Five per­ilous myths of prop­erty in­vest­ment

Oi Vietnam - - Contents - Sven Ro­er­ing is a Man­ag­ing Part­ner at Ten­z­ing Pa­cific In­vest­ment Man­age­ment. He holds an Eco­nom­ics De­gree from Rhodes Univer­sity in South Africa, and is a can­di­date in the Char­tered Fi­nan­cial An­a­lyst (CFA) pro­gram, hav­ing suc­cess­fully com­pleted level 1 a

Five per­ilous myths of prop­erty in­vest­ment


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, in­ter­est­bear­ing 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.

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