Investment options – real estate, gold etc.

Physical assets are economic goods with a certain value and demand. They include real estate, commodities, precious metals, jewelry, art and antiques. Any decision to invest in physical assets and other alternative assets should be assessed carefully. Only invest in these assets if you have a sound knowledge about them. 

Click here for more information on shares, bonds and funds.

Investing in real estate

Investment property is a key part of many Austrians’ personal retirement income strategy. As real estate prices are often on a long-term uptrend, the purchase of an investment apartment is considered to be an attractive alternative to other investments. 

People buy real estate for various reasons. Those who purchase real estate for investment purposes generally rent it out and do not live in it. If the purchase is financed by a loan, the rental income ideally covers or exceeds the outstanding mortgage payments. At least in the long run, the rent should generate a steady income that supplements the capital gain.

When investing, you should be aware that your capital will be tied up for the long term. Compared to other investment products, buying and selling will incur high transaction costs. Keep in mind also that it is impossible to predict how the neighborhood around the property, i.e. its location will change (e.g. access to public transport) and that owners are responsible for building maintenance. In the case of co-ownership, such as apartments in an apartment building, maintenance work can only be carried out in consultation with the other owners. If the property is part of your retirement income strategy, note that you might incur maintenance costs even if your income drops after retirement.

However, there is a lot investors can do to maximize the returns on their property. Such factors include negotiating a purchase price, setting the rent as legally permitted, and controlling costs, for example by getting good deals on maintenance work. In addition, you can buy sustainable real estate that is energy-efficient and minimizes the environmental footprint of construction. Alternatively, you can upgrade an existing property so that it meets the criteria of sustainable real estate. 

Note that buying a property is a complex process that requires experience in the real estate sector and a sufficient amount of capital. 

However, if you want to invest in real estate, you do not necessarily have to buy your own investment property. There are other ways to invest smaller amounts in the real estate.

Real estate shares represent ownership interest in stock corporations that operate in the real estate sector. These companies buy, manage and sell commercial and residential real estate. They provide exposure to both shares and real estate without investors having to own their own property. You do not need a lot of money to invest. However, real estate shares involve risks such as stock market volatility, and the return is tied to the performance of a company. Another option is to invest in real estate investment funds. A real estate investment fund collects money from investors and puts it in various properties that are actively managed. Real estate ETFs represent a passive investment in real estate and track a real estate stock index, offering broad diversification across sectors, countries and regions.

Investing in commodities

Commodities are basic physical assets that are inputs for products and services. They are natural resources that are either consumed or processed, and can be grouped into agricultural products, mineral ores and fossil fuels. Although they are suitable for investment, commodities do not generate regular dividends or interest. Their price is determined by supply and demand at the national and global levels, and it is difficult to predict future prices. When considering an investment in commodities, it is important to ensure that they meet your sustainability criteria. Commodity extraction and production is resource-intensive and contributes to climate change. In addition, ethical considerations also play a role. You can opt for investment products that avoid human rights violations such as child labor and instead support community projects.

Commodities are typically divided into two groups: Hard commodities are metals and energy resources such as iron ore, crude oil and precious metals that are mined or produced from natural deposits. They can normally be stored for extended periods of time. Soft commodities consist mainly of agricultural products such as wheat, corn, coffee, cotton and livestock. They are usually seasonal and spoil quickly.

Another way to classify commodities divides them into four groups:

Prices of grain, oil and other commodities can be influenced by factors such as droughts, geopolitical tensions and currency movements. Some investors view commodities as a portfolio diversifier and as a hedge against inflation because commodity prices are likely to rise during periods of high inflation. However, commodities can raise ESG concerns, e.g. about fossil fuels and non-compliance with minimum social standards in the extraction of raw materials. ESG-oriented investments need to take these considerations into account.

There are a number of ways to invest in commodities. Particularly suitable for retail investors are commodity ETFs and commodity stocks. Commodity ETFs are exchange-traded funds that track the performance of commodities and commodity companies. Commodity stocks represent shares in companies that are involved in the extraction, trade and processing of commodities. Share prices are not determined by commodity prices but by company performance.

It is crucial to plan carefully and have a sound risk management strategy. However, these strategies cannot fully eliminate the risk of loss.

Precious metals like gold are well-known physical assets. Gold is a popular and stable investment, especially in times of economic or political uncertainty. In the past, gold prices have gone up during crises, and the metal is often used as a hedge against inflation. Gold is considered a long-term investment, and it is important to know that gold investors need patience as the gold price tends to go up slowly. 

Precious metals

Precious metals like gold and silver can be purchased in the form of coins and bars. They can be bought at banks, on online platforms and from precious metals dealers. When buying coins, you should pay attention to metal value as commemorative coins can have very low metal values.

Precious metals can also be traded on exchanges. There are a number of investment products to choose from. You can purchase gold ETCs, gold stocks and invest in a gold savings plan. Gold ETCs are linked to the performance of the gold price. They allow investors to buy exchange-traded gold at the prevailing market price. Gold ETCs aim to replicate the gold price as closely as possible, and most ETCs are backed by physical gold. Before investing in ETCs, you should make sure that they are actually physically backed. Gold stocks, by contrast, represent an ownership interest in gold mines and not in gold. The value of these stocks is not determined by the price of gold but by company performance. Gold savings plans enable investors to invest in gold with small amounts of money. Many companies now sell gold savings plans, and they use the investor money to buy and store physical gold. They charge a fee for the purchase transaction and for storage. Further information about gold savings plans can be found here.

Note that although precious metals are considered a safe asset class, precious metal prices can be volatile, which can lead to gains or loss. It is therefore advisable that you think carefully about whether buying large quantities of precious metals is a suitable investment.

Precious metals mining often involves human rights violations and destroys the environment. However, those looking for sustainable investment options do not need to exclude this asset class as they can buy responsibly sourced precious metals.

Derivatives

Derivatives are Financial instruments whose price is derived from an underlying asset. Underlying assets can be shares, bonds, precious metals and other commodities etc. When trading in derivatives, you do not purchase the underlying assets such as shares or bonds. Instead, you speculate on the future price of the underlying assets, i.e. on rising or falling prices. This means a much lower capital investment. It is crucial that investors have a clear expectation for the future price of the underlying asset to make good derivative investment decisions. The life of a derivative varies by the type of the underlying asset. Derivatives make it possible to make indirect investments. However, because of their complexity, derivatives are not suitable for retail investors with little experience. 

Crowdfunding and crowdinvesting

Crowdfunding is a type of financing in which a large number of people support projects and companies, typically with each person providing a relatively small amount of money. 

Crowdinvesting is a form of financing for companies, projects and real estate. The money comes from a large number of retail investors, i.e. a crowd. Investors can receive dividend and interest payments, capital redemption with a share of the profit, or a combination thereof. Crowdinvesting projects tend to finance startups and small companies. This means that they are risky.

Crowdfunding can also involve a large number of people donating money to finance charitable and social projects. In reward-based crowdfunding, investors receive products or services from the company they finance. However, they do not receive any returns or an ownership interest in the company. 

Crypto-Assets 

 Crypto assets are a broad category of digital assets. They use cryptography, i.e. encryption technology, to enable anonymous transactions that are difficult to trace. In addition to crypto money, there are Digital tokens that represent rights or assets, such as digital works of art, real estate and investment shares. “Crypto asset” is therefore a very broad term and refers to a variety of digital assets based on blockchain technology. They are traded on digital platforms that are not protected by deposit guarantee schemes. Investments in crypto assets are highly speculative and risky. Due to the high risk, there is a great public interest in regulating crypto assets. The intention is to foster its potential and innovative strength and protect investors. For more information, see the website of Austria’s Financial Market Authority (FMA).

To own and use crypto assets, you need a digital Wallet. A digital crypto wallet is an electronic medium for safe storage of crypto assets. There are different types of wallets that can be stored on computers, smartphones or even in hardware form. The security of crypto assets is largely determined by the security of the wallet. Unfortunately, it is not uncommon for hackers to attack crypto wallets.

Crypto assets were originally intended as a digital means of payment, but they are now mainly used as an investment. Prices of crypto assets are determined only by investor demand. They go up when a lot of investors are looking to buy them (and not because of company performance). The value of crypto assets is therefore very unstable and there is no guarantee that crypto assets can be exchanged for cash when needed.

When investing in crypto assets, you should keep in mind that crypto mining uses a lot of energy, most of which comes from fossil fuels. This depletes our natural resources, which is why crypto assets cannot be considered a sustainable investment.

Note that income from crypto assets is subject to income tax (investment income tax) in the same way as other kinds of investment income. 

In recent years, inexperienced investors have bought crypto assets. Many people own a digital Wallet and various crypto assets, hoping to make big profits fast. Crypto assets are associated with a high level of risk. Before buying crypto assets, keep in mind the following considerations: