Is property a good investment?

Is property a good investment?

Buying houses and apartments to rent out has become hugely popular in many countries, with the buy-to-let boom fuelled in part by strong growth in residential property values. But strong past performance shouldn't blind us to the very real risks involved, or to the question of whether property actually makes a good investment at all.

In this video, Professor Jens Hagendorff explains why so many people underestimate the risks of investing in property compared with the stock market. There are perfectly good reasons to own your own home, he notes, but whether property makes a great investment is a separate question entirely. One of the biggest and most overlooked risks is leverage. Because most house purchases involve a mortgage, they are essentially a leveraged buy. If prices fall, and countries like the UK and US both have a history of property bubbles bursting, you still owe the bank the full amount you borrowed. That negative equity can become a serious drag on your lifestyle for years afterwards.

You'll learn why it's so important to focus on the ongoing income an investment provides. Before buying a buy-to-let property, ask yourself what rent you can realistically expect, and whether that income genuinely justifies the asking price. When the rental income does stack up, Hagendorff explains, property can be a wonderful way to invest, and a socially useful one too, providing homes for younger people, students and professionals who might otherwise struggle to find somewhere to live.

You'll also learn why too much exposure to property can be dangerously risky. If you already own or have a mortgage on your own home, you're already exposed to the housing market. Even large buy-to-let investors typically own only a handful of properties, which leaves them heavily exposed to any fall in prices, potentially losing value on both their own home and their investment properties at once. As Hagendorff points out, if a financial adviser told a client to put a million pounds into just three stocks, the client would likely have grounds for legal recourse for being so badly under-diversified. Yet that's exactly how many property investors approach their portfolios, remaining highly concentrated and highly exposed.

The takeaway: property can be a good investment when the numbers genuinely add up, but it's far riskier than many assume. Don't underestimate the leverage, the lack of diversification, or the "hassle factor" of difficult tenants and constant maintenance. Buying property to rent out is a decision that should never be taken lightly.

Chapters / Key points

• Why the buy-to-let boom has made property so popular
• Why owning a home and investing in property are different questions
• The hidden risk of leverage and negative equity
• Why property bubbles can leave you owing more than your home is worth
• Why rental income should justify the purchase price
• When property can be a genuinely good investment
• Why too much exposure to the housing market is risky
• How property investors are often dangerously under-diversified
• The "hassle factor" of tenants and maintenance

Transcript

Is property a good investment?

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 leveraged 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 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 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.