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Robin Powell: In many countries, buying houses and apartments and then renting them out has become very popular. This buy-to-let boom has been fuelled, in part, by generally strong growth in the value of residential property. But we shouldn’t let that blind us to the risks involved.
Jens Hagendorff: There are very good reasons to own your own home. Whether or not they make a great investment is a different question and I think, in some parts of the world, a lot of people who invest in homes are often underestimating the risks involved. And there are true costs compared with investing in the stock market, for instance.
For most people, house purchases involve a mortgage. Meaning they are essentially a leverage buy; and that means that, if the price of that asset were to fall in the UK, US – all of those countries have got a history of property bubbles that burst at some point. If the property bubble were to burst, you don’t owe all your bank any less money, you’re still liable for the amount that you borrowed. So this negative equity then becomes a real drag on your lifestyle going forward.
Robin Powell: With any financial investment, it’s very important to look at the ongoing income you can expect to receive from it. Ask yourself, what kind of rent can I realistically expect to receive for a particular buy-to-let property? And does that level of income justify the asking price?
Jens Hagendorff: If the rental income justifies the investment, that can be a wonderful way of investing money. Also, a very helpful way for the economy because you are providing some space to live for people – who often are younger, whether students or young professionals – who are individuals, at the moment, priced out of the market, who otherwise would find it very difficult to be able to afford somewhere to live.
Robin Powell: Remember, if you already own, or have a mortgage on, the house you currently live in, you are already exposed to the housing market. Too much exposure can be very risky.
Jens Hagendorff: Even most very large buy-to-let investors will only own a small number of homes and that means that you may own your own home, you may own a couple of properties that are bought on a buy-to-let basis. But that makes you extremely exposed to falls in the property market, which means you might lose some of the value of your own home as well as the value of your buy-to-let property might go down. If you were a stock market investor, and you’d approached a professional adviser and that adviser would have told you to put perhaps a million pounds into three stocks, you’re very likely to be able to take legal recourse against such an adviser because they would have really under-diversified you massively and left you hugely exposed to risk in the fluctuations of your assets. But that’s sadly the way that a lot of buy-to-let, and a lot of property investors, approach their investments, which is to remain very undiversified and therefore very risk-exposed.
Robin Powell: And one final thing. Many buy-to-let investors underestimate what might be called the hassle factor — dealing with difficult tenants, for example, or the ongoing maintenance that every property requires.
Buying property with a view to renting it out is a decision that’s not to be taken lightly.