Darcy Ungaro: Property, house prices – should your home be an investment vehicle?

OPINION:

Personal finance experts and financial advisors agree that viewing the equity in your own home is not part of a “valid” investment strategy.

Why? Here are just two of the many reasons:

It is illiquid: It is
difficult to convert property into cash. Consider not only the real estate and marketing commission to be paid, but also the bet you are making with market conditions in the future. By partnering with a bank, you can indeed “unlock” some of the equity in your home, but what if the lending criteria or your financial situation changes at that time, preventing you from to get approval?

You must always live somewhere: A good “investment” should put money in your back pocket, without making you homeless. As we’ve seen over the past two years, most properties “earn” more per year doing nothing but their owners. As exciting as it sounds, you just watched real estate inflation, that’s all. Before you sell and spend your winnings, remember that the next house you live in has also gone up in value (and even more so if you’re looking at higher price ranges).

So (coming from a financial advisor), is it wrong to think of a house as an investment vehicle?

No, and before you choke on your meatless sandwich, let me explain…

Let me introduce you to the “slow simmer passive ownership” strategy.

The first step: Stop viewing real estate wealth as unethical. Karl Marx would never approve, but we still live in a world where the returns to capital outweigh the returns to labor. You can object to this fact or make it work for you. Over the past 50 years and across the banking system, we have watched capitalism on steroids. Too much currency injected into a world where real growth is insufficient and interest rates set far too low to remedy inflation rates potentially a little higher than the CPI would suggest. This creates a shock wave of wealth. Yes, it crushes the “have-nots”, and yes, it takes a lot out of the middle and then throws them firmly into the “low”…but it’s a wave that also propels some “haves” into the upper class too.

Second step : Benefit from the inequality resulting from the first stage. Yes, it might be as dodgy as it gets, but if it makes you feel better, you make money from those going up, not those going down. By the way, governments on both sides have been doing this for ages, so you know it has to work. Overall, the ‘middle’ that is propelled into the ‘upper’ (thanks to the inflated assets it owns), could create a much higher demand for higher value homes in the future. Why? Well, on the one hand, it’s too difficult to be a homeowner these days, and on the other hand, the capital gains made on owner-occupied homes can be more tax-efficient than the owning rental properties.

Third step: After a few decades of slow cooking your high-value home at a compound growth rate of 7% per year, you sell. This strategy is even sweeter if you can retain ownership of a rental property all the time that is to be converted into your next home after the mansion is sold. However, you only own one house? No problem, just sell and downgrade to a lower value home and you are now ready for the end of days. Capital gains released in the process can be invested for passive income in retirement. Simple.

So in a nutshell, to make the passive slow real estate profit strategy work, do this: buy an expensive house (based on land value not housing), own a rental you can move into in the future , then do nothing.

Don’t flip, don’t renovate to “add value”, don’t subdivide…wait.

The “experts” here would rather you stay and live in a lower value home and invest the rest (and yes again, that’s technically still probably the best answer!). However, when you compare the two strategies and ignore all the illiquidity and concentration risks, you can end up with a similar lump sum to spend. The best part of the slow cook passive real estate profit strategy, however, is that you can live in a nicer home in the process. Try doing this with a managed fund.

So why does it work? Nothing has changed structurally with the functioning of the current financial system. Lower interest rates will inevitably return, and in all likelihood, although not perfect, a system that depends on newly created bank credit and lower long-term interest rates will persist. Property values ​​will again inflate accordingly and potentially continue to double every 10 years. That’s been true for nearly half a century, so what are the chances it won’t be true for the next 20?

• Darcy Ungaro is a licensed financial adviser and the host of the NZ Everyday Investor podcast.