Have you ever heard the term, “safe as houses”? This is exactly how many would describe their attitude towards property investment. That it’s the safest haven for your money, and an appropriate platform to shelter long-term savings. To be fair, property can often be a fantastic investment. Owning large quantities of property, mortgage free, in a robust market with all your rentable space filled, could make you incredibly wealthy. Such a venture would be perfectly suitable as an income platform and savings vehicle, but very few of us would ever find ourselves in an investment utopia as described above. For the average person, it is important to consider why property is not always a suitable platform for long-term saving, and why the term “safe as houses” does not always ring true.
The most common fallacy when it comes to property is that it is a relatively riskless investment when compared to regular paper-based assets, such as stocks and bonds. Due to the fact that property gives the buyer physical, tangible value, it is perceived as not being very “pie in the sky”, and is thus preferable when compared to stocks and bonds, whose values are observed and perceived often only from numbers on a computer screen. The inconvenient truth, however, is that property prices can fluctuate as much as stocks, bonds and mutual funds. Another element of risk one should consider when it comes to property, are the chances of your investment being destroyed or damaged by natural disasters and/or accidents. This not only puts your property at risk, but all assets held inside your property as well. To mitigate the potential loss from the aforementioned risk, insurance would have to be purchased, and depending on the geographical location of your property, can be a very expensive endeavor. Finally, it’s important to note that the financial crisis of 2007-2008 was directly related to a collapse in the property market, and the assets derived from it.
The second most common mistake people make when it comes to property is the belief that when property is purchased on credit, that it becomes the purchaser’s asset. Property is only an asset to those who lend you money. In the same sense, property has formed a historical platform for unsustainable institutional lending to consumers. Obtaining loans against personal property one owns can often lead to one’s personal financial downfall, and would most certainly be inappropriate if one were holding such an asset to finance long-term savings goals, such as saving to have an income during retirement. Property does not give you security; it gives your creditors security.
Another error many consumers make when it comes to property investment, and investments in general, is that individuals will often start an investment with no specific purpose or goal in mind. If you want to buy property to let, to produce some additional income or to finance an idealistic lifestyle, that could make sense. If you want to buy property with the idea of residing in it for the foreseeable future, you cannot consider that an investment in the truest sense, because it will form part of a personal, emotional attachment, and might be very difficult to dispose of in the long run to realize profit. I believe that something can only be considered an investment when one plans to profit from it.
Purchasing property for the specific purpose of funding retirement could be seen as inappropriate, as it is extremely difficult to forecast what price you would be able to sell for at a specific time in the future for one to have enough money to fund a comfortable retirement. Regular, disciplined, long-term savings plans would be most suitable for this purpose.
Finally, it is extremely important to remember that property is not a liquid asset, i.e. you will not be able to sell your asset and receive the cash proceeds very quickly. Any home owner who has disposed of their home in the past will tell you how painstaking it can be to find a suitable agent who can match your home with a buyer, at a suitable price. Not to forget how much processing transactions can cost, on top of the management and maintenance fees before sale, which can pile up and eat the return on your investment away. The process can often take many months and you might not sell your home for the price you hoped for.
In property-owning democracies, where most of us hail from, it can often be difficult to turn down the temptations of owning your dream home as soon you start to enjoy some form of wealth. Think of how often many of your friends, and loved ones, fall victim to the mantra of prioritizing marriage, home purchases and children over making regular, disciplined contributions to long-term interest-bearing retirement or savings plans. Just like any other investment, property can be fantastic when paired with a specific purpose and goal. Make sure that the purpose of your investments fit the goals that are most important in your life.
Written by Sven Roering, Total Wealth Management
Partner & Member of the Investment Committee