Investment property or pension?

There was an interesting article in The Irish Times last week and the age old debate of buying an investment property or investing in a pension . With the Irish obsession with property now back in full swing (after the prices have risen again!), it is a well timed article. I am not a big fan of people buying investment properties, mainly because people put all their money into this one asset which results in a highly concentrated investment portfolio.

1. You are taking increased investment risk through borrowing. The maximum you are allowed to borrow is 70% of the value of the property. That means for every euro you put in yourself, you are borrowing €2.33 from a bank.
2. If you have a mortgage, you are making a commitment of up to 25 years to repay the loan to the bank. That is a long time and your financial circumstances will change a lot over that time.
3. According to the experts in The Irish Times article, the investment property won’t pay for itself at all during the time of the mortgage. So you will have to supplement the rental income for 25 years.
4. If you do find yourself struggling to meet the costs, you couldn’t pick two worse bodies to owe money too…the banks and the Revenue. You are contractually obliged to make your mortgage repayments and the Revenue will come down on you like a ton of bricks if you don’t pay your taxes.
5. If you can’t afford to maintain the property, you may not be able to sell it as it is a very illiquid asset. After the last recession, it was not uncommon for properties to be on the market for over a year. That’s a long time if struggling financially.

In The Irish Times article, they compared the cost of the property and put that money into a pension instead. What they forgot to include was the interest paid to the banks which I calculate at €119,904 over the 25 years. The total cost was €322,810 for a €250,000 property.

I always say to clients that I don’t care what they use for a pension as long as they have something to live off in retirement. The same applies to investment property. They can be a great source of regular income. But before you commit to borrowing and committing funds to an illquid asset, you should build up other liquid assets first, so not all your eggs are in one basket.

What do you think? Do investment properties represent good value over pensions or other investments?