Property or cash — which one would you prefer to have?
It sounds like a senseless question, since people of course think that you’d ideally have both. Still, the point here is to address another question: in terms of your assets, which portion should be in cash and which portion should be in real estate?
It’s true, that definitely depends on each person’s particular circumstances. However, assuming that you want to preserve and expand your wealth (whether your net worth is $100,000 or $100,000,000), having properties, rather than cash, is a better strategy.
First of all, cash doesn’t produce yield — banks pay ridiculously low interest rates for your deposits, or they may even charge you to hold your money. Secondly, cash held in banks is exposed to several counterparty risks — banks that may go bust and take your money down with them, and security holes in banks that leave your money available for hackers to take it away from you. Thirdly, there’s the government wild card: as we’ve seen in Cyprus, governments can make and enforce new laws overnight to keep a part of your money or give it to insolvent banks, as they try to keep them going. And, finally, holding most of your net worth in cash has yet another risk: inflation, in which case your cash is losing purchasing power.
That’s the story with cash — although there’s an important positive point to mention about it. Holding cash gives you optionality, since you can take advantage of any great opportunity you’re suddenly faced with, if you have cash at hand in very liquid and easily accessible terms. That is especially useful if you’re betting on a negative economic scenario setting in soon — and what would you want to buy with that cash, as asset prices get depressed in such a scenario? You guessed it: property.
Now, property has some problems that you should know of — and for which there are simple solutions.
One, if you buy property using credit (or leverage, if you prefer that term), that only works if you’re planning things very well, if you’re betting on an inflationary scenario, where your debt will decrease in value overtime, and if, in the meanwhile, you’re generating a solid income with a great yield from that credit-purchased property — thus leveraging your down payment in quite a daring but potentially very successful way. This way, using leverage to grow your property portfolio can work brilliantly — whereas in a deflationary scenario debt and interest rates would be downright destructive. This means you should really be sure about what is the likely economic scenario that you can expect to face in the coming times, if you do use credit to buy property.
Two, the real estate market is cyclical, so your properties may appreciate or depreciate in value according to the economic cycles. Still, if you make the right buy, their price may not be very important, as long as they’re generating some very good and positive cash flow.
Three, property taxes, that wild card that always depends on what local and national governments will do in terms of new rules and need of funding. However, again here, if you’re using properties to generate cash flow, property taxes are an operational cost that you’re already contemplating in your income-generating plan, so, as much as they may bother you, they’re not really a problem.
And, now that we’ve gone over these points, it should be stated that the main advantage of having property as opposed to having cash, especially as an investment, is that you can use property to make a lot of money — whereas it’s hard to stay in cash and get richer.
That being said, plan your wealth-creation goals and strategies very well, and make sure you always have some cash available to have and take advantage of the above mention optionality — while giving an important share of your portfolio to properties, which can significantly increase your wealth in a way that cash can’t.
If you happen to be looking for income-generating properties in Portugal, or an apartment in Lisbon where you can live and which you can keep as an investment, please feel free to get in touch with me since I offer you a win-win situation. I can help you find the perfect property that fits your interests, and, while my assistance is exclusively committed to advancing your best interests, it is nevertheless free of charge to you, as a buyer. How can you say no to that?