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  1. #1

    What proportion of your wealth should be in property?

    So this is from another thread but seemed like a good idea for a thread on its own as another topic for people to consider prior to investing.

    What proportion of your wealth should you be putting into property and how much elsewhere? Or maybe this should be how do you reduce the risk of your property portfolio (i.e. how do you diversify your assets)?

    We for example have always been good savers and whilst not wealthy we had the houses we lived in when we got together and then the remainder in shares which were split between ISAs and pensions and a bit more that were not tax protected. BTL investing is a later development as we think that in general it is higher risk due to the leveraging aspect (you can lose more than you put in if you are forced to sell whilst in negative equity due to unforeseen circumstances). As a result we looked at having a buffer of other assets that were not leveraged. This will also help cover voids etc if for some reason the rental market crashes. Some of my relatives have nothing in property, rather just in shares, and think we are mistaken in increasing our risk without needing to.

    Other may put everything in property. If that is what you do how do you reduce your risk?

  2. #2
    In the next couple of weeks we'll have a guest post by Graham from Moneystepper which addresses this question exactly, and I'll also have Pete Matthew talking about it on the Property Geek Podcast next week - so stay tuned!

  3. #3
    Call me a fool. But I've put all my eggs in one basket. Is this wise ? Well, history has shown me it's worked for me.

    Let's look at some things the financial world has attempted to sell to me

    Endowments... Well, we know what has happened their. Mine matured yesterday (honest it did) it performed 75% of what it should have - i take that as a good return
    Opting out of SERPS... I think I have a pension of 4,500 - 5,000 sitting in that one, and advisor had obviously sold me that a move would be good for me... I'm sure they have quite a lot of my pension !!
    Private Pensions.... And the return on these are not great, but the pension funds and fund managers have done well.
    Stock Market... For me it would be a like a lucky dip... I have no understanding of it.

    We can never predict the future. It's just do you trust someone else to look after your money better than you ?

    Do what you know/understand. if it is outside of your scope of knowledge, educate yourself or keep clear.

    So, I've got cash and property. Most property is now paid off, so I have an income from property.

    However, I've refurbed most of the property as I have those skills...

    Would I have done this differently ? In hind site, no. Just perhaps bought more earlier. But, my method was pretty low risk. Low LTV. Low borrowings.

  4. #4
    Good points Paul. None better perhaps than: 'I have no understanding of it'. Investing in something you do not understand seems to be the biggest risk of all.

  5. #5
    I personally don't see property as a very risky investment vehicle.

    I think you're right that if somebody doesn't understand the market and the fundamentals of investing, then yes - they could end up losing money.

    I have friends who are desperate to get on the property ladder, and are looking at some pretty shocking BTL opportunities with no real idea about what a good deal looks like. I know someone who has bought a flat at market value, which has stood unlet for 4 months now and even if he got a tennant he would only be achieving a gross yield of about 4.5%. He bought with the 'I need to get on the ladder before house prices go up any further' mentality, and has bought badly (in my view)

    I feel like if you get into the position of having to sell a property which is in negative equity then you must have made some pretty poor calls when buying!

    Of course the property could drop in value, rental demand could fall off a cliff and interest rates could jump up - putting you in a position where you are losing money each month and have to sell at a loss. But if you're doing the following, then surely this risk is miniscule (famous last words!):

    Reducing the risk of getting into negative equity:

    1. Buying the property at a discount initially to create a built in equity buffer at the time of purchase

    2. Buying at the right point in the property cycle, i.e. not at the top of a bubble. I know no-body knows what will happen with house prices, but it's possible to look at history and the circumstances affecting present conditions and take an educated guess.

    3. Buying in an area with good prospects for growth (strong jobs market with a broad range of industries, good transport links, good housing stock, plans for infrastructure investment, plans for regenaration, etc)

    Reducing the risk of being forced to sell:

    4. Buying in an area with good ongoing prospects for rental demand so as to ensure there will be regular income. These will be a lot of the same things as 3.

    5. Buying with a good yield (7.5%+) Calculating the probable net rental yield before purchasing - based on putting a good amount aside each month to account for voids and maintenance, accounting properly for all other costs (insurances, letting agent, etc) and then stress testing this to ensure that rental income would continue to cover costs in the event of and interest rate rise of 4% on your mortgage.

    6. Not over-leveraging. Again, this is about ensuring a healthy buffer between the income generated by the property and the costs. The stronger the yield, the bigger the buffer so you could afford a higher LTV.

    As Paul has illustrated, compared to the other 'investment' opportunities that seem to be out there (I'm by no means an expert on these) - the potential upside of property is pretty high and I think with thorough due diligence, the downside risk is pretty minimal, and importantly for me, my financial future is in my own hands.

    So the short answer is that I am happy to put all my investment money into property, for all the above reasons and the fact that focussing on this 1 market enables me to become an expert - further reducing the risk. I couldn't imagine having the time to learn how to play the stock market effectively as well!

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