The Irish obsession with property is well and truly back. With ever increasing frequency, I am getting calls from people looking to buy property through their pension funds. In some circumstances, when I tell them that the banks will only lend for commercial properties with very strong tenants, they start looking online to see what they can buy for the money they have accumulated so far (you can buy a 2 bed apartment in Cashel for €30,000).
I am not against people owning property as an investment. What I am against is people rushing headlong into a major financial commitment without considering all the pros and cons and the long term nature of purchasing property.
This is never a good idea to invest in something. We invest to make money, not to show our friends. Will the property make you money or won’t it?
If you do want to show your friends, there are lots of better and cheaper ways to do it. Remember when you buy shares, you become an owner of the company that you have invested in. I own stock in Disney, so when people tell me how great the new Star Wars film is I can tell them that I own the company that made that film.
I believe in having a diversified investment portfolio. We do not know what asset class is going to be the top performing asset in any period of time, so invest in a bit of everything. A should look something like this:
Spread the risk over lots of different assets classes in different countries all around the world.
In a well diversified portfolio, you have lots of shares invested in North America because that is still where most of the world’s capitalisation still is, a heavy weighting in European stocks, Emerging Markets, Fixed Interest and Property.
Investing solely in property, you are betting that property is going to outperform all other asset classes. And not only that, in some cases you are saying that one residential property on a small island on the periphery of Europe is a better investment than anything else. You are reliant on the Irish economy, which doesn’t even register when it comes to market capitalisation, continuing to grow.
Do you want to take on more debt? Are you prepared to make repayments for the next 25 years? Rental incomes are strong at the moment but it won’t always be this way. Are you able to make the mortgage repayments if the property is vacant? What if it is vacant for a year? Can you afford to make those payments?
When you get a mortgage, you have to show that you can withstand a 2% interest rate increase. But what happens when that actually happens? Will having to redirect some of your disposable income to pay for a mortgage have an adverse effect on how you enjoy living your life?
Interest rates are low at the moment. What about when the stress test you have to pass becomes a reality and you have an additional 2% in interest payments?
People are telling me that they want to buy a property for a few years and then sell it for a profit. If you are getting a mortgage to buy a property, your investment term should be for the term of the loan. Don’t take a short term view of a long term debt repayment structure.
The financial planning software I use has a heading called “Unencumbered Readily Realisable Assets”. That is, money you can get your hands on in a hurry. The more assets you have under this heading, the better.
Property sits outside of this heading because you cannot realise the value of the property in a hurry, it is a very illiquid asset. Even in a market of high demand, it usually takes a few months from when you post it on myhome.ie to when you get the cheque. People are usually in a hurry to sell a property when the economy is falling and there aren’t many buyers. In these circumstances, it may take a year or longer to sell a property. What will happen to your lifestyle and your health if you need cash but can’t get rid of an asset for such a long period of time?
If you want to buy an investment property, make sure you do your homework first. What is the rental yield? Is it in an area where there will be capital growth? Can you afford to meet the repayments if the property is vacant?
If you have any questions, please contact me directly at email@example.com