In the previous blog, we discussed the basics of investing and distinguished between two popular investment categories: stocks and real estate. It was noted that investing in real estate often has a high entry barrier (often starting at €200,000 or more). BRXS makes it possible for anyone to invest in residential real estate through notes starting at €100. We purchase and manage these properties and finance them through the notes. As a noteholder, you receive a fixed net interest rate based on the initial rental. The properties we select are located in major cities such as Amsterdam, Arnhem, and The Hague. In this blog, we have a closer look at BRXS notes and compare them to alternative investment products such as stocks and crowdfunding in terms of transparency, volatility, and predictability.
- Gross versus net return: transparency is key
- Fixed interest: knowing what to expect
- Conclusion: return and peace of mind
Gross versus net return: transparency is key
Fool's gold
Several investment funds and crowdfunding platforms try to persuade consumers to invest by using attractive advertisements highlighting high returns. For example, a famous crowdfunding platform advertises with phrases such as 'Invest with an average return of 8%'. This figure represents the gross return, a fact that is not clearly communicated upfront to attract potential investors.
However, our analysis of their public data over a 9-year period reveals a significant difference. The average actual net return is 3.37 percentage points lower than the advertised gross return – approximately a 44% reduction. This substantial difference is due to various costs like management fees, depreciation, and provisions that are only later deducted from the gross return.
While the resulting net return may not be inherently bad, the discrepancy between the advertised and actual return is significant. Furthermore, as discussed in the previous blog, risk and return are intertwined. For the level of net returns this platform delivers, investors could potentially find options with a much lower risk profile.
BRXS notes
The BRXS notes offered on the platform also indicate a certain return to the customer. However, these fixed rates are net. Once BRXS is offered a rented property, the real estate analyst team makes a very detailed calculation of all costs. Costs include, but are not limited to: municipal taxes (property tax, sewerage and water charges), management fees, cash reserves (an emergency buffer to cover these costs), monthly savings for (potential) maintenance costs, insurance, and more. The total annual bare rental income, minus all operating costs, provides an overview of the total net rental income. This net rental income is compared to the total purchase price including all associated costs (transfer tax, agent's fees, notary fees, etc.). The bottom line is the net return offered to BRXS investors.
Transparency
Although gross returns for real estate investments, i.e. the gross rental income (excluding all costs) compared to the purchase price (excluding all costs), show a much better return and appear more attractive, BRXS chooses to be transparent from the start. Showing the correct net returns up front may be less appealing, but it is reliable, transparent and honest.
Fixed interest: knowing what to expect
Volatility
As discussed in the previous blog, volatility, the degree to which an investment fluctuates (rising and falling in value), is a significant indicator of financial risk. Stocks generally provide a good return in the long term, but are also volatile. For example, the value of the Nikkei, the Japanese main index, dropped by 12% in early August 2024. In the long term, such 'market crashes' are expected to recover, but it can be unsettling to see your portfolio's value suddenly drop by 12%.
Predictability
When investing in BRXS notes backed by Dutch residential rental properties, volatility and therefore risk are relatively low. As mentioned above, BRXS calculates the expected costs of buying an investment property very precisely and builds in a cash reserve for unforeseen costs. BRXS displays the fixed net annual interest rate (e.g. 5% or 5.5% net) on the deal page of each offer and pays it to the investor quarterly, in instalments. Potential setbacks, such as additional costs (boiler breakdown or a non-paying tenant), are therefore not reflected in the return, but come from the cash reserves. In this way, the investor knows exactly what to expect, which gives him peace of mind. You can also make a good forecast of the future income from your investment pot.
Compound interest
As an annual net return of about 5% can be made with a relatively low-risk profile, these profits can, for instance, be reinvested, which could also yield about 5% net return. In the long term, this 'interest on interest' ensures that your capital grows increasingly faster. Pim van Vliet and Jan de Koning write in their book 'De Conservatieve Belegger' that €100 invested in a low-volatility portfolio in 1929 would have yielded more than €1 million. The same €100 invested in a high-volatility portfolio would have yielded less than €33,000. According to Van Vliet and De Koning, the reason for this is too much focus on the short term. As far as high volatility is concerned, the longer an investor's horizon, the more negative the impact of risk on long-term returns. This is purely due to the phenomenon of compound interest, where profits can be reinvested, which in turn yields returns.
Conclusion: return and peace of mind
Investing is a popular topic at parties and gatherings. Everyone has their own ideas about how best to invest money, so there are many different opinions. Success stories are also often told, while scenarios where people have lost a lot of money are not. By educating yourself on the issues, especially diversification and risk, you can make the right choice that suits your profile. Cryptocurrencies, real estate, stocks, there are many options with different risk profiles. Rather than putting all your assets in a high-risk product like Bitcoin, it may be wise to diversify.
Investing some of your assets in relatively safe, fixed-income products such as BRXS notes can be a good foundation for a low-risk portfolio. Want to start building a well-diversified portfolio by investing in BRXS notes? Check our app for the latest offers.
Photo by Alireza Parpaei on Unsplash
