It seems that for as long as the sun has come up on Australia, we have had a love affair with property. When I ask clients what their ‘goals and objectives are’, it surprises me how many times the first responses include buying a property...even from those that may already have two or three investment properties. Time and time again we are told that, if done wisely, buying a property is “the best investment you can make”. You would be forgiven for being sceptical though, as the media is seemingly awash with stories of ‘slowing capital growth’ and interest rate announcements from the Reserve Bank of Australia.
So, we have to ask ourselves the question is it really a good idea?
Income compared to growth capital
When looking at investments, we need to look at income and growth. If you are buying the property for the rent, you need to make sure the capital value doesn’t crash. On the other hand, if you think you are buying in a ‘growth’ area, you need to make sure it will be rented out continuously if you need the cashflow to pay for debt (interest), maintenance, and agent’s fees.
Liquid assets and affordability
Being such a lumpy asset, it is not liquid (able to move in and out of quickly), easily, nor cheaply! So when you make a decision to invest in property, you need to ensure you have the appropriate time horizon to make the exercise worthwhile. The big real estate sites (Realestate and Domain) and even friends or family members are a good starting point for advice. However, for an investment of this magnitude you will want to ensure you have your ducks in a row and get some expert advice and your financial adviser will be best placed to assist with this.
Not having all of your eggs in one basket (AKA diversification) is commonly used to reduce the overall risk in your investment portfolios. My belief is that although property holds a great and sometimes important place in a diversified portfolio, it should not be the only asset class explored in your strategy.
So in short, some tips for property investing:
- Do your research! Know your suburb, know where we are in the cycle (both property and interest rate cycles), and know your limits.
- Do your cashflows – make sure you can sustain the ongoing costs of property investment, even if interest rates rise, or the property is not rented for a period of time.
- Diversify, diversify, diversify – if you have a family home, and an investment property, and are in the market to add more property to your portfolio, consider looking at other asset classes to reduce the overall risk in your strategy.
- Lastly, get help. With so many options available, it can be hard to know if you’re making the right decision.
- Have fun! Buying property can be a stressful experience for some, but it doesn’t have to be. Take a deep breath, give yourself plenty of time, to explore all the options and do your research. You are buying something that will, hopefully, significantly improve the financial wellbeing for you and your family.