5 reasons why property investment doesn’t necessarily make a good pension

publication date: Mar 16, 2015
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

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5 reasons why property investment doesn’t necessarily make a good pension...

The idea being banded around the UK at the moment is that it’s a ‘good idea’ to cash in your pension – or part of it – and invest your pension pot into property.

And there are plenty of people, including, astonishingly many major newspapers, telling you it’s a ‘great idea’, although the better ones are making sure you hear about the ‘good, bad and ugly’ of property investment and buy to let.

Now I am a fan of making money from property. But I’m fan of it if you know what you are doing.

Too many people think you can buy ‘any property’ on ‘any street’ and it will magically grow into millions. Too many so called ‘gurus’ and ‘property mentors’ are happy to charge you hundreds to thousands and tens of thousands of pounds to find out the ‘secrets’ of property investment.

So to make sure there is some ‘balance’ to the appalling amount of ‘get rich’ off the back of property by cashing in your pension, here’s 5 reasons why you shouldn’t.

Bear in mind the 5 reasons not to invest in property for your pension are based on meeting and working with many people who have seen their property investment fail.

#1 Property doesn’t double in value every 10 years
A tremendous myth which hasn’t been true since 2004. Many property prices across the UK are still the same price. Some aren’t and some have doubled, but many haven’t.

Property prices since 2004 have not grown bar areas like London (and not every Borough) as much as they have before.

Just put in a postcode near you of a property you are looking to buy and checkout the property prices and how much they have / haven’t grown by.

Download my free calculator to work out how much a property has grown by each year.

#2 Investments need to keep up with inflation – buying property with cash often doesn’t
As property prices haven’t doubled every 10 years since 2004, property prices haven’t also kept up with inflation ie the rise in the cost of living.

A property price needs to increase by (on average) 3% each year. So a £100,000 property bought in Nottingham with 100% cash in 2004, would need to be worth over £137,000.

The reality is, this property would only actually be worth £85,000 when taking into account inflation. Then if you sell you have to take off your buying and selling costs. So a property bought for £100,000 in 2004 would, when sold, actually only buy you around £80,000.

#3 Rental income for the average buy to let landlord rarely keeps up with the cost of living
And rental income tends to rise according to the Office of national statistics by 2% per year – less than inflation too, so many landlords are receiving less rental income year after year, bad news if you are a pensioner.

#4 Tenants can stop paying their rent
When you want your pension to pay out – you want it to pay you regularly and on-time, especially if you are relying on the rent to pay for your food, utility bills or any housing costs. If it’s what I call ‘bunce’ money, then it’s not so bad, but if you rely on rents, it can be a problem. In England there are over 65,000 tenants who are in arrears of their rent by over two months.

If you are 75 years old, perhaps in hospital or poorly or busy enjoying family life, do you really want to have to pay out all the bills because your tenant is paying their rent and then have to go to the trouble of having them evicted?

#5 Over 20% of landlords earn no income from their Buy to Let investment
For some reason, many people are talking about buying to let to invest for an income. I have no idea where this came from. The reason buy to let delivers is because it gives a return over a long period of time, typically because you ‘gear it’ through a mortgage.

If you cash in your pension and then try to get a mortgage at 60 – will anyone lend to you? If they do what will the rates be?

If you invest the average £30,000 pension pot, then that would buy you a property for say £100,000. That property would need to be renting for over £7,000 to give you any real income after all the maintenance costs – so you’d be earning, if you are lucky around £2,000 from the investment.

And that’s if the tax doesn’t change. What if capital gains or tax on rents is increased? It could wipe out much of your earnings.

In contrast if you invested the £30,000 find out with an independent financial advisor what they could deliver through financial investments and then look at which is the safer or more riskier option, taking their regulated advice – rather than just believing rubbish that you are told by people who have vested interest in you buying a property to let.

If you want to invest in property wisely, checkout:-

My article - Pros and cons of investing in property for a pension

How to analyse a Buy to Let checklist

How to finance a Buy to Let checklist

And if you can, come to meet me and chat through your options at my next property investment clinic – it’s all free of charge!

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