Key Post You’d be mad to put residential property in your pension

[Marc]

I’ve lived in Ireland for over a decade now and over the years I’ve read a lot of comment from people facilitating those who want to put a residential property into a pension but it’s extremely hard to find the other side of the argument so over time I intend to set out here the many arguments against holding residential property with or without gearing inside a pension.

I appreciate that this isn’t a “popular” line to take and naturally there will be those who take the opposite view.

I’ll start by setting out some of the arguments used to support the case for the accused.

Rental Yields
Capital Appreciation
Gearing
The bloke down the pub

1) Diversification is the only free lunch in investing

2) Home bias

3) Overconfidence

4) Extra costs

5) Extra risks

6) No evidence of extra returns

Pensions & Rental Property - Everlake

At odds with much online financial advice, here are our reasons why we don’t recommend holding residential property in your pension.

globalwealth.ie

 

[Brendan Burgess]

Hi Marc

Fully agree with you.

You can add to the list the additional difficulty in resolving problems if you get a difficult tenant. It is hard enough to collect rent and deal with the RTB and courts as a personal investor. I would imagine involving pension fund trustees would add another layer of treacle to wade through.

An investment in equities is so much more flexible. When the pension matures, it might be necessary to sell the property and this might be difficult to do. With equities or funds, there is a ready market.

Even if the property is transferred to an ARF, there might not be enough cash for the minimum drawdown.

The only possible reason for doing it would be if one has a pension fund of €1m. It might be ok to allocate 25% or so to investing in property.

As you have pointed out the risk is huge. I have seen at least two people lose their entire pension fund through leveraged property investments.

Is it more expensive to borrow through a pension fund than to borrow directly?

Brendan

 

[Gordon Gekko]

Hi Brendan,

It is indeed...4.5% to 6.5%, and typically closer to the latter.

Mad stuff, especially when one is typically doubling-down or even tripling-down on a single asset class in a single peripheral geography.

Gordon

 

[cremeegg]

Hi Brendan,

It is indeed...4.5% to 6.5%, and typically closer to the latter.

Borrowing at 4.5% to invest at 9% is obviously unwise

 

[cremeegg]

You can add to the list the additional difficulty in resolving problems if you get a difficult tenant. It is hard enough to collect rent and deal with the RTB and courts as a personal investor.

This is of course a valid concern. However if an investor has significant experience dealing with these issues the rewards can be worth while.

 

[cremeegg]

I have seen at least two people lose their entire pension fund through leveraged property investments.

As I recall you posted about one of these previously. I seem to remember that the projected rental income did not meet the mortgage payments at the outset. That type of experience is no basis to form a judgement on a well thought out property investment plan, which expects to make a good return on rental income alone.

 

[Bronte]

As you have pointed out the risk is huge. I have seen at least two people lose their entire pension fund through leveraged property investments.

Can you please put up those two cases so we can see the figures. It's not acceptable a bland statement like that because it proves nothing. People in companies lost their entire pensions - see BHS for example. And they were supposed to be 'gilt' edged.

Conversly, are you suggesting that only leveraged property investments can go wrong, and that ergo, unleverated is a good way to go?

 

[Bronte]

As I recall you posted about one of these previously. I seem to remember that the projected rental income did not meet the mortgage payments at the outset. That type of experience is no basis to form a judgement on a well thought out property investment plan, which expects to make a good return on rental income alone.

We all know people who were relucant landlords from posts down the years on here, where they borrowed 100% and then some, and it never made sense from the get to. Rent maybe meeting the interest only mortgages, which were a totally bad idea as many had no way to pay down the capital etc. They were at the time, recommended on here.

 

[cremeegg]

1) Diversification is the only free lunch in investing

2) Home bias

3) Overconfidence

4) Extra costs

5) Extra risks

6) No evidence of extra returns

1) Diversification reduces your return to the average. I accept that this may be a good outcome, but it assumes that an individual investor is no better informed than those who drive the market. In the case of an efficient market, or even a broad market with lots of competing investors it may well be impossible for an individual investor to outperform the average. Property investment for rental yield is a very different beast. It is not a single global market, it is rather a series of loosely connected individual markets.

2) Home bias, or concentrating on your area of expertise. I don't think that my home market offers better investment opportunities than any other, but I am in a better position to recognise when it is overpriced and when it offers value.

3) Overconfidence. A trap for us all. However with leverage property investment the investors confidence has the reality check of needing to convince the lending institutions underwriters. While they may have been asleep on the job in the early 2000s, that is not usually the case.

4) Extra Costs 5) Extra risks These are trivial objections. If you are not aware of all the costs you should stay away from any type of investment. And while risks can be difficult to address the same observation holds.

6) No evidence of extra returns. There is little evidence of any meaningful study on the returns to residential property investing for yield. Any such study would have to first break away from the equity mindset. It would have o assess returns based on identified initial price points.

 

[Clonback]

I started investing in a pension via equities in 1998 and in 2013 converted into cash.I got back exactly what I put in with no profit except tax relief.I then invested in property and doubled my capital inside 4 years plus got a 6% rental yield.
Im back in cash as I can now take 25% tax free and am going to buy property via an ARF with the other 75%.My plan worked because I bought in the right location and did not borrow.All my financial advisers told me I was crazy.

 

[Cervelo]

I started investing in a pension via equities in 1998 and in 2013 converted into cash.I got back exactly what I put in with no profit except tax relief.I then invested in property and doubled my capital inside 4 years plus got a 6% rental yield.

But if you'd left it in equities in 2013, how would your portfolio have performed over the same time frame ??

Sorry I should've added that my own pension was in a similar position to yours in 2012/13 but had nearly doubled in value by middle of 2015

 

[Gordon Gekko]

I started investing in a pension via equities in 1998 and in 2013 converted into cash.I got back exactly what I put in with no profit except tax relief.I then invested in property and doubled my capital inside 4 years plus got a 6% rental yield.
Im back in cash as I can now take 25% tax free and am going to buy property via an ARF with the other 75%.My plan worked because I bought in the right location and did not borrow.All my financial advisers told me I was crazy.

What kind of equities?

 

[Bronte]

I started investing in a pension via equities in 1998 and in 2013 converted into cash.I got back exactly what I put in with no profit except tax relief.I then invested in property and doubled my capital inside 4 years plus got a 6% rental yield.
Im back in cash as I can now take 25% tax free and am going to buy property via an ARF with the other 75%.My plan worked because I bought in the right location and did not borrow.All my financial advisers told me I was crazy.

So you've demolished the argument in the OP. QED.