10 reasons not to invest in property: A perspective shift for potential investors

It’s easy to understand the allure of real estate investment. Tangible assets, potential rental income, and long-term capital appreciation—what’s not to love? Well, as with any investment, there are downsides to be considered, and property is no exception. Here are ten reasons that may make you reconsider before jumping into the property investment game.

1. Lack of Liquidity: Property is an illiquid asset, meaning it can’t be quickly converted into cash without the potential for losing value. In a financial pinch, you can’t sell off a bathroom or a couple of bedrooms to raise funds.

2. High Entry and Exit Costs: Buying a property involves significant upfront costs like stamp duty, legal fees, and survey costs. When you decide to sell, you’ll also be hit with estate agent fees and potentially capital gains tax.

3. Interest Rate Risk: If you’re relying on a mortgage to purchase an investment property, remember, as we have seen this past year, interest rates can go up as well as down. A rise in rates can dramatically increase your repayments and eat into or even eliminate your rental yield. Right now with the increase in rates, many properties in the UK that have been financed by debt are cashflow negative.

4. Maintenance and Management: From boiler breakdowns to leaky roofs, properties require ongoing maintenance which can be costly. If you’re not up for being a hands-on landlord, you’ll need to factor in the cost of a property management company.

5. Problem Tenants: Late rent payments, property damage, or disputes can turn your investment dream into a nightmare. Even with the best tenant vetting processes, you can’t eliminate this risk entirely.

6. Regulatory Changes: From changes in tax relief to new tenant rights, regulatory shifts can impact your returns. Now the talk is of rental caps, and rent controls which have always been in place in Europe. Staying on top of these changes requires time and effort.

7. Rental Vacancies: Empty periods between tenants can be costly. If you’re relying on rental income to cover a mortgage, a few months without tenants can put you in a tight spot.

8. Diversification Challenges: A property is a large and local investment.  When you buy a property it requires a significant amount of capital tied up in one asset, in one specific area of the town or city in the country you live in. All your eggs are very much in one basket.

9. It’s not tax efficient – You can’t use the ISA wrapper every year to shield your property from capital gains and income tax. Any rental income is applied to your highest marginal tax rate.  You can’t put it in a pension so you miss out on up to 45% tax relief. Capital gains are taxed at 28% at the higher rate versus 20% for equities or funds.  All this means, purely on a tax perspective you need much a higher return on your property just to give you the same return as an index fund portfolio invested tax efficiently. It’s like starting a football match two nil down.

10. It’s Not Passive Income: Many people are drawn to property investment with the idea of earning passive income. However, managing a property is often anything but passive. Dealing with tenants, repairs, and paperwork can be time-consuming and stressful. Your index fund does not call you on the weekend to say the taps are leaking.

In terms of total historical returns, the numbers speak for themselves. The MSCI World index over the past 20 years has increased 5.5 times whereas UK property (Financial Express UK property proxy index) over the same period has slightly more than doubled. (source: FE Analytics). Of course, past performance does not mean the same will happen in the future.

All this, of course, is not to say that property investment should always be avoided. You may be in a certain business or have connections that give you an edge or expertise in this market,  or you may have significant wealth and a property investment may be acting as a diversifier.

It’s always worth remembering though that your investments are merely means to an end and should help fund your financial plan so that you can reach your goals. In this respect, liquidity, cost and diversification are all key. To help you navigate these decisions and ensure all your investments are aligned with your plan, get in touch with us.

  • Not all mortgage contracts are regulated by the Financial Conduct Authority.
  • Your property may be repossessed if you do not keep up repayments on your mortgage.
  • If property prices fall and your capital value falls below your outstanding interest-only mortgage, you’ll need to make up for any shortfall if the property sells for less.

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