Property is an asset class which tends to split the investing community. Some investors love investing in property and access the asset class through various means. Other investors eschew property altogether and focus on equities and bonds.
A common criticism thrown at bricks and mortar is that many investors already feel over-exposed to property. Why? Because they usually spent far more money than they wanted on a single property – their own home!
I personally argue that a property shouldn’t be counted as part of your investment portfolio, however to those who keep an eager tab on the valuation of their house, it may feel a little too much to begin adding more property investments into a retirement pot as well. I have sympathy with that view.
To a younger investor, the opposite might apply. If you’re planning on saving for a house over a long period (e.g. 5+ years), then adding property to your portfolio could act as a useful hedge against house prices racing upwards while you’re saving up for a deposit.
If house prices rise, your investment portfolio should grow faster too, helping you to keep pace as the deposit bar is raised. Like the rest of this article, this is only a general observation and not a specific recommendation.
Reward – property
Property investments provide a return in two main forms:
• Rental income
• Capital appreciation
Rental income and capital appreciation are very different investment objectives. Rental income is earned by letting the property to a short-term tenant over a period of time.
Capital appreciation is only realized as a cash gain when a property is sold – typically after enhancing its value through development, extensions or redecoration.
Investing in land is seen as more speculative, because an unused parcel of land does not generate rental income.
Risk – property
Property ownership brings several risks:
As a landlord, you may be drawn into issues with troublesome tenants, damage (accidental or otherwise), void periods and the mountains of red tape and an unfriendly tax regime.
It can be difficult to ‘diversify’ yourself as a landlord, due to the fact that you may not be able to afford to own more than one investment property to begin with.
As an investor in property development companies, your investments could lose significant value in a downturn. The market value of British Land, a diversified Real Estate Investment Trust (REIT) lost two-thirds of its value during the financial crisis which began in 2007.
The common phrase ‘as safe as houses’ conveys a sense that the property asset class has a degree of security which others do not. This paints a misleading picture. In some parts of the North American Mid-west and the UK house prices have actually not yet recovered to the pre 2007 price level when inflation is taken into account.
Liquidity – property
Property is very difficult to transfer between two parties, owing to the multitude of factors that make each property unique.
Banks, surveyors, conveyance solicitors and sometimes planning permission departments in councils will sometimes all need to be involved to simply let a single house change hands. This can lead to orderly house sales taking between 2 – 6 months to fully complete.
High transaction costs, such as stamp duty, appraisals, inspections and real estate agents fees can be in excess of 5%-6% of the property value, which further discourages trade.
Properties can be sold expediently to ‘house buying companies’ or through auctions, however this speed will come at the expense of not achieving the full market price. House buying companies need to make a profit margin on the resale of the property, and auction bidders will discount the property to cover unidentified risks or issues which may need remediation.
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