Real estate investing is gaining popularity at an increasing rate. Nevertheless, many investors jump at the opportunity without fully recognising the risks involved – some of which are never mentioned in the media.
Naturally, investing is a highly personal pursuit. Thus, I will discuss the reasons why I don’t invest in residential real estate.
It’s Expensive
Since properties are physical assets, extra costs are involved compared to other asset classes. The costs of owning a piece of real estate include: stamp duty, conveyancing fees, legal costs, repairs, property management fees, land rates, water rates, and insurance.
The upfront costs of entering the market are also exorbitant. Lender’s mortgage insurance can easily add thousands to a mortgage if you deposit less than 20% of the property value. It’s even expensive to exit the market, as selling a house comes with its own slew of fees.
Paper assets such as shares, ETFs, or bonds, are much easier to manage. You can even enter the market with as little as $5 due to the rise of fractional investing.
It’s Risky
Different asset classes come with their own varying levels of risk. Economically, property is a moderate to high-risk investment, with the potential for moderate to high returns. However, in addition to economic downturn, property ownership comes with many more caveats.
By putting all your money in one asset class, you will lack diversification. This strategy is risky in volatile periods such as the disaster we’ve just experienced due to the virus. Property is also one of the least liquid investments. So if you need to access the equity, selling can be a painful and slow process.
You could lose a tenant for long periods of time. You could house a “bad” tenant who might significantly damage the house. They could also fall behind on rent, as they’re a human who may face a catastrophic life event (who knew?!). You could even be stuck with a dodgy property manager who doesn’t put in the work. These are inherent risks of owning a physical asset.
Some landlords use cross-collateralisation to quickly build their investment portfolio. This involves using one investment property as collateral for another investment loan, and it’s incredibly dangerous. You don’t have separate loans for each property, so if one property drops in value it affects the entire portfolio. On top of that, the bank has all the power over the decisions you make.
If you are cost-sensitive and don’t want to accept the risk of losing a tenant, don’t invest in property. Over the long-term, equities have outperformed almost every other asset class, with fewer fees and less hassle.
It’s Unethical
Being a landlord is socially unethical because you’re profiting off someone’s access to shelter. Some have argued that landlords are a service to society since they “provide” places to live. But this fallacy disregards that providing resources is an altruistic endeavour. Profiting off a basic human need is not a benefit to society.
Ideally, the duty of housing provision should fall on the government. In countries like the Netherlands, 20-30% of all housing is social. Notwithstanding, in Australia, social housing makes up only 4% of properties, with upwards of 60,000 people on the public housing waiting list.
If landlords were indeed providing a steady supply of housing, why are there so many empty properties? Australian census data from 2017 indicated that there were around two empty investment properties for each homeless person in New South Wales alone. These properties are referred to as “speculative vacancies”, as the investor expects to benefit from a rise in house prices without the hassle of a tenant. Housing shouldn’t be a commodity.
Tenants not only have to cough up enough to cover the landlord’s mortgage, but many of them are treated poorly. A survey conducted in 2017 revealed that 83% of renters were living with little to no long-term security. A quarter of respondents had asked for repairs from the landlord or property manager with no response, and most were hesitant to complain due to fear of eviction. Rental properties with sub-par living conditions are also on the rise. A number of housing developments are riddled with inadequate fire safety and waterproofing, which is a tactic developers use to maximise profits. It’s unfair to expect people to pay top dollar for abysmal accommodation.
Hoarding property investments magnifies the housing affordability crisis. The 2017 census revealed that the number of homeowners had been falling for three decades, whereas house prices were up 70% in Sydney alone (over the previous 5 years). The proportion of Australian households renting had also increased from 22% in 2006 (1.5 million households) to 27% in 2016 (2.1 million households). It’s obvious that low to middle-income families are still being priced out of the market.
Let’s face it: most tenants are perfectly capable of servicing a mortgage. They just don’t have the upfront capital since they’re tied up in paying someone else’s “passive income”. It’s dehumanising to exploit households as no better than a cash-cow.
“The notion of houses as investment opportunities of any sort has been a cancer. Here’s a radical idea: buy a home if you can, then live in it, and do something else with your time. Something that isn’t about exploiting the less privileged.”
Rhik Samadder – The Guardian
The Future of Housing
I personally prefer to receive investment income from a portfolio of large companies, rather than struggling families. But despite all the ethical and economic concerns, not investing in property won’t simply fix the problem.
We need to support legislative changes to provide more public housing and emphasise ESG investments (Environmental, Social and Governance). Additionally, the Australian government should provide fewer tax breaks to property investors and more tax breaks to owner-occupiers. And we need to push for proper regulation around the tiny house movement: the cheaper, more sustainable alternative to housing.
I don’t think the concept of renting is inherently immoral. It’s an agreement between two parties and has its place amongst other housing options. However, greed and poor execution tend to make the theory immoral in practice.
Homeownership is becoming progressively harder to achieve. But if the avaricious instead strive to pursue wealth a little more ethically, then more people might just have a chance.
Do you invest in property? Why or why not? Let me know in the comments!
Crystal Violet 