I have been working as a financial adviser for over two years, during which time I have had many meetings and discussions with clients and investment professionals. Views of course vary on how best to achieve investment success without taking unnecessary risk.
One topic which often comes up in discussion is whether owning a rental property is likely to produce higher returns than a conventional multi-asset investment portfolio (with exposure to global stock markets, bonds, commodities, commercial property and cash).
When faced with this question, my answer is always simple – if your finances allow, why not invest in both, over time? For most of us, particularly when younger, we don’t have the resources (or expertise) to invest extensively (or successfully) in rental property and conventional multi-asset portfolios. However, if and when circumstances allow, having exposure to both can provide valuable diversification and reliable income streams from unrelated sources. Conversely, over-exposure to a single type of investment creates excessive risk and vulnerability in our finances.
Let’s say you have a pot of €500,000 to invest which you might have accumulated over time, or perhaps inherited. Investing exclusively in rental property might seem sensible, and safe, but such a decision should always recognise the longer-term expenses associated with property ownership. In calculating a realistic rental yield, as a landlord it is essential to take into account maintenance bills, occupation/vacancy rates (seldom is a property occupied for the duration of ownership), refurbishment costs, possibly letting agent fees and insurance premiums, tax liabilities and other expenses, all of which of course dilutes the eventual return, often significantly.
Now you might consider putting your money into technology stocks (the NASDAQ index has averaged around 15% pa over the past 10 years), or crypto currency. The potential returns are highly appealing indeed, but perhaps you would be underestimating the levels of volatility, and the risks of dramatic losses, that come with such speculative investing. Is that something you can afford, financially and psychologically?