Is there a catch?

tdowson

Hotel rooms and villas are being sold for a 'Resort and Spa' development in the Carribean. The deal offered is 50% or 100% ownership of a room. The room as a property is 'independently' valued at £100,000. 100% ownership can be purchased for £50,000 (50% discount on 'market value') or 50% ownership for £25,000.
Taking the 100% ownership example, from the point of purchase the owner gets a fixed income of £3,500 p.a. (7% return on investment) for 10 years. Thereafter from year 11 onwards the income is higher (15%), but this is only a forecast not fixed, so we will ignore that and assume anything is a bonus. In theory the property should appreciate in value (allegedly it is purchased at 50% discount), but for arguments sake assume the property is only worth what it was purchased for and no appreciation.

There is the risk the developer could go bust, there are insurances, but let us assume they are worthless too.

Worst case scenario appears to be invest £50,000 and get 10 x £3,500 p.a. = £35,000 return after 10 years. Not to be encouraged, but the up side is that there could be continued income, and the property may well appreciate in value.

There is also the option to put this in a SIPP which I understand as a 40% tax payer could mean investing £30,000 for the £35,000 guaranteed return over 10 years, which is 11.6% p.a. return. If this is in a SIPP, does the rental income have to be paid into the SIPP too, and does the property (or proceeds if I sell it early) have to stay in the SIPP until I am of retirement age?

Has anyone experience, good or bad, of this type of scheme? Am I missing some other downside?

Thanks all!

Jegersmart

The downside is the risk which is subjective. I would and have considered things like these in the past with say a max of 10% or so of my portfolio but personally I am much more comfortable with investing and trading equities and derivatives because this is what I "know". If you have experience of property developments in developing countries and have contacts there etc etc and this would form only a part of a larger portfolio then it could be viable - but this is only my opinion ofc.

Good luck!

J

tdowson

Jegersmart wrote: »

The downside is the risk which is subjective. I would and have considered things like these in the past with say a max of 10% or so of my portfolio but personally I am much more comfortable with investing and trading equities and derivatives because this is what I "know". If you have experience of property developments in developing countries and have contacts there etc etc and this would form only a part of a larger portfolio then it could be viable - but this is only my opinion ofc.

Good luck!

J

Yes this would not be all eggs in one basket. I have Stocks and Shares ISAs and some cash savings too.

Jegersmart

tdowson wrote: »

Yes this would not be all eggs in one basket. I have Stocks and Shares ISAs and some cash savings too.

As aggressive as I am, I wouldn't put more than 15% of my investment pot into something like this, at an absolute maximum.

imho
J

Linton

You are missing an important downside. It is more than possible that the company is not regulated by the FSA. This means that if something goes wrong you are on your own - you may well get no compensation. So the worst case scenario is that you get no return and lose your capital. Your best case scenario assuming you ignore the alleged potential after 10 years is that you get a 7% return. This sort of return is quite possible with a well managed share/fund portfolio which would be protected by the FSA.

As I am not sufficiently rich to regard the deal as a pure speculation where a 100% loss could be shrugged off I wouldnt touch it. Your situation could of course be different.

When your SIPP buys something such as property, that something is owned by your SIPP not by you. These are two different legal entities. So the returns from the investment must be kept in the SIPP.

Can you give us the name of the name of the company wanting your pension funds? We can have a check on it.

SliAbhaile

What about management costs?

A friend of mine (no, not me honestly) got burnt buying an apartment in a hotel in Tenerife. On the surface it sounded great: a decent price for first line to the sea, guaranteed income from the hotel and 24 hour porterage and cleaning.

Of course the reality turned out different. Two floors of the hotel had been sold like his and the owners were treated like a cash cow for the management charge. The hotel filled its "own" rooms first of course and the spillover rental for the privately owned rooms was dismal. It still didn't stop them charging the owners EUR €80,000 to repaint the corridor. At one point my friend reckoned the owners' service charge was paying for the entire payroll of the hotel.

He is currently suing them. Lord knows how long this will take or what the outcome will be.

Tread carefully.

innovate

Is the development on an island that exists? What evidence is there that the development will go ahead / will complete as advertised?

Think I'd rather buy the flat above the local chippy.

le_loup

innovate wrote: »

Think I'd rather buy the flat above the local chippy.

Chips AND bubble and squeak! But you're not as slim as your avatar.

innovate

Afraid, you are right....but I can dream :cool:

jimjames

tdowson wrote: »

There is the risk the developer could go bust, there are insurances, but let us assume they are worthless too.

Worst case scenario appears to be invest £50,000 and get 10 x £3,500 p.a. = £35,000 return after 10 years. Not to be encouraged, but the up side is that there could be continued income, and the property may well appreciate in value.

I'd say you are understating the worst case. I'd suggest that the worst case is actually 0 return. Either developer goes bankrupt, hotel never built or done so badly, hotel has no business or stops trading and no prospect of making money. Would a hotel room really have appreciated in value in 10 years time - or would they demolish and build a modern one instead? And that assumes you get any income in that time.

Any of these are possible and when it is the other side of the world it isn't exactly easy to check up on.

£50k in and £35k out doesn't sound like a good investment to me. Rather than being worst case of £35k, that might actually be the best case.

mulronie

To answer the thread title - Yes. There is a catch. If the juicy promised returns were net of any catch, the developer wouldn't be offering you the deal. You think they are selling you an asset for 50% of its true value, and a 7% fixed return on your initial investment, without a catch?

If you are not ruined by developer bankruptcy or outright fraud, you will eventually be killed by management costs - and end up owning a piece of junk in a far-flung land that costs you a fortune in annual fees, doesn't generate the promised returns, and can't be sold.