In today’s world of negative yields, the search is on for various alternatives to fixed income investments. Bricks and mortar is a popular option. In the past real estate looked like an attractive opportunity thanks to its continuous appreciation in value. In addition, in an ideal situation the asset generates regular flows of income. Not only that, in most cases the property can be viewed at any time without the need to travel far. So far so good. But we now need to bear in mind that as a result of its popularity, property has now reached the top end of its price range in many cases, which will have a corresponding impact on future returns. Equally, an investment property is generally only an attractive proposition if it can be fully rented out. Otherwise, vacancies erode returns month in, month out. What is more, rental income is taxed in full at the property’s location. As a result, after-tax returns can end up being 40% lower. The debt component of the funding is also an important factor if the lender makes a change to the valuation of the property. Property owners carrying high levels of debt can soon get into liquidity difficulties in this situation. Is the property self-managed or managed by a professional? What happens if a tenant proves to be awkward? What effect does our landlord and tenant law have in such cases?
What is the most sensible form in which to hold real estate? This question is cropping up ever more frequently in practice, which means that property investors require an analysis of their tax position. Personal assets, a company, or – in specific cases – a real estate stock corporation or real estate fund are all possible ownership vehicles. A tax comparison of the various forms in which properties can be held is a complex and multi-layered process. It is essential that this is always conducted in the context of investors’ other assets, for example with regard to succession planning.
Property can certainly make a highly attractive addition to a portfolio. But with this type of investment, the key issue is to analyse the attendant risks in advance and in full. Gross returns need to be compared with net returns, and the individual workload involved should not be forgotten either.
Do you already have a real estate portfolio or are you thinking of developing one? If so, we would be delighted to offer you our all-round professional support.
Konstantin Wyser | Partner
Your Wealth at a Glance.