For many people, the purchase of a house isn’t just to start a family or keep 47 cats. It’s also a common investment vehicle. You may have heard the recommendations from friends and loved ones: “property increases in price all the time” and “it’s a stable investment”. Whilst both these benefits can arguably be true in the majority of cases; it isn’t the only thing you should consider before taking the property investment plunge.
As with any investment, there will be many factors at play and the house is no exception. Let us run you through the general pros and cons to investing in a property to help you make a decision if this is the best avenue for you.*
Advantages to Property as an Investment
Property can be used as an investment in two ways: to sell at a low price, collect rental and then sell later for a profit or it can also be used solely for it’s rental yield – providing an additional income for the owner. Whichever you choose, here are some of the reasons why people like investing in property.
- Stable and simple with decent returns. Unlike other investments such as the stock market for example, no investment know how is really required and the risk factor is significantly reduced. Whilst some care is required in choosing the location for the property; in most cases the value will appreciate – it’s just a matter of how much or how quickly. Investing often requires some knowledge of the working of financial investments and market movement; something not really required to purchase property.
- Availability of loans. For most other investments; you will be required to come up with the funds on your own. In the purchase of your house; banks are willing to lend you the purchase amount making it easier to invest in property.
- Helps offset inflation. Whilst some quarters may warn against using property purely as a hedge against inflation; it’s still a pretty reliable asset to have with many backing it as a good way to offset the effects of inflation on your wealth accumulation. Whilst the prices of goods inflate; so will the price of your house.
These are just some of the most common reasons for choosing to buy a house as an investment vehicle. But there are also downsides.
Disadvantages to Property as an Investment
It’s always important to see both sides of a coin; and the analogy is almost perfect in the context of an investment. Here are some of the disadvantages you may find when taking the property option.
- Slow to sell for cashing in. If you are buying a piece of property for later resale; you will have to wait a bit for the cashing in. Unlike unloading stocks or other investments; selling a home for the price you want (even if it is fair market value!) will take time. Not only will you need to find the right buyer; you will also have to wait for the bank to process the new purchaser’s home loan. Processing a home from application to disbursement can sometimes take up to six months.
- You can’t split your investment. Whilst you can sell some share units or partially withdraw some fixed deposit funds; you can’t sell just a bedroom or a kitchen. Investing in a home means having your entire investment amount in the one asset and the only way to retrieve any part of it is to sell the whole.
- The house will require maintenance. In order to keep your house in a state fit for resale or rental; it would mean expending particular amounts to maintain and do light repairs around the house. Sometimes, wear and tear through the years may require more extensive renovation to, for instance, fix piping and wiring. If you are renting the house out to tenants; keeping the house in good repair would be your responsibility and if for resale, the house would need to be ‘spruced up’ to attract a buyer.
That said, if you are able to afford a house; considering to use it for investment is not a bad idea by a longshot. However, as with anything in finance; research is crucial to make an informed decision.
The above article is not meant to constitute investment advice. Please consult your personal finance advisor or investment professional before making any investment decision.