It’s one of the longest running arguments in personal finance – is it better to invest in property or shares, for example through a pension fund?
From time to time, the debate reignites such as happened last year when the Bank of England’s chief economist Andy Haldane came out on the side of property – and each time it does, one expert or another will come up with a fictitious example to try to compare the two.
Inevitably these comparisons tend to be somewhat artificial. Ultimately, which option provides the best returns will depend largely on the performance of property and the stock market during the period your money is invested and, of course, individual circumstances – which property or investments you choose.
For those weighing up the odds, here are eight things to take into account:
- What is your current position?
Any decision on investments will be informed by your stage of life and circumstances. So for example, for a couple in their 20s, owning their own home is likely to be top priority. For those living and working overseas, a buy-to-let property in their home country will ensure they keep a foot on the property ladder if and when they return – and if they are UK citizens being paid in dollars or euros, UK property will mean they are quids in.
- What investments do you have already?
A general rule of thumb is to spread the risk by investing in both property and shares, as well as having some cash to hand. Matt Lavin of Benoit Properties International says: “Ideally we should all aspire to have both property and a pension, as well as some money in the bank in reserve. Once you have made reasonable provision in all three areas, you will have greater flexibility to invest the extra money as you see fit.
“Spreading the risk remains a good rule however – even if you decide to invest all your additional money in buy-to-let property, you may not want to invest it all in the same neighbourhood. You can buy in different locations and even different countries.”
- How much do you want to invest?
For those with very limited budgets, a pension is more accessible as you can invest smaller amounts on an ongoing basis. Buying a property is a bigger commitment as you have to make the investment all in one go. Of course if you don’t have the full amount you can arrange a mortgage but you will generally need a lump sum deposit and the ability to cover repayments in the event it becomes vacant. However the good news is that in many cases, the rental income will cover most, if not all, of the mortgage repayments.
- How much, if anything, will you need to borrow?
If you do need a mortgage, then the returns on the property will depend on the interest rate and health of the property market. Matt Lavin adds: “In the good times, when interest rates are low and house prices and rents are rising, having a big mortgage will magnify the amount you make. However like other markets, property slows from time to time and a rise in interest rates will eat into your returns. In the worst case scenario, there is the risk that you may be in negative equity for a while.”
- When do you want to exit the investment?
Unlike shares and bonds, which can be bought and sold, extracting money from property takes a bit more time. In both cases, it’s best if you have the flexibility to sell your assets when the time is right. With a pension, advisers often try to get round this barrier by suggesting clients switch money into low risk, though lower earning, equities in the run-up to retirement.
- What about the tax situation?
Tax rates and allowances vary from country to country and year to year. In general, there are more generous tax breaks to encourage people to save for a pension. In the UK, as in many other countries, contributions below a certain level are not taxed so your money can grow tax free until you take it out. Meanwhile with property, you will pay stamp duty on purchase and capital gains tax on price growth. Changes made by the previous UK chancellor aimed to make property slightly less attractive to buy-to-let investors but, judging by the continued interest and price growth, have so far failed to deter investors!
- What are the other costs?
With pensions and other investments, the advisor will charge a fee or take commission – either way, it comes out of your money! There are also ongoing fund management charges. With property there will also be upfront costs, including estate agents’ commission, legal and survey fees. You will also have ongoing insurance, maintenance and management costs which will be set against rental income.
- Which option do you prefer?
Regardless of the finer details, there is one fact that both sides will agree on – people prefer to invest in property.
Matt Lavin says: “People like to have their money in bricks and mortar as it is something solid that they can see and touch. They find it more reassuring and enjoyable than investing in the money markets. Whether that is because there is a lack of trust in financial services or pensions appear more complex and obscure – the simple fact is that people like investing in property.”
