Is Investment Property for Everyone? What can be Overlooked…

When evaluating the return of an investment many potential investors often focus solely on the price tag of investments: the cost now and the value in the future.

However, this overlooks the true cost of owning assets, which extends far beyond the buy price and sell price.

Sound financial planning involves accumulating assets that align with future needs. This might be a need for income in retirement or earlier, or growth to make the money work harder and grow the future purchasing power, rather than losing value to inflation.

While the monetary cost might be more obvious to some, it's not the full picture. Hidden financial costs can significantly impact the financial success, but intangible emotional costs can have an even bigger impact on our well-being, yet they're frequently overlooked in investment decisions.

Some potential property investors will forget to consider ongoing financial costs like storage, maintenance, and insurance, and the impact of tax on income and a future sale. They might also overlook the time required to maintain assets, the attention diverted from other pursuits, and the emotional resilience some assets demand.

By comparing the cost of residential property ownership, with a popular alternative for long-term investors; equities (shares), this can help highlight some of the true differences in their costs.

The cost of owning equities

Choosing and owning a diversified equity fund demands an informed upfront decision. However, in terms of ongoing costs, it demands very little. Counterintuitively, the less you do, the more likely your chances of long-term success are.

You’ll want to review and confirm each year that the portfolio still suits your needs. But day-to-day the global companies, which you own a share of, are managed by professional management and boards, and the fund you are invested in is reviewed by an experienced team of advisers, managers, and custodians. There is a monetary cost for this advice and management, but the right team can help you to minimise these and provide tremendous value on your road to financial security and freedom.

Investing in equities via an ISA or pension, can also provide huge tax savings immediately and over the long term.

The one intangible cost of this asset class is the emotional fortitude required to endure the frequent but temporary declines in the value of your portfolio. However, the pain of these declines is likely to be forgotten in time while your long-term gains can be managed to support your financial future.

The cost of Investment Properties

The allure of tangible assets like residential properties often captures investors' imaginations. Most investors will already own their own home and therefore have first-hand experience and comfort in this asset.

The ability to see and touch an asset, coupled with the promise of ownership, leads many to equate tangibility with value. However, the picture looks very different when we analyse the true cost of owning investment property.

The upfront monetary costs are high; purchase prices, stamp duty, renovations, rental costs, and a seemingly never-ending list of ongoing financial costs associated with ownership. These ongoing costs are often forgotten in the initial analysis of a property’s attractiveness and are frequently left out when calculating the return on the investment.

The ongoing costs include annual maintenance, finance costs, insurance, various taxes, vacancy periods, tenant damage, outsourced management, and many others.

More worrying, especially for retired investors, is the ongoing “hassle factor” that can take many, often unexpected, forms. Property ownership can come with a high hassle factor and shouldn’t be underestimated. These intangible costs frequently surpass monetary considerations, impacting investors’ well-being and happiness, and can suck away the one thing that can’t be bought: time.

If it ever becomes time to sell, another round of selling costs and tax await.

All these factors add layers of complexity to the financial return and personal well-being.

Final thoughts

While property may be a suitable investment for some investors, understanding the full spectrum of costs associated with different asset types empowers investors to make considered decisions beyond the initial attraction.

Financial planning involves allocating financial resources and optimising time, attention, and energy. By considering all aspects of asset ownership, investors can make informed choices that enhance their overall quality of life while securing long-term financial stability.

As you review your investment options, consider your financial end-goals and the time, energy, and attention needed to achieve them.