August, 01 2009
Buy Property not Shares
Buy Property at Home and Abroad rather than Shares
Why?
Name one bank anywhere in the world that will lend you money to buy shares! Banks will gladly (and on their own terms) lend you money to buy a house!!
While UK property prices were down around 9% annually in June according the Nationwide, the FTSE 100 is down 17%, even after the recent rally.
Go back ten years and the case is clearer still -- house prices are up more than 100%, whereas the FTSE 100 is 31% underwater (both figures exclude income).
In the last 40 years, house prices have never had been negative longer than 8 -10 years.
The benefit that investing in property has over shares.
We see our family and our friends buying property, not to mention all those TV shows. It's easy to find support and advice if the survey throws up a problem or the lender drags its feet.
But far fewer families boast a successful share mogul. And anyway, most of the stress from buying property comes from the financial commitment. If you could find £200,000 to invest in shares, you'd be just as worried.
Borrow to buy (Leverage)
Of course, no one will give you £200,000 to buy shares. This is the number one benefit of property versus shares. That most of the population owns property shows how easy it is to buy -- and underscores how easy it is to borrow.
It's lucrative, too.
• Property: Save £25,000. Buy house for £250,000. See the price double. Result -- a £250,000 gain (excluding costs).
• Shares: Save £25,000. Invest in tracker fund. See the price double. Result -- a £25,000 gain (excluding costs).
This leverage is why the older generations of most family's have substantial property assets despite modest salaries and little saving.
Less risky
Property prices are far less volatile than shares. This has been the worst and fastest house price crash for years, and the annualised drop never got to 20%. Shares were down nearly 40% last October.
House price fluctuations are anyway irrelevant for most people -- they just keep paying the mortgage. If it is an investment property the rental yield is (in most cases) taking care of the mortgage anyway.
Politically popular
Governments favour homeowners, and they want to keep them in their homes. In contrast, governments are ambivalent towards shareowners, except when they invest under some cosy label such as 'pensions'.
Think of all the soothing words politicians have spouted about the housing market, and their attempts to talk it up. Homeowners are seen as good for society. Shareholders are seen as opportunistic ne'er-do-wells who get what's coming to them.
Retire or Invest Overseas
Off plan property can be one of the most profitable investments, if the proper research is carried out. You should never pay any more than a deposit until you have been out to the country you are purchasing in and done a lot of research into the development and the developer: Do they have the proper permissions, a good track record of issuing title deeds, are they in sound financial shape or relying on off plan sales to pay for the building work.
Off plan property is generally sold at a massive discount as developers factor in the risk you are taking; buying something that has yet to be built. This increases the rental yield potential, and gives you instant equity when the property is completed.
You have a holiday home that will provide rental income for 20 – 30 weeks of the year. You have an investment that will grow steadily in value and can be passed onto your family on your death.
Andy RGP Solutions
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