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Got your eye on property? Stop and read this before you even think about signing on that dotted line

By Sam Instone - March 05, 2019

House prices are now falling.

Great news if you’re in the market for one.

And good news if you think people could do with being a little less property-obsessed.

Most investors still feel property is a better alternative to a pension.

The evidence shows otherwise.

Here’s why.

Being British, I was born with a property-fetish gene.

I live in Dubai – an equally ‘bricks and mortar’ obsessed market where fortunes are made and lost within ‘real estate’.

This is because houses are economically significant and the cause of a great deal of insecurity.

They are also emotional – not least because they literally hang over us.

As part of a balanced portfolio, property makes perfect sense.

But does our emotional love of property cloud our judgement when we think about it as an investment?

Here are 12 facts to think about before buying.

(Hat tip to Jonathan Clements from Humble Dollar for these).


1. Homeownership isn’t as safe as it feels

The old saying “you can’t go wrong with bricks and mortar” has been well hammered home.

But the truth is you can.

A house purchase is a big, highly leveraged, undiversified bet.

It’s arguably substantially riskier than owning a diversified portfolio of index funds.

Yet it doesn’t feel that way.


2. Don’t buy unless you plan on staying put for 5-7 years or longer

Buying and selling property involves steep transaction costs.

You need many years of price appreciation to overcome that hit.


3. Home prices generally rise slowly

They climb faster some years and slower in others.

Over the long haul, you should expect an annual increase of around a percentage point more than inflation.

Now that prices are falling, that tends to feed on itself.

Just as in the stock market, everyone wants to buy at the bottom.

When prices are rocketing, people panic to get in.



4. Annual home maintenance costs

As a rule of thumb – expect to spend around 1-2% of your home’s value on maintenance each year.


5. There’s a good chance you’re going to lose money

Any increase in your home’s value will be largely offset by transaction costs, maintenance, property taxes and homeowner’s insurance.


6. The benefits of leverage are often offset by the cost of it

Let’s say you put down £30,000 on a £300,000 home.

If the home’s price increases 30% to £390,000, your home equity would soar 300%.

But how much did you pay in mortgage interest to get that leveraged gain?

Often the total interest paid rivals the increase in home equity.

Particularly as global interest rates rise.


7. The mortgage tax relief is changing for landlords

Mortgage tax relief is being phased out for UK buy-to-let property owners.

Landlords will instead receive a reduction on their final tax bill of up to 20% of mortgage interest costs.

The result? Over 400,000 UK resident lower-rate tax payers pushed into a higher bracket with UK higher-rate tax payers most affected.


8. If you have a fixed-rate mortgage, you want inflation

The inflation will likely drive up both your home’s price and your salary.

While leaving your mortgage payment unchanged.

That means you can repay the mortgage lender with depreciated pounds while having more disposable income for everything else.


9. The greatest benefit of all

You get to live in the place yourself.

Despite potential depreciation of the home’s value, you’re effectively renting the home to yourself.

House key


10. A paid-off home is the cornerstone of a comfortable retirement

Paying off your mortgage eliminates a major expense – making retirement more affordable.

This can finance retirement by downgrading to a smaller place or equity release.


11. Remodelling is a money loser

Home improvements will increase the value of your home.

But they are expensive.


12. An estate agent wants you to act quickly

If you spend an extra month looking for a home or wait for a buyer to offer you a higher price, the agent might make little to no additional commission.

But don’t allow yourself to be rushed.

Property is a major financial commitment.

The bottom line

Investing in property is not all doom and gloom.

I’ve luckily ridden “the ladder” myself.

But you need to think about it carefully.

It isn’t a good alternative to a well-invested pension or retirement fund.

Considering all data not just the headline figures.

Focus on evidence not emotions.

Buy property you can comfortably afford, you’ll enjoy living in, or forms part of a balanced portfolio of equities, property, bonds and cash.

Wise decisions could make all the difference between whether you are now able to think about jacking it all in for a portfolio career with a heavy dollop of golf and city breaks on the side…

Or whether you are looking down the barrel of another 25 years of back-breaking mortgage payments that could rocket to unaffordable, lose-your-home-at-age-65 levels on the whim of central banks.

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For further reading on pensions:

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