Now that we’ve looked at some of the benefits, and risks, of investing in property, it’s time to consider how to invest.

How can I invest in Property?

There are a number of ways to invest in property, below we consider some of the most common.

Directly 

This is the road many people go down, purchasing a property for investment purposes.  Purchasing directly allows the owner to take advantage of negative gearing, it also allows you to choose and inspect the property yourself. 

The tax benefits need to be weighed against some of the downsides:

  • You need a lot of money to enter the property market, unlike the share market where you could start with a very small (e.g. $100) initial investment amount.
  • The purchase costs can be high (including the deposit, inspection costs, solicitors’ fees and stamp duty).
  • The ongoing management costs are high, including agent’s fees and maintenance costs.
  • By investing in one property in one location you are putting all your eggs in the one basket and concentrating your risk in that location
  • You can’t sell part of a property, it is either all or nothing.  Whereas with an investment in shares, you can sell part of your investment portfolio.

Indirectly via shares

Instead of buying directly into property, it is possible to get access to the property sector by buying the shares of companies that operate in the property sector.  This could include companies involved in property development, real estate management, or the supply of building materials.  Investing in the shares of property companies will not allow you to gain all the benefits we outlined above, but it is an option worth considering if you do not yet have the funds to purchase a property.

Exchange Traded Funds

There are a number of passive funds that provide access to property, including ETFs that focus on different classes of property (e.g. office, shopping centres, industrial).  The benefit is that you get access to a diversified portfolio, however the downside is that you do not get the benefit of negative gearing, or the security that comes with personally owning a tangible asset.

Unlisted Managed Funds

Another option is paying a fund manager to invest in property.  Property managers generally specialise in one particular area, whether it be residential, or commercial, or industrial property.  The downside is that this will cost you between 1-2% p.a, and you do  not get the benefit of negative gearing, or the security that comes with personally owning a tangible asset. 

REITs

A REIT is a real estate investment trust and provides a way for investors to access property investment, without having to purchase the entire property.  The real estate investment trust owns and manages the property, and the investor gains access to the assets of the trust through a purchase on the Australian stock exchange. 

Each REIT usually has a particular investment focus, e.g. shopping centres, office buildings.  The performance of the REIT is dependent on the skills of the manager who is picking the underlying assets and managing them, it also depends on the amount of debt the REIT has, higher debt leads to higher risk.  Before purchasing a REIT, make sure you do your due diligence on who manages the REIT and the financial position of the REIT.

Another point to note regarding REITS is that although they might feel more liquid because they trade on the stock exchange, REITs are still exposed to property and the underlying investments can be illiquid.  A number of REITs were frozen (i.e. you couldn’t get your money out) during the GFC.

According to the SPIVA report  over 75% of actively managed Australian REITs under performed the passive index over the last 10 years.

So there you have it, a number of options for you to consider if you feel that property is an area you would like to invest in.  Next week we’re moving on to the exciting, and all-encompassing world, of “alternatives”.

The information in this blog is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs before acting on the advice.

Stepping on to the property ladder

Now that we’ve looked at some of the benefits, and risks, of investing in property, it’s time to consider how to invest.

How can I invest in Property?

There are a number of ways to invest in property, below we consider some of the most common.

Directly 

This is the road many people go down, purchasing a property for investment purposes.  Purchasing directly allows the owner to take advantage of negative gearing, it also allows you to choose and inspect the property yourself. 

The tax benefits need to be weighed against some of the downsides:

  • You need a lot of money to enter the property market, unlike the share market where you could start with a very small (e.g. $100) initial investment amount.
  • The purchase costs can be high (including the deposit, inspection costs, solicitors’ fees and stamp duty).
  • The ongoing management costs are high, including agent’s fees and maintenance costs.
  • By investing in one property in one location you are putting all your eggs in the one basket and concentrating your risk in that location
  • You can’t sell part of a property, it is either all or nothing.  Whereas with an investment in shares, you can sell part of your investment portfolio.

Indirectly via shares

Instead of buying directly into property, it is possible to get access to the property sector by buying the shares of companies that operate in the property sector.  This could include companies involved in property development, real estate management, or the supply of building materials.  Investing in the shares of property companies will not allow you to gain all the benefits we outlined above, but it is an option worth considering if you do not yet have the funds to purchase a property.

Exchange Traded Funds

There are a number of passive funds that provide access to property, including ETFs that focus on different classes of property (e.g. office, shopping centres, industrial).  The benefit is that you get access to a diversified portfolio, however the downside is that you do not get the benefit of negative gearing, or the security that comes with personally owning a tangible asset.

Unlisted Managed Funds

Another option is paying a fund manager to invest in property.  Property managers generally specialise in one particular area, whether it be residential, or commercial, or industrial property.  The downside is that this will cost you between 1-2% p.a, and you do  not get the benefit of negative gearing, or the security that comes with personally owning a tangible asset. 

REITs

A REIT is a real estate investment trust and provides a way for investors to access property investment, without having to purchase the entire property.  The real estate investment trust owns and manages the property, and the investor gains access to the assets of the trust through a purchase on the Australian stock exchange. 

Each REIT usually has a particular investment focus, e.g. shopping centres, office buildings.  The performance of the REIT is dependent on the skills of the manager who is picking the underlying assets and managing them, it also depends on the amount of debt the REIT has, higher debt leads to higher risk.  Before purchasing a REIT, make sure you do your due diligence on who manages the REIT and the financial position of the REIT.

Another point to note regarding REITS is that although they might feel more liquid because they trade on the stock exchange, REITs are still exposed to property and the underlying investments can be illiquid.  A number of REITs were frozen (i.e. you couldn’t get your money out) during the GFC.

According to the SPIVA report  over 75% of actively managed Australian REITs under performed the passive index over the last 10 years.

So there you have it, a number of options for you to consider if you feel that property is an area you would like to invest in.  Next week we’re moving on to the exciting, and all-encompassing world, of “alternatives”.

The information in this blog is of a general nature only and may contain advice that is not based on your personal objectives, financial situation or needs. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs before acting on the advice.

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