Income Focus
Should I invest in property or an income fund? Alexander’s dilemma
In our latest scenario, Alexander inherited his parent’s apartment, which he planned to rent out. But now he is considering another option – selling it and investing the proceeds in an income fund.
In a previous article, we learned that Alexander’s elderly parents had died, leaving him – an only child – most of their wealth. This included an apartment.
Alexander, in his mid-fifties and single, initially planned to rent out the apartment. The rent would be a helpful income – it would give him flexibility to take a break from work and pursue his hobbies, which include travel.
But as Alexander comes face to face with the responsibility of being a landlord, he is having second thoughts – especially now that his financial adviser has proposed an alternative option: selling the apartment and investing the proceeds in an income fund. This option may not be right for everyone – individual circumstances vary – but Alexander thinks it’s an idea worth exploring.
Maintenance costs: the hidden expense of owning property
Alexander’s parents had lived in the apartment for many years. Alexander knows it well and has a sentimental attachment to it, even though he has never lived there himself. Despite having a home of his own, his instinct was to keep it.
Alexander has heard from friends that property can be a good investment. His parents’ apartment is in a city where property values have increased over time. Alexander hoped that as well as receiving a monthly rent from the property, he would benefit from it rising in value too. It seemed like a no-brainer.
Then the problems began. While Alexander was cleaning the apartment, he noticed a damp problem caused by a leak that had gone unnoticed. Then he noticed that one of the window frames had broken and was no longer airtight. He investigated replacing the windows and discovered that local regulations required him to install a specific and expensive type of window frame.
“The quote for the windows was a shock,” he says. “Something shifted in me and I began to see the apartment less as an asset and more as a burden.”
Wanted: an experienced landlord
Alexander’s elderly parents had struggled to maintain the property in their later years, allowing problems to build up. Once the problems were solved, he was sure the apartment could command a good rent. But Alexander was nervous about handling the renovation himself.
Alexander explained his situation to his financial adviser who offered another option – sell the apartment and invest the proceeds in an income fund. This is a type of fund that is designed to generate a regular income – from dividends, interest or other distributions (payments can vary depending on market movements).
As with property, investors in an income fund can benefit both from regular income and long-term capital appreciation. Income funds may invest in a range of asset classes, including bonds, stocks and other instruments. They are typically exposed to financial markets and therefore involve risks.
For Alexander, the benefit of investing in the fund is that he would no longer have the responsibility for maintaining the property. He would not have to budget for ongoing maintenance costs, nor the administration involved with dealing with private tenants.
Alexander decides to sell the apartment and invest the money.
“Supervising builders is not my idea of fun,” he says. “Although it’s sad to say goodbye to the apartment, I think this is the best solution. It deserves to be in the hands of a new owner who will love it as much as my parents did.”
What are income funds? Download our explainer
Property or investing – a comparison
Alexander’s decision was the right one for him. But for another investor, it might make sense to keep the apartment. Here are some key things for a potential property investor to consider:
- What is a realistic rent that can be generated consistently?
- How much should I set aside for maintenance costs?
- Do I have the capacity to manage the relationship with my tenant(s) myself, or should I involve a lettings agency?
- Can I raise the value of the property by refurbishment or other work?
- Might I or a family member want to live in the property in future?
- Could I rent out the property for short-term stays while keeping the flexibility to use it myself when I wish?
Each investor will answer these questions differently. For Alexander, the ease and simplicity of an income fund was a big attraction. He would prefer not to have the responsibility of managing a tenant and fixing the apartment. The income fund was a good choice for him. What would you choose?
