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Is property investing properly investing?

18th March 2019

The Author: Tom Vjestica

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Tom brings great international experience to the team, has always held an interest in both the financial and the marine sectors, and is a strong believer in the importance of having a financial plan in place to build for the future.

I was bought up believing that buying a house was an investment and you should do it come hell or high water. For as long as I can remember, both my seniors and peers have touted property as ‘a good investment’.

But, is it really?

I explore the reality around whether buying bricks and mortar actually is a good investment.

What is a ‘good investment’?

Robert Kiyosaki, author of the renowned “Rich Dad, Poor Dad”  puts it very simply. He talks about an asset as something that money comes in from, whereas a liability is something you pay money out for. A good investment is something you gain more from than you paid for it.

Property always pays off in the long run?

Let’s look at an example to see if this assumption holds water.

You’ve just had the home you’ve been living in for thirty years valued.  You are ecstatic to discover that the house you initially financed with a €100,000 mortgage at 5% interest is now worth €300,000.

A jaw-dropping 200% return over thirty years… or a, maybe not so remarkable, 3.7% annual return.

But let’s dive deeper into the figures.

Your Original mortgage €100,000.00
Mortgage interest you’ve paid at 5% over 30 years€92,422.95
30 years taxes and insurance at €2,000 a year€60,000.00
Maintenance, repairs & upgrades average roughly 1% of purchase price per year, so €1,000 a year for 30 years€30,000.00
Total investment€282,422.95

And the above figures don’t include inflation! This averaged around 3.5% a year for the period. So, when we take that into account, our 200% return is much closer to zero.

The question is, would you put that amount of money into a savings account that gave you practically zero interest over thirty years?

When you sell your house, it feels real good to get a nice cash lump sum. But, in reality, you’re only getting your money back. If we apply the rule that an investment is something that returns more than you paid for it, then the maths indicate that your home is not an investment.

What if the mortgage is already paid off and I continue to live there?

Even if you’re no longer paying a mortgage on the property, you are still liable for paying taxes, insurance, and maintenance costs.

In short, although your net worth may appear higher, any equity you have is still locked up in the property, and it is still taking money from you. Selling the house, or raising capital by refinancing it with another mortgage simply puts you back to square one.

Some might argue that the value of the property will appreciate over time, but we know that isn’t necessarily true.  It’s about timing – when you get into and out of the market. No-one can accurately predict what’s going to happen in the world and how that might affect the value of your particular property at any given time.

What about buying property purely as an investment?

Buying an ‘investment property’ rather than simply buying a property to live in can yield a valid return on your investment. This represents a different relationship between you and the money you spend on the property. This is because it’s not you making the payments, but your tenants.

Let’s have a look at our earlier example in this context.

Initially, you put a deposit down on the property, say €20,000.00, financing the remaining cost over thirty years.  The money you receive from renting the property pays for the mortgage repayments, and annual taxes, insurance, repairs, upgrades.  To protect your investment over the term, you increase rents annually in line with inflation and tax increases.

After 30 years, your property is worth €300,000.00 and, in this instance represents an annual return of 9.4% on your original €20,000.00 deposit.

Let’s assume you always have tenants, and because your tenants pay you more each month than it costs to own the home, your income versus expenditure nets you a modest income of around €150 a month, giving you an additional €54,000.00.

So, same property, different scenario. This time the property is an asset rather than a liability and because it returns more than you paid for it, it’s an investment.

If you’re renting your house out…where do you live?

That depends on the lifestyle you want and how your mindset is split between ‘freedom’ and ‘security’.

Millennials tend to enjoy more flexible mobile lifestyles than previous generations by making the best use of available technology. They often adopt diverse, resourceful and innovative mindsets to managing income generation, ‘work’, and their relationship to exchanging time for money.  Taking full advantage of their freedom to travel, often leading ‘nomadic’ lifestyles as so-called ‘digital nomads’, and making the best use of the incomes they generate to perpetuate the lifestyles they desire.

This shift to a more global culture, driven by a need for freedom of movement means that many do not wish to feel locked to a particular area or, indeed, to one specific property.  You may own property, but you don’t live in it.  It’s more of a lifestyle match to travel and rent.  You prefer ‘freedom’ over ‘security’.

If you are lucky enough to work in the superyacht industry the problem of accommodation is taken care of when on charter. This leaves you free to save your property investment income. This is one of the unique situations where letting a home may actually provide security as well as freedom. As should you decide to move back on shore you know you have a permanent residence to help with the transition.

And if you crave home comforts…

Sometimes investment is about more than financial returns

We’ve focused here on the financial aspects of owning property because monetary value is typically how we view investments, but there are other, perhaps more intangible benefits to owning your home. These might include;

  • You’re proud to own your own home
  • You want the freedom to make changes to your home to make it yours
  • You want to live in the same place forever
  • You want a stable base for your children to grow up.
  • You want to pass the value of your home to your children

There are, of course, many more very valid arguments and justifications for why you prefer to own your home. The stability and reward of owning and investing in a home may be more important to you than a pure return based on numbers. It might be the stability of your children attending the same school all their lives or renovating a building you fell in love with.

Is buying a house a good investment?

The answer will be different for everyone; there is no right or wrong answer.  It depends on why you want to buy a property, and what you want to do with it once purchased.  If your lifestyle dictates that owning a property is not a priority, what you do with your money instead to achieve your personal goals?  The real question, perhaps, is what do you want, freedom, or security?