will get it from, is a key part of your real estate investment plan.

Certain types of property management are simply not available in certain places (possibly suggesting that you should look elsewhere).

9. Understand Risk and Reward

Some property investments are much more dangerous than others.

  • The country might be more dangerous. 
  • The legal system might not work well. 
  • The market – in particular, the resale market – might be in its infancy, or very restrictive to foreign buyers. 
  • The house you are looking at might not yet be built (‘off-plan’ property), exposing you to the risk of the developer going bust. In many places, there is no system of protection or compensation in place for failed property developers.

Curiously, and contrary to what you might have been told, you do not always make more money by taking more risk. In fact, the reverse is often true.

Make sure you understand – and are comfortable with – the amount of risk you are taking.

10. You must seek independent legal advice when buying property

Independent advice means:

  • Not the lawyer your estate agent told you to use
    • Even if it’s at a discounted rate
    • Even if it’s the agent’s brother-in-law who is a “really good guy”
  • Not the Notary – even if you’re in a country where Notaries are highly qualified. 

See our guide to Choosing a Lawyer for International Work.

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