Property has been a popular route to wealth for many Australians for many years. Buying their own home is often the first ‘investment’ many people make; purchasing another property may well be the second – even before shares and other assets.
But your first investment in property needn’t be your home. Indeed, buying a small apartment to rent out can be a good way to accumulate funds so you can eventually buy your own place, in an area where you want to live.
Increasing numbers of young Australians are choosing this route, buying in one suburb while renting in a more desirable and expensive area – or living at home for a while longer.
Still others are diversifying into non-residential property via property trusts and syndicates.
Sensible investments in property 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 (an increase in the value of your asset) as well as rental income. Then there’s the tax advantages associated with negative gearing (more about that later).
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 – how higher rates might affect their expected net return and the market for their property should they wish to sell. They also need to make sure the return or ‘yield’ from their property stands up against the return they might have achieved had they invested in shares, for example.
Of course, you don’t have to make a direct investment in property. Pooling your funds with other investors in 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 financial advisers would argue that too many Australians let direct investment in residential property dominate their portfolios. In theory – and this is far from reality for most people – property should account for perhaps 10 per cent of an investment portfolio.