10 reasons not to invest in real estate

During my time working in the investment industry, I have heard a lot of misconceptions about various financial instruments. However, some of the biggest misconceptions are about property. There are good reasons to own property, especially one family home which isn’t leveraged through mortgage payments, but this blog will focus on some reasons why not to invest in property.

1 – Herd mentality

The fact that `everybody` thinks property is a good idea is one reason why not to invest in it. Warren Buffett’s observation that `if too many people are on one side of the boat, you should be worried`, couldn’t be more important here.

2- Overvalued

Following on from point 1, too many property bulls, coupled with rising debt levels around the world, zero interest rates and central bank QE, has lead to sky high valuations in many markets around the world. In many cases, now is a selling opportunity, not a buying opportunity.

3 – Long-term performance

It is a misconceptions amongst property bugs that real estate has out formed other asset classes. In fact in the long-term, equity markets have outperformed real estate. The S&P and Dow Jones have both comfortable outperformed real estate.

4 – Property’s long-term performance is less certain than equities

The reasons why property have gone up in the last fifty years, including rising incomes and population, low interest rates, and women joining the workforce, might change or are one time boasts. For instance, unless it becomes a norm for 3-4 friends to have a mortgage together, which seems unlikely, women coming into the workforce and hence giving couples more spending power was a one-time boast to the mortgage and real estate industry. World population is also rising less quickly than before, and might stagnant after 2050, once growth rates are decreasing, with interest rates due to rise in many markets.

In comparison, the logic in buying stocks is the same as before. The 100 most productive and successful companies in the US, will, almost for sure, gradually become more productive and profitable as time goes by, with new technology and the survival of the fittest.

5 – Costly

Investing in stocks can often cost 1% or less per year, depending on the product. With real estate, often property insurance is compulsory or at least recommended, whilst bills, including local government taxes, need to be paid. Maintenance is another cost people don’t think about, as is rent-free periods where you will need to cover the mortgage payments yourself.  If you add up the initial commission from the broker or agent and all these hidden costs, that decreased overall returns.

6 – High barrier of entry

Stocks can be bought for hundreds of dollars, and regular savings plans can sometimes be had for $50 per month for low cos, whereas even in some of the cheapest cities in the world for real estate, $50,000-$150,000 is often needed. If you don’t have the money, you need a mortgage, which means more debt payments, and therefore more indirect costs. Once most mortgage holders account for inflation and take away all the aforementioned costs, they might find they haven’t made as much from property as they originally believed.

7 – Makes relocating more difficult

In the end, your salary and/or your profits are one of the biggest, if not the biggest, influence on your wealth. The more you earn, the more you can save and invest. If you don’t want to accept a new lucrative opportunity in another country or city, and one of the reasons is that you don’t want to leave your dream house or you can’t sell it, you are indirectly losing big time.

8 – Illiquid investment

Further to the last point about not being able to sell your property, property isn’t like liquid cash, funds or stocks. With cash, you can, in 99% of occasions, take it out of your bank straight away. With funds and stocks, you can, in 99% of occasions, sell straight away and need to wait a few days to get the money back. With property, it can take months to sell, sometimes years, if there is political instability in the country, or you have bought a house which is near a mobile phone operation that is linked to cancer like my father once did…….

9 – Tax implications

A property, as an illiquid asset, cannot be easily moved abroad, unless you invest in a trust, which has its own implications. Therefore, if you become an expat but want to rent out your house to have more money, you are earning an income from your home country and your new country of residency. As a general rule, this is tax inefficient and in some circumstances, might be double taxed. In fact if you continue to earn significant amounts of money in your home country, your home country’s tax authorities might look into whether your overseas income should be taxed or not, as you haven’t cut your ties that much.

10 – It is inconvenient.

A lot of people invest in property because they think it is easy money. It is actually much more hard work as you are dealing with people. If you invest into quality funds every month, you can sit back, and realize that as markets go up and down, over the long haul, you can make money. If you have 3-4 houses and need rental income, you need to find tenants, and as tenants are people, eventually you are going to have big problems sooner or later. It could be non-payments, or thrashing the place or any number of things.  Furthermore, as time is money, such inconvenience only adds more indirect costs to the process.

Rotary Club: Change and Continuity in Financial and Insurance Industry in Indonesia for Locals and Expats

A few days ago, I delivered a presentation to the Rotary Club in Jakarta, about changes and continuity in the insurance and financial industry in Indonesia. I focused mainly on people in the individual level, rather than for firms.

I made the following broad points:

• For locals, only around 3% have life policies. Take up of many types of pensions is also low. However, with new compulsory pension and insurance changes on the way, that might be about to change.
• Culture dictates investment more than logic. A good example of this is that locals have typically focused on real estate rather than equity investments, despite the superior performance of the later.
• Trends, such as slowing growth and aging populations, make change imperative.
• For expats, in recent years there has been significant changes at the government level which affects, in particular, UK and US citizens.
• Some things have remained the same, however. In particular most citizens in Indonesia, especially expats, save too little, as the expat lifestyle makes overspending easy.

The full presentation is available on request.