This article looks at the reasons you shouldn't invest in property, in contrast to the previous article (Upsides of Property Investment) which covers why you perhaps should invest in real estate.

In the previous article we covered the reasons why investing in real estate can be a very lucrative investment vehicle to make substantial returns on your investment.

The power of leverage offered by purchasing real estate on mortgage means that any increase in the property value can be greatly magnified into a much higher ROI for your investment.

However, such fantastic yields are not without a plethora of fees, charges, and other deductions, as well as highly leveraged risks.

Charges, Taxes, and Deductions

| Deduction | Cost | Rental % | |-----------|------|----------| | Residential Tax | $2,364 | 15.89% | | House Insurance | $223 | 1.50% | | Landlords Ins. | $246 | 1.65% | | Safety Certificate | $147 | 0.99% | | Maintenance | $984 | 6.61% | | Management Fees | $1,488 | 10.00% | | Service Charges | $1,637 | 11.00% | | Total | $7,089 | 47.64% |

With all costs stacked up, it is clear to see that any rental yield is effectively halved even in the best case scenario.

This scenario assumes a 100% success rate of rental payments being made, in full, and on time, without any exception. It also assumes a 100% occupancy rate and 0 days of vacant property.

In reality rental arrears and defaults run close to 10% further driving down the rental income by 56.74% to give a net of 43.26% of rental income, before tax.

With a monthly gross rental income of $1,240, a net of 43.26% would give a dollar figure of $536 per month, to give an annual net rental income of $6,437.09

Net rental yield: $6,437 / $441,000 = 1.46%

However, with an interest only, buy-to-let, mortgage at 4.5% the monthly payments of $1,488 eclipse any rental income:

$536 Rental Income - $1,488 Mortgage Payments = -($952)

Running at a cost of $952 per month, or $11,424 per year:

-($11,424)/$441,000 = -(2.59%)

This means that the property would need to increase in value by at least 2.59% per year to break even, not accounting for inflation.

The Double Edged Sword of Leverage

#### When Interest Rates Rise

A 1% increase in the rate of interest paid on your mortgage represents a 22% increase in monthly mortgage repayments.

Such is the power of leverage.

If we apply this to the scenario where we used leverage to purchase 7 properties, an increase of 1% would add 7 * $331 to the combined monthly mortgage repayments = $2,317 each month increase.

#### When House Prices Fall

In a 35% fall scenario (as stress-tested by the Bank of England), an investor who invested $61,960 total into a leveraged property finds themselves at -($160,336) -- having lost 2.6 times their investment amount.

For the investor with 7 properties on mortgage:

Effective Return: -($1,115,022)

His decision to purchase on leverage has led to a loss of $967,104 higher than would have been realized had he purchased a property outright.

Purchasing real estate is something that most people will likely do at some point in their life, most without taking the time to fully understand the financial risks they are taking by using a large amount of leverage in the form of a mortgage.