01/10/2017
It’s safe (as houses)
There’s a reason why ‘safe as houses’ is a well-known phrase: it’s true. According to research by AMP, Australian property has increased in value at a rate comparable to that of the share market since 1926 – an average of 11.4% per annum – despite a succession of wars, disasters, recessions and crises. It’s done so without the volatility of the share market, too (more on this later), making it an all-round safer investment.
“When you factor in the return and risk associated with buying property and shares, property wins hands down,” says investor, university lecturer and author Peter Koulizos. “Shares have [marginally] higher capital growth, but the difference in risk is huge. The risk is measured in variation in returns and capital growth (or loss) on shares can range from +40% in a year to -40% in a week! You don't get that sort of variation in property, hence it is considered a safer investment.”
It’s easy to get started
You don’t need specialist knowledge to start investing in property: in fact, many Australian property investors didn’t start off intending to make their fortune through property. Instead, they just bought a house to live in. It’s only after seeing the value of their home increase – and realising how much wealth you can generate – that many investors take the leap and start proactively investing.
It’s easier to research than stocks and shares
Playing the stock market requires a lot of education. You have to understand how the system works, understand the complex world of trading (not least the different kinds of financial instruments used), as well as research brokers and fund managers. Once you’ve done this, you’ve then got to get to grips with the companies on the market – which involves trawling the financial press, annual reports, other company releases and so on.
Investing in property, meanwhile, is much simpler: at its most basic, you can simply jump online and start looking at properties. Admittedly, there’s more to getting property investing right than just picking a property, but a significant amount of research can be done online (and is usually either free or inexpensive) or by visiting suburbs, open houses and auctions – without having to garner reams of specialist knowledge beforehand.
It’s relatively easy to get finance
It may not feel like it when you’re applying for a mortgage, but lenders like property. Home loans are a major part of any bank’s business model, and lenders are more likely to lend on residential property than any other asset class – as evidenced by the fact that they will lend a higher proportion of the value (up to 95%) and at lower interest rates than any other asset class – including commercial property. This makes it a lot easier to borrow to invest in property than in any other asset class.
You can use leverage
Borrowing to invest in property also means you get greater access one of the oldest and most powerful tricks in the financial book: leverage.
“You can borrow more when using property as security as compared to using a share portfolio,” explains Peter Koulizos.
Lenders will lend up to 95% of the value of the property, whereas they may only lend up to 50 or 60% of the value of a share portfolio. This greater borrowing power allows you to benefit from the capital growth of a larger asset.
“Imagine two people in the same job, on the same income, same assets and considered to be a similar risk by the bank,” adds Koulizos“The person wishing to buy a house may be able to borrow $450,000 based on their financial position whereas their workmate may only be able to borrow $300,000 to buy a portfolio of shares.”
Assuming these both increase by 10% in a year, the person with the property has netted $45,000 in capital gain, while the shareholder has gained $30,000. That’s a difference of $15,000 in just the first year – and remember, the profit’s all yours.
Paul Giezekamp, director of Property Secrets, reckons that the greater leverage you can access is “probably the best thing in regards to property.”
Different strokes for different folks
Property is a remarkably flexible investment: no matter what your financial aims are, you should be able to find an investment strategy that suits you. Common strategies include:
Long-term capital growth
Looking to build a retirement nest egg? Long-term increase in value is the most effective way to do this.
“Property has historically proven its ability to deliver capital gain provided you select the right area with correct supply / demand ratio and demographics,” says buyers agent Rich Harvey.
Positive cash flow
Need cash now? Choose properties where rents outweight holding costs.
“Certain property products offer exceptional cashflow. This extra money can definitely assist all areas of your life,” says Paul Giezekamp, director of Property Secrets.
Adding value
Spotted a shabby old place with potential? You can renovate, subdivide or develop and create value out of thin air even through asimple paint job– unlike other asset classes.
“I can influence the value of my investment by renovating, developing or even altering the use,” says developer Troy Harris. “However there isn’t one thing I can possibly do to change the currency or share market. I can polish my wedding ring but the gold price still drops!”
100% control
If you invest in the sharemarket, you typically need to hire a broker to handle your trades for you, and the value of any shareholding is reliant on market conditions and the actions of the people running that company –introducing an element of uncertainty. This is much less the case in property: once you’ve settled, you directly own the asset and you have complete control over it (assuming you can keep up the mortgage repayments, and within the bounds of planning law). That’s a hugely powerful thing, as it means that you can influence both asset worth (by adding value) and cash flow (eg by raising the rent) directly – something that’s nigh-on impossible to do with shares in a company.
You can renovate (cosmetically)
Talking of influencing asset worth, there are a number of strategies you can use to do this, in ascending level of difficulty (and cost). One of the most common is cosmetic renovation – buying a tired property and sprucing up the interior and exterior. This can vary from simply repainting and putting in new carpets, to putting in new kitchens and/or bathrooms and landscaping gardens.
It’s a tried and true method of increasing the value of a property – even the outlay of just a few thousand dollars can add twice as much to the right property.
The next step up from the cosmetic renovation is the structural renovation: adding bedrooms, bathrooms and so on. This is more complex than a simple cosmetic job – with more scope for things to go wrong and costs to blow out – but can also be significantly more profitable.
You can subdivide
Find a property on a big enough block, in an area that’s zoned correctly (or will be soon) and you can apply to the council to chop the block in two – and sell one or both halves for a tidy profit. While not physically difficult, finding the right property can be a challenge – and council approval to subdivide can take months.
You can develop
Biggest risk and biggest reward is taking an existing property or vacant block. subdividing and building upon it – usually units or townhouses. The profits can be substantial – if you can get it right.
Buying property that can later be developed can equal massive profits. These types of opportunities cannot be found in other asset classes.
An investment for every budget
A quick look at the property data in the back of this magazine shows that the too-often-made assertion that Australian property is unaffordable is simply untrue. Admittedly, if you’re looking for an investment in the prime suburbs of Sydney or Melbourne, it’s likely that you won’t come away with much change from half a million – even for a two-bedroom unit – but middle-ring suburbs, regional towns and cities, or cheaper capitals (Adelaide and Hobart, for example) can all offer affordable entry points; if you buy smartly, you can also expect equivalent or even better growth than more expensive assets.
Price is flexible
If you buy a share, you buy it at the market price at that time: there’s no scope to negotiate. In the property market, it’s exactly the reverse: buying and selling is all about negotiation. You (or someone working for you) can talk down a vendor; equally, a motivated buyer could pay over the odds for the right property. There’s also huge scope to find undervalued properties, particularly deceased estate or mortgagee sales, or sales due to divorce.
Michael Yardney refers to this as ‘an imperfect market’.
“As opposed to shares where all shares in the same company are sold at the same price and, in general, all the players in the market have similar knowledge, I can use my knowledge and contacts as well as my negotiation expertise to buy a property considerably below market price,” he says. “In the share market this type of knowledge would be considered insider trading and illegal.”
It improves your financial knowhow
Perhaps a left-field advantage, butinvesting in property improves your financial know-how. The simple act of saving for a deposit teaches financial discipline; working the numbers in terms of affordability prior to purchase is essential, and once an investment has been acquired, the juggling act of dealing with holding costs, rental income and tax benefits not only requires some monetary dexterity, but also makes you more capable of managing your money – and making the most of every cent.
Tax breaks – negative gearing
Speaking of tax benefits, we’d be remiss not to highlight one of the most important benefits for investors: the fact that the tax office allows you to write off investment expenses against tax, thus lowering your income and your tax bill a
