Property debate: a new perspective needed

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One needs to compare correctly to generate accurate conclusions.

This article is in response to the following articles:

Your house is not an asset
Why your home is an asset
Property: The good the bad and the ugly

Every so often, the media revisits the debate regarding whether a home is an asset, and – by illogical extension – whether property is a good investment. It is an ongoing debate complicated by the narrow perspectives of experts who focus solely on capital growth – ie: how much does it cost now and how much it can be sold for in the short to medium term – and therefore try to compare apples and pears.

A home is an asset

Recent headlines claimed “Your house is not an asset” and opposingly, “Why your home is an asset”. Some say that given the maintenance costs, taxes, interest payments on a bond, and the constrained rate of property price growth, a home is not a great investment, but this can only be true from a limited buy-and-sell perspective.

When comparing homeownership to renting, it is clear that a home is indeed an asset. When renting, a home is simply an ever-growing expense, as rentals increase each year. While tenants may not pay rates and taxes and levies separately, these costs are often factored into rentals. And, when the lease expires, the tenant walks away with nothing, except perhaps the portion of the deposit not withheld for damages to the property.

If you buy a home, you acquire an asset that will increase in value over the long term, as property prices increase – at an average of 10.5% over the last 20 years. While there are maintenance costs and rates and taxes, the bond repayments remain static, barring interest rate fluctuations, which mean that in 10 years’ time, your bond repayments will still be the same as today, when rentals will be roughly double of what they are today. In addition to this monthly saving, if you want to sell the property in 10 years’ time, there will be a fair amount of equity in the property, provided you have maintained the property. This equity can also be accessed by, for example, taking a second bond, which can be used to start a business or fund your children’s university education. You can also use your own property to generate an income, for example by renting out a portion or running a business from home. If nothing else, owning a home is a way of saving up for the future. After having provided a home for your family for 20 years, you will own a fully paid off home to live in during retirement, or to sell in order to buy a retirement home.

Property as an investment

The debate about whether a home is an asset is inevitably and illogically extended into a debate about whether property is a good investment. Comparing a primary residence, a holiday home, or a similar lifestyle property, to a buy-to-let investment property, which is acquired to increase wealth, is comparing apples and pears. So is comparing a buy-to-let property investment to a passive investment on the stock market or in a retirement fund.

A buy-to-let property is not similar to a primary or lifestyle residence, it is much more like a business venture undertaken to create, firstly, an ongoing income and, secondly, capital growth. The model is very similar to that employed by listed property companies. Like residential buy-to-let property investors, albeit on a larger scale, listed companies acquire a property, such as a shopping centre, often using gearing (finance). The shops are then rented out to tenants, to create an ongoing monthly income to cover expenses, including the finance repayments, maintenance, and the fees for professional tenant and property management. In addition to the monthly income generated, the property also produces capital growth over the long term.

For those investors who do not have the time, expertise or inclination to follow this tried-and-tested system of creating wealth, these listed companies offer a passive form of investment: buying shares in the company, in exchange for a portion of the monthly profit and with the option to sell the shares. Essentially, for the ability to invest “passively” and to sell shares quickly, these investors sacrifice not only higher returns, but also any control over the investments made by the listed company and any protection against the volatility of the stock markets.

As such, a buy-to-let property is also not similar to this kind of passive investment, it is much more like a part-time business, through which investors implement the buy-to-let model used by the listed companies themselves in the residential sector, acquiring a property, often using bank finance, and renting the property to a tenant, with a professional agency managing the tenant and the property. The difference between a “passive” investment in a listed property company and a direct investment in a buy-to-let property is that both the ongoing, passive, inflation-linked income and the capital growth all accrues to the investor, who also retains full control over the investment, without any exposure to the volatility of the stock markets.

A new perspective

One cannot judge whether a home is an asset or whether property is a good investment if the focus is solely on capital growth – a perspective perpetuated by those who consider property to be a buy-and-sell commodity, like shares – which it is clearly not, unless, of course investors are speculating with property.

Focusing solely on the potential capital growth of property obscures the real reasons why a direct investment in a buy-to-let property is such a powerful vehicle for building wealth:

  1. the dual returns of an immediate and ongoing, inflation-linked income;
  2. compounding capital growth over the long term; and
  3. the ability to gear the investment (to borrow money to acquire the property asset).

These features ensure that a buy-to-let property significantly outperforms the returns possible through owning a lifestyle property, speculating with property (buying with the hope to sell at a higher price in the near future) or a passive investment in the stock market. It is no surprise, then, that property is the asset of choice of the world’s wealthiest.

A new perspective is required when considering the property debate – a perspective that considers capital growth as only one part of the property equation, and therefore also considers the fact that a home is an asset that provides accommodation not only now, but also in retirement; and that a buy-to-let property is a business which can generate an ongoing, inflation-linked income indefinitely.

From this perspective, investors can compare apples with apples, and instead ask: ‘How do I maximise my investment in a home?’ or ‘How do I choose the right buy-to-let property to maximise the dual returns this part-time business will generate?’. Indeed, property is such a unique investment that those investors who learn how to choose the right properties, employ good risk management practices and manage their asset and part-time business professionally, will increase their wealth so rapidly, it will make any passive investment returns seem mediocre.

Doing so does not require qualifications or experience, or much time, training or effort, or massive financial investment. All that is required is a new, clear and rational perspective about the power of property to create a financially-independent future.

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