Is property the right investment for you?
By Thomas Kidd
When it comes to investing, Australians have always had a soft spot for property. Property is widely considered a "safe" investment when compared with other growth assets such as shares; some attribute this to reduced price volatility, or the security of holding a “real” asset. Many Australians believe that investing in property is not only safer, but provides greater returns than the share market.
In reality, property investment can not only carry a multitude of additional risks, but may also lack the returns to justify it. A recent white paper from Property Investment group PEXA found that based on property price growth data from 1990 to 2020, the average Australian investing in property would have been better off investing in their super fund. The study of 100,000 properties in Australia’s three largest cities showed that after adjusting for fees and taxes, the median return on property investment was 6.3%, compared to an average super fund return of 7.4%.
Some of the major risks to property investment that drag down returns are:
- Rental issues. While rent can provide supplementary cash flow, unexpected maintenance costs and renters falling into arrears can create significant expenses for landlords that may take an inordinate amount of time to fix.
- Natural disasters. Having such a significant amount of capital held in a single, real asset means that a flood, hailstorm or fire could take it away overnight.
- Liquidity. Sometimes investments need to be sold to meet unexpected costs, and unfortunately, a house can’t be sold in parts. Selling a home can take a lot of time, and may incur additional costs such as repairs and advertising. Being forced to sell your property at the wrong time can be a major contributor to poor investment outcomes.
- Fees and taxes. While there are many tax advantages to investment properties, direct investment still means your marginal tax rates will apply to any income received. There are also additional costs such as land tax and interest payments to consider, and interest rate rises can further increase this burden.
Comparing property to super is a little like comparing apples and oranges, because in reality, super is not an asset class, but a tax environment. But this points to one of the key reasons super is such an effective instrument for accumulating wealth; tax concessions can help to increase investment returns, and compounded over many years, can make a huge difference to investment outcomes.
While advice on financial products like super is strictly regulated, an investment property is in fact not considered a financial product at all. This means that investment property advice is often unregulated, and may not be trustworthy. Real estate agents and property spruikers are not required to consider your financial circumstances when recommending an investment property and may be more likely to promote the potential upsides without warning about the relevant risks.
This is not to say that property investment doesn’t have its place in an investment portfolio, and there are many other legitimate reasons you may consider a property; for example, buying a home for a relative, or somewhere that you plan to retire one day. Rather, it emphasizes the importance of diversification in your investment portfolio. In fact, most diversified investment options will hold a certain proportion of property, either through direct investment, or through the use of listed property investment trusts, which diversify funds across a number of properties. Diversified investments mitigate some of the risks outlined above, eg. natural disasters will not threaten your entire investment portfolio at once. If you’re considering investing in property, make sure this decision aligns with your investment goals, and talk to a financial planner about the potential risks involved.
Thomas Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001292328)