Pensions and Property
Education HMO Investing Mindset Money and Finance Wendy Whittaker-Large  

Pros and Cons of Pensions v HMO Investing – Leaders V Wendy WL

I saw a recent article about (by Leaders estate agency of all people!) about the pros and cons of property v pensions. I’ve commented on the article below (my comments are in bold).

When I talk to landlords and property investors about why they want to invest in property, one of the top answers is: “to create a pension pot for the future”. This might be building a lump sum through the property’s increase in value over time, or securing ongoing additional income from renting. Leaders’ article supposedly weighs up the pros and cons but I think does it superficially and badly!

They suggest three recommendations:

  1. How much are your assets and income currently worth?
    It may seem an easy question, but it can take some time to collate the information. If you choose to use an IFA or tax expert they will need to understand what your current gross and net income is, how much you spend, what you can save and what assets you have – for example: existing investments, pensions, your home or other properties. You can do this just as easily yourself. A simple spreadsheet and an hour’s work will in most cases allow you to see all your assets and liabilities in one place. Start from there. In fact I would say most IFAs I know are less savvy about investing than I am!
  2. What income do you need and by when?
    Investors often say they want ‘financial freedom’, but this can mean different things to different people. For some, a top up to their existing pension might be enough; for others, it might mean being able to leave the day job and live off property income and capital growth. ‘An expert will need to know how much capital you want or need – and when – in order to assess whether your expectations are achievable, based on investment returns’. What kind of ‘expert’ are they talking about? Someone who has done a couple of financial training courses and dabbled in the stock market? Only you know what you want to achieve from your investments but property can be so much more than just an investment. It is a business that can operate at arm’s length giving you great returns and making a difference to other people’s lives.
  3. What major expenditure is required in the future?
    Depending on what stage in your life you decide to invest, you may need to make provision for school or university fees, renovations on your own home or a new car. It’s worth having a list of how much your future plans will cost, so you know what money you’ll need to keep aside. There are major tax advantages to investing in property if you know what you’re doing. Your lifestyle can be recreated with much less obvious disposable income when you are no longer a PAYE employee.

What are the pros and cons of investing in property instead of a pension?

Leaders advises: ‘Once you have researched the information you need to give to your IFA or tax expert, it’s worth talking through with them the pros and cons of investing in property versus a financial pension’. I would say get some education! What you don’t know yourself will cost you a lot more in the long run! Don’t rely on IFAs or ‘experts’ who will probably steer you away from property and cost you far more than your own education or training!

Pros of investing in property (Whoa, Leaders has discovered the Pros of Investing? Who knew)!

  • It is possible to buy a property at a discount, especially if you’re paying cash, which could provide an instant increase in equity (the difference between the price you paid and the true market value) and a better return on your investment income through letting.
  • If you buy a property that you can add value to, it’s possible to secure an increase in capital growth that’s greater than the cost of improvements. This could allow you to release capital to purchase more properties or re-mortgage at a lower loan to value.
  • You can borrow money to invest in property, which you can’t typically do when investing financially. Leveraging your property investment through mortgage borrowing can boost the return on your own invested capital if the property’s value rises.
    For example, if you buy a property for £200,000 with a 75% mortgage and a deposit of £50,000, if the value increases by 10% (£20,000), your return will be four times better than if you fund the full £200,000 yourself:

£20,000 ÷ £50,000 = 40% return. £20,000 ÷ £200,000 = 10% return.

Yep this section is A OK [Wendy says]

Cons of investing in property

  • When you invest money in a pension, the government will give you a ‘tax break’ on the amount invested, so ‘additional’ money goes into your pension pot. In contrast, the costs of purchasing and selling property are often a lot higher than investing cash in a financial investment. Yes that’s true that to start with you may have to use post-taxed earnings but later the tax position is much more favourable.
  • If you hope to pass on your pension pot to a beneficiary, they may not have to pay any inheritance tax, whereas it’s more difficult to transfer additional properties tax free. Not necessarily – there are many ways of shielding your portfolio from IHT.
  • Your pension pot is often spread over different investments, which can be less risky than investing in one or two properties. Really? Have you looked at returns on the stock market recently?
  • If you need to cash in your investment when the market isn’t favourable, it may be difficult to do so. Yes investing in property is a hard asset investment – not liquid.
  • All properties have on-going maintenance costs, which are higher with rentals, so you have to keep putting money in during the life cycle of the investment. Yes indeed but what about the service charges on a pension or stocks and shares ISA? These are often invisible! And often when you undertake repairs or maintenance you can immediately increase the capital value of a house.

Over the years, we have seen property deliver some amazing returns for homeowners and investors. However, it’s not guaranteed, and you may have to tie up a lot of your capital and wait for a few years before you start seeing a good return, versus financial investments.

I completely disagree with this last statement! You want to get immediate returns when you invest and you can only do that when you know what you’re doing, what to look for and how to secure the right deal. Education is the best way yo make that happen.

Come along to my next HMO Discovery Experience Day to find out about investing in HMOs and you’ll learn a whole lot more beside!