Investing in Property
Australia’s love affair with real estate raises some unique risks ?
Investing in property offers you an opportunity to leverage your hard earned savings, receive regular income payments, and reap the benefits of potential capital gain over a mid to longer term time period. It’s also a strategy that raises some unique investment risk considerations.
Sensible investments in property can have many attractions. Property can be less volatile than shares (though not always), and it tends to be regarded as a safe haven when other assets are declining in value.
It has the potential to generate capital growth as well as regular income (rent). There’s numerous tax advantages associated with negative gearing.
However, as with any investment, there are no guarantees. Property prices go down, as well as up, and sometimes tenants are hard to find, especially good ones who pay on time and take care of your investment.
Investors need to have a keen awareness of the interest rate environment. Higher rates can impact expected net return and the market for their property should they wish to sell. You also need to make sure the return or ‘yield’ from your property stands up against the return they might have achieved had they invested in other assets such as shares.
You should also consider your other options when investing in property. You don’t always have to make a direct investment in property. Purchasing managed funds with a property focus, listed property trusts or property syndicates provides exposure to a broader range of property, including commercial, industrial and retail as well as residential, often with a smaller investment required.
Many would argue that too many Australians let direct investment in residential property dominate their portfolios. This tends to be far from reality for most people.
To invest in property you can invest in:
- Your own home
- A residential property to rent out
- Commercial property
- Listed property trusts
- Unlisted property trusts
- Property securities funds
- Property syndicates
What are the Risk factors when investing in Property?
Some of the risks associated with an individual property can include, but not be limited to all or some of the following:
|Rental payment default (covenant risk)||Lease Length; short leases offer less certainty & extra expense||Market Risk; Property is subjected to cycles: growth, oversupply, market weakness stabilization and absorption, and back to growth. Timing is therefore crucial|
|Funding Risks; The price of money; interests rates while low at the moment are likely to at some point return to higher more normal rates as the current low rates are unsustainable for the long term||No capital appreciation; real estate does not always go up in value. In declining markets, how long can you hold on to a property hoping that it will go up in value?||Vacancy Risk: failure to re-let (void risks)|
|Underestimate management requirements; both financial and time requirements.||No exit strategy; having only one option available to you (sale) is accepting a lot of risk||Repairs; Most investors don’t work maintenance and vacancy into their costs.|
|Rental Growth: Rental growth can be influenced by the economy, local conditions, the fluctuations in the financial stability and non-availability of alternative properties||Stamp Duty Land Tax: In buying & selling a property, stamp duty is levied, combined with the purchase price and interest expenses buys can be in a negative equity position from day one||Liquidity: should you need to raise capital you cannot slice of a piece of real estate and sell it on a secondary market. In a dull market, the possibility of selling the asset can be practically nil or at a substantially reduced price|
Property has been a popular route to wealth for many Australians for many years. Buying your own home is often the first ‘investment’ many people make; purchasing another property may well be the second, but before you lose yourself in this populist approach to investing, make sure you have all the facts. Talk to your adviser and understand all the possibilities and pitfalls that go hand in hand with property investment.
To learn more speak to a Lifespan financial adviser in your area.