Investing in property

Property certainly has its role to play in securing retirement and for most people investment in a property will represent a significant proportion of their wealth. The cost of accommodation is also the biggest outgoing for most people, so owning your own home outright will reduce your monthly outgoings. As well as rising in value over the long term, your home can also provide extra income by letting out one or more rooms to lodgers and/or short-term guests.

However, buying property is an expensive business.  As well as requiring a sufficient deposit, there are other costs involved – legal fees, survey fees, stamp duty etc.  When it comes to selling a property there are also agent fees/commissions to pay. There are also running costs simply for owning property eg insurance and maintenance.

Property is also an illiquid asset ie it can’t generally be sold quickly (at least if you want to achieve its market value).  It is also “lumpy” – although your equity in a property can build gradually over time, your overall investment in property rises and falls in large chunks whenever you buy or sell.

Despite the high costs, property has been an attractive investment for many people due to its tangible nature (you can touch and feel bricks and mortar), tax breaks and enhanced return through gearing ie the ability to leverage your investment through borrowing (taking out a mortgage).  Property values (although hard to ascertain without actually putting a property on the market) aren’t as volatile as the stock market.

Property has benefitted from falling interest rates for many years now.  However, the tax-breaks offered to buy-to-let investors and more rigorous lending criteria by banks may mean that property values may not rise as much in the future.  Indeed, with so many people unable to buy their first property the government may no longer view ever-increasing house prices as a vote winner. Having said that, falling house prices aren’t appealing either as banks and the wider economy may suffer.  The happy middle ground is one where prices stabilize and/or rise less than wages so property gradually becomes more affordable in real terms. Fortunately this is probably where we are now.

Investing in a single property to use as a home has the following advantages:

  1. It will be easier and cheaper to get a mortgage for your home
  2. You will not pay any capital gains tax if you make a profit when you sell your home if it has been your main residence throughout the period of ownership

To conclude, investing in property to the extent of owning your main residence outright remains a key step in any FIRE plan.

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