Property Investment Is Safe As Houses If You Consider Pitfalls And Possibilities

The Age

Saturday June 28, 2008

Raegan Durch

DIRECT property (as opposed to listed property) is popular with investors. Because of its tangible nature, it may feel less risky than other investments like shares. But is it?

Returns on investment property take two forms: capital growth and yield. Capital growth comes from an increase in the value of your asset over time. It is usually a long-term consideration. Yield is the income the property generates right from day one. In most cases this is rental income. The ideal scenario is one where the yield is high enough to generate income over the short term while capital growth is occurring over the long term.

What are the risks?

Property is considered a growth asset class and, in contrast to the maxim "safe as houses", has a moderate to high-risk profile. Returns are subject to cyclical volatility, much like shares. This type of investment has low liquidity, so it's not easy to convert quickly into cash.

Property is typically a solid performer that can be borrowed against to further build your investment portfolio.

The increasing population has meant that demand for property has outpaced supply, particularly in the inner suburbs of the big cities. This has resulted in strong capital growth and rent increases. But prices have stabilised recently, particularly because of rising interest rates.

Things to consider

While it's easy to say property is generally a "good investment", it's more important to determine whether it's a good investment for you. Consider these issues:

Your investment goals over the short and long terms - do you need income, capital growth, or both?

How you can maximise the tax-effectiveness of your investment.

The liquidity you need.

Your tolerance for the risk profile associated with property.

Your overall asset mix - do you have enough diversification?

Should you buy property direct or use a managed fund (that has a property portfolio)?

Do you have enough money to buy a property, or are you willing and/or able to borrow to invest?

This last question is important. If you borrow (this is referred to as gearing), it can have an impact on the overall return, because you have to make loan repayments that involve interest and charges.

There are taxation implications and these should be considered when you look at your gain from direct property investment. Other factors to consider about the loan are interest rates, the term of the loan (and how that fits in with your investment timeframe), as well as the features of the loan.

It is also important to make sure you can repay the debt if you are unable to work. Getting your personal insurance in order is therefore vital.

Making a decision

You can obtain professional advice about investment. But, in many cases, the best place to start is by talking to a financial planner who can help you work out what the answers to the questions posed mean for you.

Raegan Durch is a senior financial adviser and a certified financial planner with Mercer Wealth Solutions.

© 2008 The Age

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