Irish people love property. That has been my experience over the last 10 years in the industry, working with hundreds of families over that time.
Now, in general we aren’t big fans of direct property investments in Metis Ireland, for reasons I’ll explain. But there are, of course, cases in which it’s the right choice for the client and their family.
So, today I want to discuss in more detail the question “when is a property investment a good idea?”
Why do people love property?
Let’s first look at why people love the idea of investing in property and debunk a few of these popular myths.
Bricks and mortar are tangible. If I can see it feels more secure to me.
This of course is a mental shortcut. There’s no evidence that investing in property is less risky than investing in the global stock market, for example. But we don’t see properties’ prices rise and fall daily, so we this leads investors to think property isn’t as volatile.
It’s passive income, who wouldn’t want that?
Any landlord in Ireland can tell you there is nothing passive about being a landlord. You need to find tenants, file tax returns, keep your property in good nick, fix the dishwasher if it’s broken, fork out to replace the leaky roof, and so on. Trust us, you will work for your money.
It’s cheaper than investing in stocks, as I don’t have to pay a fund manager.
Every property transaction will have legal fees. You’ll need an accountant to file a tax return. You might pay a property manager to do some of the work for you, but this is another cost. And the ongoing upkeep of the property from wear and tear isn’t cheap.
Fair points – but what’s the main reason Metis Ireland doesn’t like direct property as an investment?
It’s several reasons rather than just one, all of which are nothing new to our stance on direct property. They’re all pinned tightly to our Investment Philosophy and Our Contract With You – you’ll always find us consistent in that.
Reason One: It’s not liquid.
A property is an all-in-one deal. You can’t just sell a window out of your house if you need to get your hands on cash on short notice.
Reason Two: It’s not diversified.
Even if you own multiple properties, they are likely to be around the same location. At the very least, we’d wager they’re in the same country. When we talk about diversification, we’re talking about exposure to all the great companies of the world and markets globally – not just one single economy.
Reason Three: We need evidence!
There’s no evidence that that direct property outperforms the global stock market in the long term. We make all our recommendations based on cold, hard evidence – speculations and anecdotal success just won’t cut it.
Reason Four: Taxes.
Most of your return from property will come via rental income. It’s likely that this will be taxed at the higher rate of income tax.
But apart from that, what did you think of the Opera, Mrs Lincoln? Yes, this blog is supposed to be about when property investment is a good idea, so let’s get on with it.
When is property investment a good idea?
It really comes down to one main point here: Utility Value.
We are, after all, lifestyle financial planners – if this property is going to add significant value to you and your family’s life, and help you live the life you want, our job is to help you find a way of making it work. Often, the bigger picture of a client’s goals and dreams is a more important benchmark than our own blanket opinions. As we always say, there’s no “one size fits all” approach with financial planning.
I have met three families in the last six months where the topic of buying another property or land came up and my initial reaction was negative.
I started to speak about all downsides of property investments. But in each case I stopped myself and started to ask more questions as I wanted understand the “why?” behind the question. When I did this, I found myself coming around to my client’s way of thinking. Let’s look at these three cases.
This family has successfully achieved early retirement.
They had recently sold several properties, including some foreign properties, as they knew the hassle caused by these types of investments. Suddenly, they were looking at buying another Irish Property. “Why?”, we wondered.
The difference this time was, they wanted some where they could spend their weekends and summer by the sea. The motivation was purely based on their goals and dreams. This meets the criteria of Utility Value for us.
Family #2 was due a significant bonus from work that could have been paid directly into their pension (which would have been very tax efficient). Instead, they were looking at buying and renovating a derelict cottage near their family home.
On the face of it, this seemed like a poor investment decision. However, on further discussion they told us that they have a big house now with 4 teenagers at home. When their kids are grown and independent, they don’t want to maintain such a large property. They love where they live, so don’t want to move elsewhere.
Doing up this cottage allows them to secure their future in the location they want to retire, without tying them to the big house for the rest of their lives. That’s some forward thinking we can get behind!
The final family had just bought their first house on the edge of the estate they live in. There’s a plot of land next door that they want to buy.
This is a significant cost for them for an asset that won’t really get a return in the long term. However, for them buying this land secured their privacy. It ensured that nobody could buy and build directly beside them, which would have a negative impact on their quality of life.
Once again, the Utility Value is sound.
What should I take away from this?
In summary, the question you need to be asking yourself when thinking about investing in property is “why?”
Why are you looking to buy property? Is it just a great deal that landed on your lap? Is it something that will add utility value to your family in the long term?
Or like some people, is it just because you can’t think of anything else to do with the money?
In all these cases a good financial planner will ask you questions and listen to your “Why?” and then help guide you down the correct path for your family.
Private Client Manager
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.