Short Term Investment Strategy

This strategy involves purchasing an off-plan unit i.e. a property that has either not commenced construction or is currently under construction and then selling the property prior to completion. In reality this is not a property purchase as the property has not been completed but is a purchase and sale of an option to purchase the property.

A key factor is the time taken to identify the investment opportunity as this is critical to the strategy's success.

Key Opportunity

The opportunity to purchase a property at a low initial price or in the case of a new country at potentially an extremely low initial price before market forces lead to significant capital appreciation. Then sell the option whilst demand is increasing, taking advantage of normal supply and demand economics which means the price is increasing as more people want to buy.

Timescale

Typically the time period involved will be between 18 to 24 months, although this is dependent on factors such as the stage of construction of the development, the speed of construction for that particular country, etc...

Level of Complexity

This strategy is attractive to the investor because of its simplicity, the low initial investment typically 10% to 20% of the purchase price and some basic legal fees. The short payback period allows the investor to recover their cash relatively quickly for reinvestment in other developments.

In addition the investor has not been left with a long term liability that needs to be serviced such as mortgage payments.

Key Risks

The critical element and therefore the highest risk element to the success of this strategy is the sale of the property prior to completion otherwise the investor will be forced to complete on the purchase with all its associated legal and financial consequences.

The investor must be clear on the mechanisms available to resell the option, whether that be privately through an existing database of buyers, a private advertisement, a website or through more commercial means such as estate agents, website portals etc.

Return

This type of investment is a speculation of capital appreciation and therefore returns can fluctuate greatly dependent on how popular the country, the area and even the development becomes. A good investment based on an annual growth rate of 10% could lead to returns of in excess of 50%.

Please see the example below.

  • An off plan investment is made at a purchase price of EUR 150,000
  • The deposit required is EUR 30,000 with expected legal costs of EUR 500.
  • Completion is expected to be in 24 months.
  • The area has shown a growth rate of 10% pa.
  • The initial investment will be (EUR 30,000+ EUR 500) = EUR 30,500.
  • When the option is sold in say, 18 months (i.e. prior to actual completion) the price is (EUR 150,000 * 10% growth pa) = EUR 173,250.
  • Therefore the gross profit is (EUR 173,250 - EUR 150,000) = EUR 23,250.
  • Gross Return EUR 23,250/EUR 30,500 = 76%

    Financing

    As the property is under construction and has not yet been completed, it therefore cannot be legally registered. It has still to pass all the relevant planning directives and licence requirements and as such does not provide adequate security for the lenders and therefore it is not possible to raise a mortgage upon it.

    The initial investment will have to be raised from the investor's own sources be it cash funds or by releasing equity from an existing property by way of a further advance or re-mortgage or alternatively bridging facilities may be available.

    Taxation

    Taxation rules are very different country to country, therefore specific expert advice should always be sought regarding the subject.

    Although the option to purchase the property is a legally binding contract, in itself it is not a property purchase therefore will not be treated as a property transaction with the associated registration procedures and taxation such as stamp duty or the vat equivalent.

    As the transaction is a private contract which will most probably take place outside of the country the investment is in, the resale of the option to a third party will probably not incur any taxation unless you choose to declare the gain in that country.

    Please remember there is an obligation to declare all income and gains to the relevant tax authorities.