What are the risks in property investment?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 347.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What are the risks in property investment?
  • Do the wealthy always have advantages over average people?

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Source for all answers – Adam Fayed’s Quora page.

What are the risks in property investment?

One of the best videos I have seen recently was titled: Over 100,000 Brits just lost their whole life savings. Here’s why

For those without the time or inclination, to watch the video, he makes a basic point.

There was a tragedy in the UK called the Grenfell Tower fire:

People were killed. Action was taken to reduce the risk from bad cladding, which was blamed for the disaster.

There is only one issue. Many people live in housing with such cladding, even though most don’t catch fire.

After the new regulations came in to tackle the issue, many people can’t sell their homes unless they spend 30k+ on the improvements.

Let’s see if there is enough uproar to ensure that the government decides to help these landlords and families.

The point is, housing is an illiquid asset, which is heavily regulated to a greater extent than many other investments because of how sensitive it is.

This move is the latest move in the UK, after numerous new taxes were bought in in the last ten years or so.

The government wants people to save for pensions and old age, to reduce the burden on the welfare state, and they have many tax incentives to do so.

Similar tax advantages don’t exist for property, and higher rates of capital gains taxes have been bought in specifically for the asset.

It isn’t just in the UK either. In Japan, and many other locations, governments cracked down on landlords using Airbnb.

Other risks include

  • Long-term underperformance versus other assets, especially if you buy in the wrong location.
  • Using too much debt. The ability to leverage is one of the advantages of property, but too much can be fatal. If we see interest rates rising again in 2022, we will once again see some landlords go bust.
  • Buying in a bad location. Location, location, location works the other way around.
  • Hassles, and costs in terms of time. Time should be factored into any return on investment calculation.
  • Less flexibility and freedom to change locations if a new job comes up.

Property can be a good investment, for some people, at some times. It can also be cheaper than renting in some locations, especially if you stay long-term.

It isn’t the case that people can’t lose with it though.

Why do the rich have a vast advantage over the poor?

That is the assumption. It isn’t always as black and white though. The book below makes some excellent points.

This goes beyond money and more speaks to “advantage”.

Consider some of these points made in the book

  1. In general, smaller armies often beat bigger, stronger ones, especially if they focus on strengths such as gorilla warfare. Look at the Afghans. They did well against the US, the Soviet Union, and Alexandre the Great.
  2. People assume that small class sizes are always better. That is one reason why parents pay for private education. Numerous studies actually show that very small, or very big, class sizes, can be worse than somewhere in the middle. A class of say 18 can easily beat one of 6.
  3. Smart kids who go to Harvard, Oxford, and other top universities, are more likely to drop out if they are less intelligent than the average kid in the class, compared to a student who is at the top of a weak university. What is more, sometimes those kids who came near the top of the class at weaker universities, end up earning more. This seems to be because people compared themselves with those around them, which leads to people who are inside the one percentile of intelligence feeling stupid due to the superior abilities of classmates.
  4. Despite the last point, so many people still think we should get poorer, and ethnic minorities, into certain schools and jobs, even if that means lowering the boundaries through positive discrimination/affirmative action. Often these well-meaning policies have the opposite effect to those intended.
  5. Many small, nibble, start-ups can beat established brands in some areas. They have the advantage of speed.
  6. In terms of wealth, there is a saying in Chinese that “wealth seldom lasts three generations”. Similar expressions exist in other languages. The only group of people who seem to escape this fate, apart from outliers, are those who can’t directly control the wealth. For instance, royal families and some old wealth put the money in trust, so it can’t all be spent or mismanaged at once.
  7. Wealthy families have certain disadvantages when dealing with offspring unless care is taken. For instance, most kids learn not to ask their parents for an expensive car at age 18, or a pony, as they know it is unaffordable. Teenagers from wealthy households won’t accept the “we can’t afford it” line, and a broader conversation is needed. Keeping those kids motivated is also trickier.

The point is, being wealthy is a big advantage compared to being very poor. However, it isn’t always an advantage over being middle-income.

Sometimes an inverted u-curve exists:

A simple example is this. It isn’t easy to read to your kids at night or play sports with them if you are exhausted from poverty and working three jobs.

It also isn’t easy if you are a workaholic who has a lot of money and is in a high-pressed situation.

It is actually easier for somebody who is somewhere in the middle.

This is, even more, the case for the second or third-generation rich. The first generation tends to be motivated as they came from nothing. That isn’t usually the case with those who come after.

Basically, wealth up to a certain point opens up so many doors. It helps with security, personal freedom, your health, freeing up time, giving you more choices, etc.

It usually also helps the first generation a lot, and it is much easier than being in a cycle of poverty which gets more difficult to get out of the longer you are in it.

There is a reason why so many people don’t want their kids to inherit much though.

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 353.9 million answers views on Quora.com and a widely sold book on Amazon

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