For many people, investing in bricks and mortar by buying second or subsequent properties makes financial sense. While this approach has advantages, there are also significant drawbacks and numerous factors to consider. Here we compare property to other investment options in relation to four cornerstones of successful investing: liquidity, risk and returns, diversification and tax efficiency.

1. Liquidity

A key question to ask before investing is how easy could you retrieve your capital? There are various reasons for ‘cashing in’ an investment. The asset could be performing badly or you may have found a more attractive opportunity elsewhere. Alternatively, your circumstances may have changed and you need to access your money.

Liquidity is not just about how easy it is to sell up, however, it is also whether you can do so without taking a loss.

On one end of the liquidity spectrum stands cash and bank deposits – easily accessible but offering the lowest risk and expected returns. Property is at the other end. If you are playing the long game, your investment could grow substantially over the years. However, finding a buyer could take a while and you could invite a significant loss by selling at the wrong time.

Investment funds, meanwhile, combine a suite of different assets that may include property (or shares in property companies) alongside equities and bonds. The established market for the underlying assets makes it much easier to find an instant buyer. Also, unlike property, you can just sell the amount you need, not the whole investment.

2. Risk and returns

For bank deposits, the risk/return factor is low – you have a high certainty of receiving a set amount at the end of the term. However, with today’s interest rates being close to zero, this may not keep pace with inflation.

Aim for a balanced and well diversified portfolio that will suit your unique aims and circumstances, today and tomorrow

Property offers less certainty and  therefore greater potential for higher long-term returns. However, there is no guarantee that the property will increase in value, especially when you want to sell. You also need to consider the ongoing costs of maintaining, managing and renting out property, as well as the tax implications, to calculate what you get back in real terms – net of all costs and tax – compared to what you have put in.

3. Diversification

Good portfolios spread risk across asset types, regions, currencies and market sectors to limit exposure in any one area.

If you already own a house, buying another property may make you overweight in this one asset class, especially if this represents a significant portion of your overall assets and you have few equity or bond holdings. Should property prices drop, both your properties could fall in value, while other asset classes may be performing well and can be used to mitigate risk and hedge your exposure.

Holding a range of different investments within each asset class helps reduce risk further. You could, for example, own shares from a range of companies and sectors across the world. Most people can only afford to buy one or two investment properties, however, offering little or no diversification.

4. Tax efficiency and costs

Wherever your property is you are likely to attract taxation, such as stamp duty, capital gains tax and income tax charges on rentals.

While most property in Malta has increased in value over time, more recently the momentum accelerated even further with an influx of foreigners buying and/or renting here. However, there is no guarantee this trend will continue. You should compare the cost of buying – and valuation levels at which certain property is bought for – to the prospects of that same property appreciating further in value.

In summary, consider all the assets you already own, including the house you live in, to determine the best approach for you. There may be other opportunities on a more international scale offering better tax advantages and returns than just property. Ultimately, aim for a balanced and well diversified portfolio that will suit your unique aims and circumstances, today and tomorrow.

Kevin Cassar is regional manager, Blevins Franks.

www.blevinsfranks.com