"Buy Land, They're Not Making It Anymore": The Property Ownership Dilemma

Welcome to Financial Fluency - a newsletter designed to boost your understanding of financial terms and provide you with investment ideas for long-term financial success.

In today’s newsletter:

• A Look at the Markets: Bitcoin

• "Buy Land, They're Not Making It Anymore": The Property Ownership Dilemma

• Quote of the Day: Warren Buffett

• What I’m Reading: Yahoo!Finance

• Idiom of the Day: Double-edged sword

• Whenever you are ready, here is how I can help you

A Look at the Markets: Bitcoin

When I was growing up, there was a British sitcom called 'Dad's Army'. One of the characters, Corporal Jones, had the catchphrase 'don't panic, don't panic' which is repeated usually while he was doing just that - panicking.

I am reminded of this when I look at the Bitcoin chart this week. I am actually very good at not panicking. Bitcoin has broken through the area of support of around $92,500. Despite the drop of around 24% from the peak, I still see Bitcoin as a good long-term investment. I was not intending to sell today so the price today does not make much difference to me.

30% drops are nothing new for Bitcoin and have been common in previous bull markets. Looking at the chart, we may even drop to around $72,500. However, I believe there will be a recovery and it will not be long before we are back at all-time highs.

Of course, I may be wrong so none of this is financial advice.

We will look at other markets for February next week.

"Buy Land, They're Not Making It Anymore": The Property Ownership Dilemma

Rethinking Housing as Both Consumption and Potential Wealth Builder

This timeless quote reminds us that property ownership has been on people's minds for generations. While most of us don't need land for farming, we all need somewhere to live - which brings us to one of the most significant financial decisions many will face: should you buy or rent?

Individual Circumstances Matter

The answer, like most financial questions, depends heavily on your personal situation. There's no universal solution that works for everyone. Your decision may vary based on:

• The property market in your region and country

• Your current life stage and how it might evolve

• Your financial priorities and goals

As last week's newsletter suggested, buying property shouldn't be the automatic choice for everyone.

When Renting Makes More Sense

Let's first examine who might benefit from renting rather than buying:

Business builders and entrepreneurs: As I mentioned last week, I personally delayed property purchase while growing my business. My capital was better deployed in my business venture where the potential returns outweighed property appreciation.

Those expecting relocation: If you anticipate moving within 5 years, the transaction costs of buying and selling (agent fees, taxes, legal costs) may outweigh any appreciation benefits. These costs typically need to be spread across at least 5 years to make financial sense.

Individuals carrying high-interest debt: If you have substantial credit card debt or other high-interest obligations, directing resources toward eliminating these financial drains will almost certainly yield better returns than property ownership. Additionally, paying off these debts will be good discipline before committing to a property purchase.

The Case for Buying

For those not in the categories above, property ownership offers several compelling attractions:

Built-in savings mechanism: Mortgage payments function as a forced savings plan. With each payment, you increase your equity stake in a tangible asset. For those who struggle with consistent investment discipline, this automatic wealth-building feature is invaluable.

Leverage benefits: Property allows average individuals to use significant leverage safely. With a typical 20% deposit, you control an asset worth five times your initial investment. This amplifies returns when property values increase.

It should be remembered that leverage is a double-edged sword. If your house depreciates by 20%, you’ve effectively lost all your deposit. However, this only applies if you can’t continue to make your mortgage payments. Hopefully, you can wait, and house prices will rise again over time.

Retirement expense reduction: Owning your home outright by retirement dramatically reduces your living expenses when your income typically decreases. Eliminating mortgage payments or rent creates significant financial breathing room and peace of mind during your non-working years.

Remember: Housing Remains Consumption

While property can work in your favour financially, it's crucial to remember last week's key insight: your primary residence remains fundamentally a consumption item. This perspective helps maintain rational decision-making:

• Larger, more expensive homes mean higher maintenance costs, property taxes, and insurance premiums

• The more you spend on housing (whether renting or buying), the larger the emergency fund you'll need

• Aim to keep housing costs below 30% of your gross income for financial flexibility

This consumption perspective prevents the rationalization of purchasing a bigger or more expensive house than you can comfortably afford under the false premise that "it's an investment."

Finding Your Housing Balance

The housing decision involves weighing consumption needs against financial optimisation. For most people, the sweet spot lies somewhere between:

1. Securing a comfortable living environment that meets your needs

2. Ensuring housing costs remain manageable within your overall financial picture

3. Building equity over time through strategic property ownership

4. Maintaining sufficient financial flexibility for other priorities and other investments

Questions to Consider

Are these suggestions manageable in your area or country? Does the 30% of gross income guideline feel realistic given your local housing market? Have you calculated the full cost of ownership beyond just the mortgage payment?

Remember that housing markets vary dramatically by location, and what makes financial sense in one area might be impractical or even impossible in another.

Glossary for Financial Terms

Leverage: Using borrowed money to increase your potential return on investment. With property, this means using a mortgage to purchase a home worth much more than your initial deposit. Example: A 20% deposit gives you 5:1 leverage, controlling an asset worth five times your investment.

Financial drains: Expenses or debts that continuously take money away from your finances without providing adequate returns or benefits. High-interest credit cards are a common example, as they can consume significant portions of your income through interest payments.

Tangible asset: Something of value that physically exists and can be touched. Houses, cars, and gold are tangible assets, unlike stocks or bonds which are intangible (you can't physically touch them). Property is a tangible asset that you can live in while it potentially increases in value.

Amplify returns: To increase or multiply the profits from an investment. In property investing, leverage amplifies returns because price increases affect the entire property value, not just your deposit amount. For example, a 5% increase on a €300,000 property represents €15,000, which is a much larger percentage gain on a €60,000 deposit.

Disclaimer: Always consult a qualified financial advisor before making significant financial decisions. Individual circumstances vary, and professional guidance ensures recommendations align with your specific situation.

Quote of the Day: Warren Buffett

What does this mean? In my opinion, it means that you usually have to pay somewhere near the market price for a property. However, Warren is able to find bargains and good investments in the stock market rather than the property market.

Despite being a multi-billionaire (approximately 154 billion dollars), he only has one property, which he bought for $31,500 in 1958. The property is worth about 1.4 million dollars today. This represents a tiny 0.0009% of his net worth.

So I guess Warren Buffett's message is the same as mine - don't overextend yourself buying property!

What I’m Reading: Yahoo!Finance

While researching for this newsletter, I discovered an article discussing Warren Buffett's primary residence. Interestingly, even though I completed the newsletter before reading the article, the message aligns closely.

I guess this isn't surprising, considering I've spent much of my adult life immersed in Buffett's books and quotes. His wisdom has clearly influenced my perspective.

Idiom of the Day: Double-Edged Sword

Double-edged sword - idiom - noun phrase - something that acts in two ways, often with one negative and one positive effect.

Related expressions:

• Two sides of the same coin

• Mixed blessing

• A blessing and a curse

Usage in business contexts:

• "Social media marketing is a double-edged sword – it offers unprecedented reach but exposes brands to public criticism."

• "Working remotely has proven to be a double-edged sword for many companies, reducing overhead costs while potentially impacting team cohesion."

• "Rapid growth can be a double-edged sword for startups, creating opportunities while straining operational capabilities."

Whenever you are ready, here is how I can help you:

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.