There is no shortage of friends believing that buying properties is the next big thing.
Is it really the case? You would want to reconsider this belief.
Let’s say your friend Patricia “owns” a property in the outskirts of London (or in Manchester or you decide where).
Last year she had £65k in cash in her bank account and to buy this property she took a big mortgage and paid down £40k as deposit. The property is valued £350k.
Today she is left with £25k in cash, plus the property (... well, just the part not owned by the bank, which in this case is 11%, or £40k/£350k).
From a portfolio perspective, if she decides to do nothing, her portfolio allocation is:
7% in cash (or £25k/£375k)
93% in UK real estate (or £350k/£375k)
If you are wondering where the £375k are coming from... £350k + £25k! This is her portfolio value, that is the base on which you calculate all of your percentages (or using financial jargon: the portfolio weights).
And now what? She wants to buy another property. Why? Because her friend Josh has done it 2 months ago because he believed it was a very good investment. Patricia feels she is behind. She wants to keep up with the Joneses and opts for the easiest solution: replicating what has already been done, i.e. copy Josh: buy another property.
Is it really the most sensible thing to do?
If she were to buy another property valued £180k by paying down £20k deposit, she would be left with £5k in cash and £530k (£350k + £180k) in UK Real Estate... or 1% in cash (£5K/£530k)... which is not good and 99% in UK Real Estate, which is the worst thing you can possibly do.
Diversification is the main pillar of sensible investing. You may argue that the second property that you bought is a very good investment and you feel good about it etc. etc., but there are high chances that it is not.
Why not using the £20k to invest into other things, but please stay away from UK real estate, your portfolio might be already too concentrated in UK real estate.
You might fall in the same trap as Patricia. She is probably feeling that replicating her friend's investment is the right thing to do. Or you might think that buying another property gives you the impression of having control on something tangible. You might want to reconsider this way of looking at investing. It is too shortsighted.
Even though Real Estate is tangible, you do not have control over prices falling. On top of this, consider the costs associated on maintaining a second property (i.e. stamp duties, furnishing to name a few) other than the time it takes you to bring your property to living standards (your standards!). Your time is invaluable, and your money too!
Make wise choices, diversify, look for other asset classes to invest in: Equities, Bonds, Commodities, Mutual Funds.
Seek help, start here.
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