You will have heard to term ‘safe as houses’ – this is exactly how many people describe their attitudes towards property investing, believing that it’s the safest haven for their money and an appropriate platform to shelter long-term savings.
Indeed, property can be a worthwhile investment. Owning a number of properties, 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 the investment utopia described above. For the average person, it is important to consider why property is not always a suitable platform for long-term investing, and why the term ‘safe as houses’ does not always ring true.
Myth #1: Property investing is risk-free
The most common fallacy when it comes to property is that it is a relatively risk-free investment compared to regular paper-based assets, such as stocks and bonds. Physical property gives the buyer tangible value, and is thus preferred 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 just 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 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, this 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.
Myth #2: Property becomes your asset immediately
The second most common mistake people make when it comes to property investing is the belief that when real estate is purchased on credit, it becomes the purchaser’s asset. Remember – property is only an asset to those who lend you money.
Similarly, property has formed a historical platform for unsustainable institutional lending to consumers. Obtaining loans against one’s personal property can often lead to financial downfall, especially if the ‘owner’ were holding their property ‘asset’ to finance long-term savings goals, such as retirement income. The moral of the story is: property does not give you security, it gives your creditors security.
Myth #3: Property always means profit
Another error many consumers make when it comes to property investment (and investments in general) is that they will often start investing without a specific purpose or goal in mind.
I believe that something can only be considered an investment when one plans to profit from it. For example – if you want to buy property to let, to produce some additional income or to finance an idealistic lifestyle, that could be profitable. But 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.
Myth #4: Purchasing property can fund your retirement
Purchasing property for the specific purpose of funding retirement is problematic, as it is extremely difficult to forecast the price you will be able to sell for at a specific time in the future to have enough money to fund a comfortable retirement. Regular, disciplined, long-term savings plans would be most suited to this purpose.
Myth #5: Owning real estate is cash in the bank
Finally, it’s 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 homeowner who has disposed of their property in the past will tell you how painstaking it can be to find a suitable agent who can match your home with a suitable buyer at a suitable price. Not to mention how much processing transactions can cost on top of the management and maintenance fees before sale, which can pile up and eat away at the return on your investment. The process can often take many months and you may not sell your home at the price you hoped for.
In property-owning democracies, 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 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 profitable 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.
For professional financial advice, get in touch with TPIM for your private wealth management: http://tpim.co/contact-us/.