Property – the asset class that gets the most attention, opinion, media coverage and political focus, and as a nation, we are ‘obsessed’. In many ways, it makes sense as property is both aspirational in terms of our homes and as an investment. You don’t have to go to too many BBQs and parties in capital cities to hear about ‘capital gains’ and ‘rental yield’.
It is an asset in its own right, but also an industry with a mountain of vested interests, including buyers’ agents, real estate agents, banks, lending institutions, self-managed super fund advocates and most importantly, those who make the laws around property – politicians, who interestingly own about two properties per person.
It is no coincidence that property is often described as ‘the great Australian dream’, which is a powerful moniker, particularly for those individuals and institutions described above.
Those vested interests will also be pleased if you are now thinking, ‘If you can’t beat ’em, join ’em’, but what are some of the considerations before making an investment?
Leverage
One of the most unique characteristics of property is the ability to borrow money to acquire the asset, typically in the form of a mortgage from a bank. Whilst borrowing to invest is not something new – you can borrow to invest in most asset classes, it is the scale of leverage and impact on performance – both positive and negative.
For example, you saved $500,000 over the previous 10 years (2014-2024) to acquire a $500,000 property in 2024. If the property had been growing at 5% per year, the entry price in 2014 would have been $322,000.
If you had borrowed with a 10% deposit ($32,200), instead of saving, you would have acquired the asset for $322,000 in 2014. It has now grown to $500,000 and therefore opportunity cost of delaying the purchase by saving instead of borrowing is a whopping $178,000. This is then magnified over future decades.
Granted, interest would be payable across the 10 years.
Keep in mind, that leverage works both ways – positively in a market that is performing well, but the opposite in a falling market.
Physical Presence
‘Bricks & Mortar’ are words often quoted by property advocates and provide the perception of ‘control’ in that you can always ‘touch and feel’ the property.
Theoretically, there should be little connection between investment performance and the fact you can drive across town and see the asset, yet the returns in any asset class are generally driven by demand and supply. If investors have a higher preference for physical attributes, the higher the demand for that asset and therefore the asset should perform positively.
Liquidity
If you want to sell a property, you either sell the entire asset or not at all. You can’t sell off a bedroom, bathroom or garage if you need to release $50,000 from the value of the property.
I mentioned ‘control’ above, and this is an example where the investor lacks control as the reason for selling may be unforeseen and you may only need a small portion of the value to
solve your problem but compared to a diverse share portfolio or managed funds, you aren’t able to be selective of which portion you liquidate.
Further, once the property is sold, it is sold, and the tax and lifestyle consequences are irreversible.
Ownership
Should I buy an investment property in my own name, my partner’s name, jointly, SMSF, company or other trust? There are far too many considerations for this article, but the key is to get this correct before you buy as it can be very difficult and very expensive to reverse in the future.
Capital Gains
The concept of how the gain of a property is taxed upon sale is broadly similar to most investment classes but there is complexity and again, get this correct before you buy.
Negative Gearing
This is synonymous with property investing and one of the most politically controversial elements but negative gearing is tax legislation and relevant to any investment class, not just property.
In simple terms, you can claim a tax deduction for any investment ‘losses’. Well, losing money to claim a tax deduction doesn’t seem like a sound financial decision, but if you are relying on this strategy, you better make sure the growth of the asset makes up for the losses.
Diversification
I mentioned leverage considerations earlier and the high entry cost of property may impact your diversification strategy as it can quickly take up a significant portion of your overall portfolio.
Further, there is a lack of diversity in the income from property, being the rent. You are relying on 1 individual’s financial situation to ensure the investment pays an income and maintains the asset to a standard that ensures continuity of future income. Yes, if they don’t pay the rent, they leave, but the time, cost and effort of changing tenants can impact performance.
In general, property should make up a portion of your investment portfolio, but not to the point of over-exposure, unnecessary risk and being forced to make further investment decisions to ‘re-balance’ your portfolio.
Active Market
I feel this is a big driver for many property investors, even if they do not admit it. Investing can be scary, even more scary when you get to sleep and wake up the next morning and world events have meant your high growth super investment has dropped 10%.
These types of events can make investors jittery and the temptation and ease with which to hit the ‘sell’ button can be too much, often with later regret. A property sale takes weeks or months, allowing an investor time to reflect on whether their decision is being emotionally, not logically driven.
Further, no market exists where you can watch a property price move up and down, to the second. These relentless price updates that exist with other assets, such as shares and ETFs, only heighten anxiety about buying, selling or holding.
There are a myriad of factors to consider when buying and selling property and I have touched on only a few above. There is no such thing as a perfect decision, so at least try and make informed decisions, with all the facts on the table.
