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When you’re priced out of owning a home in your neighbourhood, is property investing a good solution for growing your wealth? Will renting for the rest of your life cost more and make you more vulnerable? We talked to CERTIFIED FINANCIAL PLANNER® professional Rebecca Fergusson, financial planner at Main Street Financial Solutions, about the pros and cons of property investing as a strategy for securing your financial future.
Why do you think property is such a popular option for Australian investors?
Property is something people tend to be more comfortable with as an investment because it’s a tangible commodity and they’re more familiar with what’s involved in buying and owning real estate. When I talk to many clients about buying shares, they often don’t understand the process. They also see the equities markets as being volatile compared with property and that can make them feel more vulnerable to risk. And of course property isn’t usually a volatile asset in the long run. But if you were to look at the listing price for your property every single day – as we do with equities – then you’d probably see more fluctuation in value than you might expect.
What sort of advantages does investing in different assets classes offer when compared to investing in property?
Although property might be seen as an easy, low risk way to build wealth, there are 5 important reasons to consider other types of assets and investing strategies:
Diversification Diversification in investing is an important principle and it’s one that supports points 2 and 3 below – stability, and potential for higher returns. With direct investment into property – that is buying into one or more properties as an owner – you’re only exposed to one asset class. With an investment portfolio you can invest in different types or assets and benefit from a number of income earning opportunities as well as reducing the risks associated with having all your eggs in one basket.
Stability Direct investment into property can be risky as you’re relying on the performance of a single industry for your income. Rents or property values may stagnate or fall and that’s going to compromise earnings from your investment. A diversified portfolio has the potential to deliver a more stable, lower risk income.
Better income potential With stamp duty and other fees and charges, property is an expensive asset to get into and out of. Equities and other investments on the other hand, are relatively low cost when it comes to buying and selling. So if your investments are not performing as well as you would like it’s much easier to adjust your portfolio in search of better returns.
Liquidity When you buy a property it’s an all or nothing investment. You can’t just sell part of it off when you need to draw down some of your capital. And if you want to invest more, you’ll need enough equity or savings to buy a whole new property, or sell and upgrade. With other types of investing it’s usually easier to scale your financial commitment to suit your situation as it changes. So you can invest more or less depending on the resources you have to work with and what you want to achieve.
Ease of management Buying and managing an investment property takes a significant time commitment. Your to-do list includes researching where to buy and properties available, organising finance, conveyancing and inspection reports and then finding tenants, collecting rent, paying bills and organising repairs. Some of this work can be outsourced, but that adds to the cost of your investment, decreasing your overall earnings. An investment portfolio in comparison takes very little effort to manage, especially when you’re getting advice and support from a good financial planner.
Why might starting a portfolio be a better option than an investment property for someone who doesn’t yet own their home?
To get started as a property investor, you’re going to need a substantial amount of money to cover your deposit and any costs – like loan repayments and repairs – not covered by your rental income. A lot of young people simply don’t have the capital available to invest. And with the sharp rises we’ve seen in property values, along with more modest rent increases, it’s become harder and harder to finance a positively geared property with a 20% deposit. That means you could be out of pocket year-on-year to keep up with the cost of your investment and won’t really get a return until the time comes to sell. On the other hand, it can be a good idea to have some capital exposed to property which is still a growing market. But you can still achieve this by investing in a property trust.
Do you see any disadvantages for someone who doesn’t own a property as they grow older?
There’s always a debate about whether you’re financially better off renting or buying. According to a recent paper from the Reserve Bank¹, renting comes out ahead. And in some European countries it’s quite popular for people to choose renting long term over buying. But in many of these locations, tenants have the security of longer contracts that protect their rights as residents. It’s a concept that we struggle with more in Australia because our agreements don’t offer that security and it’s very disruptive for anyone to keep moving house because tenancy terms are so short.
Whether you’re a property owner or not a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on investing for a secure financial future.