Wouldn’t you love an investment honey pot that produces enough income to let you retire early, or let you help out family and friends, or perhaps work part time?
There’s another name for that honey pot: it’s called an investment portfolio. However when it comes to building an investment portfolio, many of my clients only want to invest in property. They think that when all else fails that bricks and mortar is the safest investment. I have a slightly different view. Let me explain.
Property investment—as with any investment—carries a level of risk. For example, will you always have tenants? Will they pay the rent on time? How much rent will they pay? What’s your property worth? How much would a future buyer be prepared to pay for it? What if you have bad tenants? Then there are the ongoing maintenance costs, rates and taxes. What happens if for some unexplained reason your income stops, or is reduced, and you can’t afford to finance the loan on your investment property? What happens if your financial situation changes and you need to sell urgently under ‘fire sale’ conditions?
These are all legitimate questions that need to be carefully considered before jumping into the investment property market. Most people are aware that share prices move up and down because the share market performance is in the news every day. Imagine if property prices were reported daily! I wonder if bricks and mortar would still be perceived as ‘the safest investment’ if it was valued two or three times daily as the share market is?
That’s one of the things that concern me about property investment. It’s NOT valued daily. So at any point in time, you don’t really know what your property investment is worth. The popular belief is that property values always increase, but that’s simply not true. There are examples of oversupply or low demand that limit or even reduce property values. Equally there have been occasions when interest rates have soared and people have been forced to sell their homes below what they paid, leaving them with money still owing on the loan. That situation is known as having ‘negative equity’ and it means that you still owe money on something that you no longer own.
Just because you can see and touch property, it doesn’t mean it’s a safe investment.
Don’t get me wrong. I’m not saying property is a bad investment. We all know many people who have done very nicely from property investing. However I also know people who haven’t done so well. In the course of providing investment advice to clients, and hearing their stories, I’ve learnt that property investment is not a magic bullet.
The point I want to make is that a property investment may not perform to your expectations. Before you commit to taking a loan on a property talk to someone such as a financial adviser who has experience in advising on a wide choice of investment opportunities and who has seen both good AND bad outcomes of property investing.
If you’re convinced that property investment is right for you there are a number of the things you should think about: firstly understand WHY you’re investing. Do you have a specific timeframe? Will you need your capital at some fixed point in the future for other planned expenses? Do you have a risk management plan in case you can’t work for a period of time and you have gone into debt to buy the property? What sort of loan is the most appropriate and what ‘structure’ should hold the asset? Should it be in your own name, jointly with someone else, in super, a trust or a company?
Give some thought to diversifying your investments as well as your attitude to risk. How much risk are you prepared to take? If your superannuation funds are already invested in the diversified investment option, of an industry or retail super fund, then in all probability you will have some involvement in property already.
Where else can you get advice? Will property seminars help you make a decision? The purpose of many property seminars is often to entice you to become involved in one property or another, or to invest in a property fund. If f you go to a seminar and you like what you hear, make sure you do your research before committing yourself to borrowing, buying or becoming involved. While there are plenty of trustworthy property brokers who genuinely want to help people buy the right property, there are just as many who are more than happy to part you from your retirement savings on the basis of a few hollow promises about the safety of bricks and mortar.
So to start building or adding to your investment honey pot, do get some advice before leaping into the property market. An appointment with a qualified financial planner is a good place to start. I’m not just saying that because I’m a qualified financial planner. I’m saying that because a planner will consider any potential property investment in the context of all your other investments and financial goals and commitments.
If you would like to make an appointment with a First State Super financial planner, call our customer service team on 1300 650 873 or call me directly in Canberra on 02 6221 6200. You don’t have to be a First State Super member and your financial goals do not need to be just about property, super or retirement.
Gianna Salvestro AFP®, BFin UC., AdvDipSuper, AdvDipBus, DipFP
This is general information only and does not take into account your specific objectives, financial situation or needs. It does not constitute product or investment advice.
FSS Trustee Corporation (FTC) ABN 11 118 202 672, AFSL 293340 is the trustee of the First State Superannuation Scheme (First State Super) ABN 53 226 460 365. Financial planning advice is provided by First State Super Financial Services Pty Ltd ABN 37 096 452 318, AFSL 240019.