Why the Hell IS a pension better than an investment property

Maybe I’m a wee bit naive BUT

can someone categorically show me why I should’t buy an investment property and let the tenants pay the mortgage off as opposed to killing myself ploughing 20% of my net wage into a pension fund?

Assume I buy an investment property for 250,000 (deposit 10%) jan 08 and pay off over 25 years. Rent covers the mortgage. Inflation 3% PA average. Risk free rate of return 4%. Growth in equities and property prices assumed equal at 5% PA. Marginal rate of tax for pension contributions relief 40%.

Now, where did I leave my calculator???



As long as your assumptions are correct

you’ll be golden,

Best of luck

There’s no categorical here but many of us feel that the maths at present support the pension route

  1. Where do you buy a property in Ireland where rent comes anywhere close to paying the mortgage?
  2. Long term studies have shown that property prices barely keep pace with inflation. What are you estimating your 5% future capital returns from? Based on boom returns??
  3. Equities have delivered a lot more than 5% a year. I wouldn’t be touching them if I was only getting 1% over the risk free rate
  4. Don’t forget to factor in repairs, maintenance, insurance, periods without lettings, management fees, rebuilding and the stress of phone calls at 3 in the morning from the neighbours complaining about noise.

5% PA, with inflation at 3%, should be 4% for property, given long-term averages. Can’t tell you what it should be for pensions. I can tell you that whatever it should be, it hasn’t been for the last 17 years (the time I’ve had a pension). It has basically been 0!

Marginal relief rate is 47% aswell. No?

As I’ve only figured out recently, largely thanks to AAM I have to say, if you have a pension that has charges of much more than 1% on it, it is not going do much. If it is not a tracker, it is not going to do much (only 3% of funds beat the index they’re picking from). Etc. etc.

And before ARW tells me to get ETFs, and geckko tells me to invest directly, it’s just not a feasible option for everyone to set up their own self-administered pension fund. And if they were to do that, they might as well invest in property and get the tax rebate!

It may be a suitable choice for you to have a property rich investment strategy, but you really need to consider:

The lack of diversity and diversificaton that might give you.
The fact that an “investment property” is typically a highly geared strategy. In effect you are saying:

“Why the hell is a 10% volatility portfolio, better than a 70% volatility portfolio?”

The answer is of course, it depends. Long term investing is about taking appropriate amounts of risk and achieving good balance.

Also consider this. The best investment returns do not accrue to those areas which attract the most interest. It doesn’t take that many people to pursue you geared property portfolio approach before you have a significant overcapitilisation in the sector, hence killing returns (a BIG problem when your are so highly geared as it leaves with large negative carry, as at present, plus increased likelihood of negative real capital gains). To put it simply, when a significant number of people in Ireland have acquired their “investment property” to fund their retirement, who is going to be around to rent these things?? NO economic value, means no return. And that is what is facing all currently overweight property in Ireland (those in recenlty will bear losses, those in any time in the last 10-15 years are likely to face greatly reduced returns if they choose not to rebalance now).

Yours is the niaive assessment that has caused over capitlisation in residential property in Ireland which is going to lead to some shocking performance for many.

In theory, it is because pensions are more about eliminating risk than maximising return.

You buy a €1m property with 10% deposit, so you use €100,000 of your own money.
If the market falls just 10%, you lose everything.
You put €100,000 in an equity portfolio, no borrowings.
Market falls 10%, you only lose €10,000.

You do make some large assumptions:
Property in your pension can only have a maximum of 70% mortgage, not 90%.
Rent pays off your mortgage, very difficult to find.
No void rental periods or tenants not paying the rent and it taking you over a year to boot them out.
Or a long term tenant not asserting their rights, forcing you to keep the rent low and being unable to kick them out.
Also, when these people eventually die, if a relation of their has been living in the property, they get to continue these rights.
Incidentially, Im not making this up. As an estate agent you come across these things regularly.

And yes, it is stupid to think that property could fall over the long term.
The only places where this has occured has been in 3rd world economies such as …ehhhh … Germany or Japan.
Remember the disclaimer all stockbrokers must issue, ‘Prices can go down, as well as up’, well, that also applies to property. There is also another disclaimer ‘past performance not necessarily a guide to the future’ which comes in handy after investors have rose-tinted glasses about a sector following peroids of high growth.

But to cheer you up, I am both an estate agent and qualified stockbroker, and I’ll always choose well priced property over well priced shares.
But the key is ‘well priced’, and always factor in the assumption that the worst can happen.

How can you get away with posting these blatant lies!!Have you no shame!!Baum and Crosby in their book entitled “Property investment appraisal” examined the performance of property against other mainstream assets from 1971-2006 in the UK.The result??Using geometric returns equities performed best returning an average of 14%,property was second returning 10.7% p.a with bonds third returning 10.7% p.a.

In addition the standard deviation of property was 10.3% compared to 31% for equities.I really don,t know how you have the neck to state that “Long term studies have shown that property prices barely keep pace with inflation.”

Pretty much all stochastic financial modelling I know of would assume lower expected returns from property, with slightly lower volatility compared wtih public equity.

I don’t think anyone would assume volatility of 30%+ for equities. That is crazy.

Less of the pejorative terms please. I’ve freely admitted in the past that I know feck all about direct property investing and I am not aware of the book you reference. Care to give some other details from it?

The only long term study of property I have seen is Malkiels 100+ year study of US property which shows returns less than inflation. If you’ve better figures for long term returns I’d love to hear them - the only figures I see quoted are for the last 10/20 years which is hardly representative.

When you’re suggesting that someone is lying because they say property barely matches inflation, the correct thing to do to prove your point is to provide the figures for property rises against inflation, not bonds and not equities.

otherwise I can’t take you seriously either.

Herengracht index suggests that property prices rose in Amsterdam at 0.2% pa above general price inflation over a four hundred year period.


Herengracht index


Yes apologies the chart I was referring to was in Shillers book, not Malkiel


In actual fact both property and pension investment have their day in the sun, with pension the incentive to invest is tax relief and you decide what reurn you would like based on the risk you are willing to accept.

With property investment the trick is trying to find a rising market that ticks all the boxes and that means searching until you find a bubble in the making or an economy on the up or maybe a property with inherent value not spotted by the market (highly unlikely).

Pros; certain tax reliefs available to both.

Cons; With a pension you can switch fund very quickly from a risky to non risk fund and thus cut your losses, but with a property in a falling market you are at the mercy of that market unless you find an idiot to take it from you and these are thin on the ground.

So in terms of which way to go you can invest in both through a pension and also either minimise your risk or at least avoid a hazard more quickly in a pension fund by switching fund as opposed to waiting 3 months + in a falling market to sell your property. :exclamation:

i wouldve thought property myself as you cant leverage your position into equities and get a tenant to pay a good chunk of the cost of the asset) i.e. you cant buy a million euro worth of equity/pension for 100k and get some tenant to contribute to the monthly payments

Yes you can, margin loans, CFDs

If you are referring to yield, it comes in the form of dividends for shares - not rent. In fact a lot of equities would pay a higher yield than property. You just get dividends once or twice a year instead of getting rent every month.

soewhere there’s going to be a few stocks in the portfolio that will return 1000% or greater.

I would be hesitant in relying on very long term historical data for house prices that seemingly ignores the fact that world population has exlploded in the last 80 years or so from roughly 2billion in 1927 to 6.5billion now, I feel this explosive rise has to be taken into account when comparing like with like.

The old … they’re not making any more land argument…

I like it…


where’s Gekko and Malthus when you need em…

Probably best to look at the population figures for the markets concerned. Does anyone have the NL’s population trajectory over the relevant 300 years handy?

As for Ireland, there were three million more people on this island 150 years ago than there are now…so we’ve a way to go, I think.

world population density: 44.57 per sqkm
India: 336
China 137
SAfrica 39
HongKong 6407

I’m not sure there’s so much to worry about.

European depopulation would then suggest that prices in this part of the world are about to experience a prolonged decline. And that property prices in Bangladesh and Nigeria will skyrocket.

That’s the best I have handy Calina :stuck_out_tongue: