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Investing into Direct Property

Investing in Direct Property

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The property market is one asset class that is showing signs of recovery following the severe economic downturn caused by the Global Financial Crisis (GFC). Most people have a property investment somewhere in their current portfolio – or would like to. Sometimes this is simply through “the great Australian dream” of owning your home, or maybe through an investment property. In other cases, investing into property may be in a more indirect way, such as via listed property trusts and

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other collective investments.

Characteristics

Since 1980, property has produced returns similar to the share market, both achieving an average of 14% pa including capital growth and income. However, in comparison with shares, property tends to be less volatile. Tax advantages may also be attached to some of the returns from property. It is a popular investment for negative gearing, as banks will lend a high proportion of the purchase price. Interest expenses in excess of the income generated by the property can be claimed as a deduction against other income.

Although both the property and share markets collapsed during the GFC, property generally operates on a different cycle to the share market. This allows for effective diversification, and therefore a reduction in portfolio risk. The tangibility of property appeals to many investors, and the willingness of banks to lend against property allow it to be used in an investment gearing strategy.

Even so, property investment is not risk-free. As with any investment it is important to differentiate between cost and value. The long duration of the property cycle makes the timing of an investment a more critical factor than with other asset types, and property is best viewed as a long-term investment. Investors also need to consider the relatively high costs of buying and selling property as part of the equation.

Finding value

There is a wide variety of property available, from residential to commercial. Some are relatively low risk while others are high risk, speculative investments. It can also be difficult to obtain all the information one might require to make a fully informed investment decision. Sellers don’t usually tell buyers about the rotten floor beams or the dodgy wiring, so purchasers of property always have to keep the maxim ‘buyer beware’ top of mind.

This isn’t always a bad thing. It creates opportunities for astute buyers who can obtain an information advantage. One BHP share is identical to another, but each property is in some way unique. Those who take the time to understand property can do well from this asset class.

And then there’s tax

The tax issues that arise from property investment can vary greatly, depending on how your investment is made and the activities that take place whilst you hold it. For example, if you have invested in a property development, a number of complex tax issues arise such as GST and whether profits are taxed as income or capital gains. Make sure that you seek appropriate advice as early as possible to ensure you are paying the correct type and amount of tax.

Is property right for you?

Many property promoters pitch their offerings indiscriminately, which sometimes results in unhappy investors. As with any investment, a property purchase must meet the specific needs of the investor. Take the time to make your decision supported by unbiased advice.

Sources:
AMP Capital Investors, Oliver’s Insights Edition 37
Russell Investments, Risk v Return 2013 Edition

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