Hi all,
I feel that most people are not too familiar with funds in general or the fund industry in Portugal. Here is a new post by us on funds. Don’t hesitate to contact us if you want more information!
Unlike previous years, in 2021, over 75% of our clients have chosen to go with the fund route. We are not only seeing Americans, but also clients from Asia like Hong Kong, Taiwan, China and India are choosing fund over property.
This shifting of trend is likely caused by the following reasons:
- With the pandemic, many clients couldn’t come over to view the property in person and are not confident in buying a property without seeing it, or knowing the area
- Not too certain where property market in major cities will head from next year on when residential properties will no longer be qualified for Golden Visa in major cities like Lisbon and Porto and other coastal area
- Residential properties in Lisbon, Oporto and most of the costal areas will no longer be qualified for Golden Visa in 2022, which could make it riskier (if you are not able to catch the online submission deadline of December 31, 2021) for a Golden Visa process that starts in the later part of 2021
- A wider selections of funds in terms of quantity, investment scope and strategy
We have written an article about fund and property options where you can take a closer look of these two alternatives.
In this post, we will focus on the two most notable advantages of funds over properties and drill into details.
Fund is More Cost Effective
Lower entry cost
- Subscription fee of average 1%-2.5% on funds vs. IMT + stamp duty of 5%-7% on property
Lower initial fee outlay
- Sometimes, the fund subscription fee (depending on fund) are deducted from the 350k of fund invested, whereas the IMT + stamp duty are paid on top of the investment
Lower exit cost
- 0% on the exit of fund vs. 5% on real estate agent commission
Lower tax
- 0% tax on income and profit from fund vs. 28% tax on income and capital gain from property
Lower ongoing cost
- While the management fee can range from 1%-2% on average for funds (most are paid by the fund, no need for investors to pay on top),
- A typical property management company charges 1 month rent for long term rental and 20% - 30% of revenue for short-term rental.
- On top, real estate agent normally charges 1 to 1.5 month rent for commission of getting long term rental.
- Additionally, maintenance fee for a property when things break down can be expensive and a big hassle. In fund, there is no maintenance needed.
- Lastly, properties pay property tax of around 0.5% - 1% per year.
Simulation of profit/ loss comparison
We have done a simulation below on income and expense of going through fund and property with 350k investment.
The below calculation didn’t take into consideration of the following
- properties may be a new built and won’t be completed until 1-2 years later, meaning the rental income won’t come in until then
- any vacancy period for rental
- any maintenance fee
Assuming no gain / loss on the captial invested. For property route, you get a loss of 7,433€, while for fund route, you achieve a gain of 45,500€.
The difference of the profit/ loss for a typical property and fund investment comes to 61,000€!
Fund is More Diversify
Having said enough about the big differences on profit. We now introduce the single one biggest advantage of fund investment over property/ hotel project investment - diversification of asset investment. And it is also one of the utmost concern of Golden Visa investors - to diversify, and in turn, lower the risk.
By regulation, Golden Visa qualified fund can’t invest more of 1/3 of its capital in any single company/ asset. Most funds invest in 3 - 20 different assets/ companies. Whereas in property, most people just buy one property, or one project.
Further diversification
Clients can easily further diversify their risk by investing into more than one fund. For example, they can combine a low risk fund with a higher risk fund to gain some upside while having a conservative fund as a foundation. Or they can choose two to three low risk fund but invest in different areas to further diversify the risks.
This is not easy to do with property or hotel projects, with the limitation of the followings
- budget - 280k, 350k or 500k can only get you as far as 2 to 3 properties
- location - you can buy in different cities, but management would be a headache
- types of property - the budget of 350k or 500k limits the choices you can have on the type of real estate assets (most clients just focus on residential, the budget won’t allow you to buy a commercial space for supermarket or agricultural land for corporate farmers). The budget also limits the size of your properties, meaning you may end up buying only studio apartments.
Clients may end up buying 2 residential properties in the same city. But the diversification is just on the number of properties, but not on the size, the location, or the asset type of the properties.
With funds, you can invest in areas where you as an individual won’t have the budget or the expertise to invest in. Just under the umbrella of real estate, you can choose from rehabilitation residential to luxury residential, from commercial to agricultural and logistics assets, from development projects to rental premises. You can also easily diversify into other business scope such as environmental, IT and so on.
More and more of our clients is choosing to invest in more than one fund. We anticipate that this trend will be very prominent next year, when the minimum threshold goes up to 500k.
What should I consider when choosing a fund?
Choosing what to invest in for a one-off 350k investment is no easy task. Here are a few points to think about as a starting point.
- To start with, you should know your own risk profile, what is your objectives in the investment, how much return are you looking for and how much risk can you take?
- Then, you should look at the return potential of the asset class where the fund invests
- You should also look at the leverage of the fund. The more leverage they use the more pressure they will have to generate income or sell the asset to pay off loans.
Happy reading!!