Is it worth using your entire life’s financial assets to invest in your dream property? – 01/12/2023 – From Grain to Grain

When considering the decision to purchase a property, it is crucial to consider how this could compromise the capital available for future retirement. If the property does not show an appreciation comparable to fixed income investments, committing current financial assets to purchase may negatively impact expected income in retirement.

I often receive this question by email: does it make sense to use all my investments built with effort over a lifetime to satisfy a dream of living better? From the question, it seems like people already know that they wouldn’t be acting appropriately if they did.

Investing in real estate is often motivated by the cultural and social desire to own a home, associating it with stability and success. Therefore, we often want to have something greater than our assets and income would recommend.

Rationally, this desire may not align with best financial planning practices.

Having possession means nothing. What matters is the use of the good. Therefore, the cost of use must be evaluated against your income. Also, the cost of ownership must always be weighed against investment alternatives for financial assets.

Diversification is a solid practice in investment management. Traditionally, experts suggest that allocation to real estate should not exceed 30% of the total portfolio. This is based on the premise that by holding a variety of assets, the investor can mitigate risks specific to the real estate sector and balance the overall performance of the portfolio.

Investing all or a large part of the reserve accumulated over a lifetime in a single property can result in excessive concentration, making assets more vulnerable to fluctuations in the real estate market.

This approach can compromise financial security as you are susceptible to a single asset.

When considering return potential, it is crucial to evaluate how a property’s appreciation compares to other options in the financial market.

Financial equity, when well invested in financial assets, can offer more stable and liquid returns, essential for supporting a retirement plan.

Depending on the economic scenario, the lack of liquidity associated with a real estate investment may harm the investor’s ability to meet financial needs in retirement.

The investor’s income plays a crucial role in determining the appropriate percentage to invest in real estate. The general rule suggests that the amount invested in properties should not exceed the investor’s annual income multiplied by a prudent factor such as 2 or 3. This ensures that the investor does not overly compromise his financial capacity and maintains a significant margin of safety.

For example, if an investor has an annual income of R$200,000, the allocation to real estate can vary from R$400,000 to R$600,000. This helps prevent a significant portion of income from being tied up in illiquid assets, providing financial flexibility.

I understand that we often want to live in that dream property that in our minds would bring a comfortable feeling, but we need to consider whether having a peaceful retirement wouldn’t bring even more comfort.

The opportunity cost of investing your entire reserve in a property is significant, particularly in relation to a retirement plan.

Maintaining liquidity allows the investor to take advantage of investment opportunities that arise and adjust their strategy as economic conditions evolve. For example, taking advantage of higher long-term interest rates right now. The inflexibility associated with real estate investments can limit the ability to optimize wealth over time.

Furthermore, the decision to buy a property to live in must take into account the flexibility associated with renting. Choosing to rent rather than buy provides valuable financial mobility. When changing jobs, cities or family needs, the rental option offers the freedom to adapt quickly, without the burdens and limitations associated with ownership.

Rationalizing the decision to purchase a property involves carefully evaluating the long-term financial implications. Considering investment alternatives, evaluating the potential for appreciation, considering the flexibility offered by renting and questioning the emotional motivations behind the desire to own a property are essential steps towards an informed financial decision.

Ultimately, balancing the dream of property with a pragmatic approach can result in sounder financial choices, preserving the capital needed for a comfortable retirement that is adaptable to inevitable changes throughout life.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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