Do you really need an investment?

CityLiving: A nice house in a good location could be a better long-term buy, says Jane Suiter

The notion of building up a property portfolio has really caught on in the last few years. Thousands of people stung by the last downturn in equities and worried about their pension when they retire have been pouring money into second homes from Bulgaria to Brittas. Whether it is buying an apartment for the kids to use when in college or a duplex to rent out, many people feel under pressure to own a second home. But, just because your friends and neighbours seem to be buying up the world, it doesn't mean it is the right thing for everyone.

Some estate agents are now warning that the notion of buying a second property to fund your retirement may be mistaken for many. It all comes down to choice. If you already have your dream home and some spare cash then investment is obviously one way to go. But that is not the choice facing many potential investors.

"It's far better to have as nice as home as possible in a good location than a more modest home and an apartment," says Martin O'Mahony of Goatstown estate agents Property Team O'Mahony Auctioneers. He points out that the thousands of people in fairly modest homes are looking at investment property whether in the Dublin suburbs, Budapest or Dubai and they are all looking for the one thing - extra income when they retire or a lump sum. But, he argues, in reality they would be better off putting their money into buying as good a family home as possible and not worrying too much about keeping up with the Jones's property portfolio.

After all, if you sell your second home in years to come, you will be liable for capital gains tax but decide to downsize and sell the family home and all returns are tax-free. On top of that, he argues well-located good quality homes appreciate at a faster rate than many investment properties. "It is really very clear-cut and simple. Pick the location you want to live in and then buy the best house you can afford even if it is in poor condition." The result is probably greater capital appreciation as well as a more comfortable lifestyle in a nicer house.

Purely hypothetically, he argues that a three-bed semi that is worth €500,000 now may appreciate to €750,000 while a €300,000 apartment may rise to €480,000 - that would be a combined capital appreciation of €430,000. On the other hand, a €900,000 home may rise to €1.9 million plus, a far greater level of appreciation and tax-free. Last year, for example, duplexes and apartments in the Goatstown area rose by 10 per cent while period homes went up almost 20 per cent.

There is a similar story in other good Dublin suburban locations such as Sandymount. Nigel Bennett of Bennets in Sandymount says the smaller properties went up about 15 per cent while the older period homes saw an appreciation of about 20 per cent and it is a pattern repeated across Dublin.

The top-of-the-range homes in the €2 million to €4 million bracket went up even faster, says Bennett, as there is a real shortage of homes in the bracket while the demand is staggering. Many people in their 60s and 70s are already benefiting from this. Those who bought the big period homes many years ago often do not own a second property but nevertheless can realise really substantial lump sums by downsizing.

However, Bennett also argues that having a second home can provide a real comfort to many people. "It all depends on your individual circumstances. Many people are buying second homes for their children when they are from the country so the children have somewhere to live while in college or as somewhere for their adult children to live. Unless you have an exceptionally large garden where you can build without significantly affecting your price, this can be a good idea." But many others are buying for investment. And if you are making the choice between buying a bigger or better located home and buying an investment property, remember that the landlord's life is not for everyone. Unless you are really cut out for it, it can be difficult when you realise you have to run out at the weekend to fix a leaking tap, or answer a phone call late at night when your tenants are partying. As with all other property decisions, you have to be very careful about the location of any investment. If it is in a holiday resort abroad, are you sure it will still be popular in a few years time? Will thousands more apartments be built in the area lowering the value of your own? If you are looking at an investment here, some locations are more marginal than others.

Even if you decide not to move, renovating your home can add value. But O'Mahony warns that putting too much into a three-bed semi on an estate can be bad news. "You may make it easier to sell but it will not go up significantly more than all the other homes on your street. Putting money into a more unique house, though, will almost certainly add value." And with more and more people inheriting substantial sums of money, the demand ought to remain high for the better quality homes.

If you put your money into your family home, you will have a nice comfortable home that will do wonders for your quality of life and you may be able to realise a substantial tax-free lump sum. Only then is it worth looking at the portfolio option.