Continuing our short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash – in which we take a look at the four most common asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.
No.3 of 4 : Property
What is it?
From my experience as a financial advisor, in Ireland property is far from an investment alternative. In fact for many, everything except cash and property are alternatives! So I think you’ll understand if I skip the ‘what is property?’ bit. What I will say is that today I’m evaluating property as an investment for those who already own their own homes. Just for the record, I believe that owning your own home makes really good financial sense for lots of reasons – which I’ll cover in a future blog. But for now, let’s just talk about non-home property investments.
What are the Pros?
- Expected long term returns of around 6% – higher than cash and bonds.
- Portfolio diversification as performance is not correlated to equities.
- Property is a ‘real asset’ that has an obvious ‘bricks and mortar’ capital value and pays (rental) income.
What are the Cons?
- Single property risk and hidden fees can be higher than expected.
- Can be subject to equity-like volatility and severe illiquidity.
- Diversification benefits cannot be relied on in a financial crisis.
How to invest?
You (or your pension) can of course directly buy an investment property and take advantage of expense income tax relief – but the capital gains tax exemption has now been phased out. Or you can avoid the additional costs, worries, single property risk and leverage risk (if you’re borrowing to invest) of being a landlord by simply buying a property fund which exposes you to a large portfolio of property assets.
Do you need it?
Not necessarily, but for a more balanced portfolio, yes. At Money Smart we stopped recommending direct property investment once the capital gains tax exemption ended. But we do believe that your investment portfolio can benefit from a small exposure to a diversified property fund (or ETF or REIT) which may have both direct and indirect commercial (and perhaps residential) property holdings.
Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing firstname.lastname@example.org.