Investments for Income – Which Asset Class Yields 20% Per Annum?

As Investors and Financial planners continue to reduce their exposure to money-market investments in order to reduce portfolio volatility and capital risk, at the same time low interest rates are driving appetite for alternatives investments capable of replacing lost risk-free income. In fact, for UK Investors, the best 3-year savings account yields just 4% per annum (2.4% after 40% tax), and with CPI inflation reducing the value of capital by 3.5% every year, cash held in deposit accounts will continue to lose value in real terms, hence the desire for high income alternatives.

Strategic property investments offer an interesting play for the Investor capable of tolerating the relative illiquidity associated with real estate assets, and many markets around the world offer a glut of opportunities as distressed sellers seek to rid their balance sheets of property assets in exchange for liquid capital. There is however a number of inherent risks associated with property investing, and direct investments often involve taking on the potential liabilities involved with tenant sourcing and management, annual taxes and property maintenance. One alternative to the buy and hold property strategy is to locate opportunities where property assets can be acquired well below open market value and sold on to end-users within a very short timescales, often as quickly as 2 weeks. This allows the Investor to capture the discount as a liquid capital gain, and removes the risks associated with holding property assets for extended periods of time.

Whilst technically generating a capital gain, this strategy of ‘flipping’ investment properties displays a very similar investment profile to that of traditional investments for income where properties are held for longer periods of time in order to collect rentals. The main difference is that annual gains are much higher, and Investors can roll over their profits into further properties, effectively compounding returns every month.

There are a number of real estate markets around the world where this process of strategic identification, asset improvement and short term disposal is possible, and investors should look for opportunities to buy at a substantial discount where end-users are able to secure reasonable mortgage deals in order to facilitate the investment exit. Any market where mortgage finance is underwritten or guaranteed by the State such as in Brazil’s Social Housing Scheme allows Investors to acquire pre-construction properties – effectively financing the build – which are ultimately sold to locals under the scheme on completion.

The US property market is another obvious example, as banks and other financial institutions seek to exchange foreclosed properties for cash, and those Investors capable of selecting suitable assets, refurbishing to a ‘mortgageable’ standard and sourcing buyers to facilitate the exit are in some cases able to double their capital on a monthly basis as the discounts often exceed 50% to appraised value.

As always, Investors should source a Partner with a track record of identifying and delivering successful opportunities, and where sufficient due diligence is available for independent third parties in order to properly assess the timely veracity of any marketing materials, and where the track record of all counterparties can be established and verified.

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