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If to sounds too good to be true….

If it sounds too good to be true…

Last weekend’s Financial Times reported how investors have suffered losses and problems with bargain properties that they have bought in Detroit and Florida through UK companies. The concept was that an investor could buy a derelict property for $40,000-$60,000 including the cost of refurbishment, which would then be let to tenants under a government backed scheme, giving returns of around 16% per annum – a fantastic chance to buy at the bottom of the US property market.

The FT reports the experience of some investors where the refurbishments haven’t been carried out, the properties are still vacant, they cannot get their money out, and they have incurred US property tax liabilities. One couple were reported as investing the entirety of a small inheritance which they cannot afford to lose. You can read the full article by following this link; or we can email it to you.

So where did these investors go wrong?

1. If it seems too good to be true – IT IS! An investment paying 40% income year after year does not exist, or not for individual investors at any rate. If such an opportunity did exist, it would be snapped up by investment banks, or even the people promoting the scheme!

2. Liquidity – unless you have an investment that can be traded on a quoted market, daily, weekly, monthly, or even quarterly – it is only worth what someone else will pay for it. Often this means an investment is worthless.

3. Diversification – this is usually the biggest mistake that investors make when it comes to investing in property. If you own one property in Detroit, and someone decides to strip it of all its copper piping or vandalise it, you will take a big financial hit, even when compared to investing in specialised stock markets. Investors should have exposure to different classes of assets – remember the old adage “Never put all your eggs in one basket”.

4. Authorisation – The properties were bought through “Property Sourcing Companies” who are not regulated by the Financial Services Authority. They have brilliant marketing emails and websites full of promises of great returns – you would be stupid to ignore them, right? No! I found one with a stated Code of Ethics which can be “changed at any time without notice”.

5. Risk – you cannot escape the following basic truth. You receive capital (or income) returns in exchange for taking risk. The higher the return, the higher the risk. There are innumerable examples of investment disasters where this basic fact was ignored e.g. BCCI, Zero coupon investment trusts, dotcom shares and Icelandic Banks.

How can clients safeguard themselves?

Look to see who these companies are regulated by, which should be on all communications. If it’s not there, they aren’t regulated, and nor are the claims that they are making.

When it comes to money, Bluecoat Wealth Management is working in partnership with you. Get in touch and ask us what we think about any proposed investment. Does it fit in with your overall financial plan? What are the risks and potential problems?

If friends or loved ones tell you about some “wonder investment”, suggest that they contact us about our complimentary Second Opinion Service. Our business has grown almost entirely by recommendation, so do not be concerned about telling friends or loved ones to get in touch.

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