Invest in Property Or In Pensions
I have been asked to amend part of an existing speech for an event next week in order to cover off where the housing market is headed.
So I guess the host, Brendan Quinn, wants me to look at what kind of house price and rental growth there will be in the future.
And this got me also thinking about whether to invest in property or in pensions.
House Price and Rent predictions
The trouble is that it is difficult to predict house prices when property prices depend on so many other factors, many of them global in nature and most of them out of our control.
All we can do as property investors is try to pick the best areas to buy into and select the right kind of property within those areas. And then be very careful to pick the best tenants and manage the place very well.
In my one-to-one consultancy sessions I often spend a lot of time helping investor-landlord clients figure out whether one area and type of property is better than another.
I can either give them the tools to be able to do this themselves or I can do the evaluation for them. It is up to them and their budget. (PS, However, I don’t think anyone should spend more than £500 on property education of any type).
As a successful landlord-investor, people are willing to pay for my expertise on this. They know that this is something that I’ve been doing successfully for my own portfolio, for over thirty years. And they know I don’t have other silly five thousand pound courses to up-sell them onto. (These are the province of the “Rah, Rah Get Rich Quick” Snake Oil Salesmen).
Which Is Better – Property or Shares?
At the “Great Buy to Let Debate” the week before last, the host, John Wrigglesworth, asked the invited audience, (mostly mortgage lenders, mortgage brokers, “journos” and folk like me), if we thought property was going to be a better bet than either investing in shares or bonds over the next five years.
Of course, that’s a hard question to answer because, once again, who can predict market conditions?
However the ever affable and cheeky Stuart Law of Assetz, (who knows a thing or two about property and how to make money in it), said this:
“If the stock market sinks 30%, do you think the government will be that bothered? No.
If the price of houses sinks 30% will they be bothered? Yes! Of course.
They may not succeed in arresting the decline of house prices, but you can bet the government will do their level best to keep the plates spinning and house prices from crashing. They will throw everything they can at the problem.”
OK, I’ve heard this before, but his timing was spot on. And of course, he is right and his comments should be borne in mind by all investors.
So what else should one consider when one thinks about whether shares are likely to perform better than property? (By the way, no one voted for bonds).
Well, a lot depends on your tax position for the two asset classes and whether you are free to leverage up and borrow money to buy the asset. Of course, borrowing to buy shares will lead a bank manager to show you the door marked “exit”, whereas asking him for a loan to buy property will lead him to show you to a seat for a cosy chat.
Now, of course, the small landlord-loving Tory government, (yes, I jest!), has rather altered the tax position facing “buy to let” landlords (and by implication, whether it makes as much sense as it did before to borrow money to buy property).
So, you have to factor in that kind of “tax shock” as well.
And what is right for you may be different for someone else on a different rate of tax and with a different type of property portfolio.
Invest in Property Or In Pensions?
But, there is yet another factor that was occurred to me last week when I received my “AVC pension statement.” (This fund was set up years ago and back in the day when I was a wage slave, working full time for a big bank).
On the statement, I painfully realised that the lovely providers – the dear life company that runs the fund, in league with my old bank employers and crappy pension fund administrators, Equiniti, have been chopping off at least one per cent every year in management fees from my investment pot. So every year some of my hard-worked-for-units are “cancelled” to pay for this particular bunch of Robbers in Suits.
High Fees and Commissions
Now, one per cent does not sound much.
But in 20 years, that means that 18% of my original investment will have disappeared in the pockets of, or indeed up the noses, of City Idiots and the charming, smiling life company and their crappy administrator. Those charges would have meant that if my original pot was £100K growing at 5% per annum, I would end up with £210K at instead of £252K – a whopping £42,000 less. Nice!
Of course, it must be said that with property investment, just as with pensions, it is equally possible for lots of your money to get trousered by someone else too.
So, anyone dumb enough to use a letting agent who, not only charges a huge management fee, but also “skins” clients for a fat loaded £400 “commission” every time they call out a plumber to fix a washer on a leaking tap, will be stuffed too.
And if you buy into a Crowdfunding scheme, you really ought to be aware of the often heavy and multi-layered levels of fees that are often there to make the promoters rich (and you poor). The likes of Merryn Somerset Webb from the FT has said people may need their heads examining if they think Crowdfunding is going to make them rich. Mr. Law would disagree. I think they have a limited place for the very hands-off investor.
So, when I do one-to-one advice sessions, I always tell clients that if they want to make serious money in property as landlords, they should learn to know as much as they can about their responsibilities as landlords and do as much as they can themselves. This includes finding the right tenants and looking after the management of the property. (And it means treating the tenants well and with respect – so no exorbitant rent hikes and no cutting corners on the safety of your tenants).
You cannot get rich if you let someone else do it all for you! Nor will you have happy tenants.
But if you must let someone else do stuff for you, make sure you know exactly what they are going to take from you in fees – and that means reading and understanding every bit of the small print!
At LettingFocus, I show my clients how to do all aspects of buy to let themselves, so they get to keep ALL the profits. And our advice is independent too. We don’t take commissions from anyone.
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