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\u2019t leveraged through mortgage payments, but this blog will focus on some reasons why not to invest in property.<\/p>\n
1 \u2013 Herd mentality<\/strong><\/p>\n The fact that `everybody` thinks property is a good idea is one reason why not to invest in it. Warren Buffett\u2019s observation that `if too many people are on one side of the boat, you should be worried`, couldn\u2019t be more important here.<\/p>\n 2- Overvalued<\/strong><\/p>\n 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.<\/p>\n 3 \u2013 Long-term performance<\/strong><\/p>\n 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.<\/p>\n 4 \u2013 Property\u2019s long-term performance is less certain than equities<\/strong><\/p>\n 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.<\/p>\n 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.<\/p>\n 5 \u2013 Costly<\/strong><\/p>\n 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\u2019t 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.<\/p>\n 6 \u2013 High barrier of entry<\/strong><\/p>\n 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\u2019t 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\u2019t made as much from property as they originally believed.<\/p>\n 7 \u2013 Makes relocating more difficult<\/strong><\/p>\n 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\u2019t want to accept a new lucrative opportunity in another country or city, and one of the reasons is that you don\u2019t want to leave your dream house or you can\u2019t sell it, you are indirectly losing big time.<\/p>\n 8 \u2013 Illiquid investment<\/strong><\/p>\n Further to the last point about not being able to sell your property, property isn\u2019t 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\u2026\u2026.<\/p>\n