Why Property ?

Property Investment – Share Market or other Managed Investment Schemes

Property investment is the superior investment. There are many good reasons proving this statement, including:-

• Capital Growth
• Rental Income
• Hedge Against Inflation
• Tax Benefits
• Greater Degree of Control
• Lower Volatility
• High Demand

Let’s take a look at each of these in detail.

CAPITAL GROWTH

Putting your money in the bank or investing in fixed interest does not give you any capital growth. If you purchase property, however, you do so expecting that the underlying value of the asset will grow.

For example, a new house on the outskirts of Melbourne’s metropolitan area bought for $400?000 may grow at 5 per cent per annum, whereas a well-located property in a growth area in say, Queensland, bought at the same price, could grow at 10 to 15 per cent per annum. In 10 years’ time, the new property on the outskirts will not have even doubled in value, while the well-located property in Queensland may be worth more than $1 million.

If you had bought the property in the prime location, you could possibly retire in 12 years’ time, based on your increased net wealth; you could not retire on the funds from the poorer performing outer suburban property. Even though properties increase in value over time, it is crucial that you buy in the right location to maximise your returns. You need to ensure that you buy property in the right location to maximise your capital growth.

Shares do provide capital growth but it is very unstable and unpredictable and can change overnight. For instance during the recent Global Financial Crisis National Australia Bank Shares (a Blue Chip share investment) dropped in a very short time to the same price they were in 1980 wiping out nearly 30 years of capital growth almost overnight and with little or no warning. Don’t ever delude yourself into thinking it cannot happen again.

Property value corrections are always minor and short lived.

RENTAL INCOME

One of the benefits of owning investment property is that you start receiving an income almost straightaway. In the current market, you could settle on a property during the week and by the weekend you could have a tenant who will have paid you some rent in advance.

With the other asset classes, you often have to wait until the end of your term (in the case of a term deposit) or until your dividends are due, which is usually two times per year.

HEDGE AGAINST INFLATION

An inevitable part of life is inflation, and the rate of inflation varies according to the strength of the economy. One of the benefits of holding property is that property values increase at a greater rate than inflation. This is great news if you already own property. The important thing to keep in mind is to buy the right property in the right location and buy it as soon as you can.

Shares are not a hedge against inflation due to the volatility in the share price and the sometimes irrational and out of control factors that affect share values.

TAX BENEFITS

There are several tax benefits available to property investors, including claiming interest and expenses, and depreciation both on the building and the fixtures & fittings.

Using property as security to borrow money to purchase other property allows you to leverage (borrow against the security) to a greater extent than if you were using a share portfolio as security. Most lenders will lend up to 95 per cent of the value of the property being purchased, whereas most will only lend up to 70 per cent if you were purchasing shares. For example, if you wanted to purchase a property worth $400?000, a lender may be willing to lend you $380?000. This means you need to fund only $20?000, plus fees (assuming that you have no other security).

If you wanted to purchase $400?000 worth of shares, however, the same lender may only advance $280?000. This means you have to fund the shortfall of $120?000, plus fees. Another advantage of a property investment is there are no Margin Calls and therefore no sudden demand for repayment of the debt like the unfortunate share investors in Storm Financial debacle.

Any legitimate expense incurred in running your investment property should also be tax deductible. For example fees paid to a property manager to manage your property are tax deductible. Depreciation of the building may also be claimed as a tax deduction. The age of the building will determine if you can claim any depreciation and at what rate you can depreciate it. Buying a new property allows for the greatest amount of depreciation. Claiming building depreciation is a smart way to increase your cash flow through an tax variation claim with the Australian Taxation Office.

GREATER DEGREE OF CONTROL

Owning property allows a greater degree of control than owning shares. For example, as a share owner you cannot improve the value of your shares. However, as a property owner you can add value to your investment by painting, landscaping or renovating. For a few thousand dollars, you can get much more than that back in added value.

LOWER VOLATILITY

Although it does have downturns, the property market is not as volatile as the share market. You can sleep well knowing that the price of your property will not plummet overnight, which can happen to shares. Keep in mind also that the security is in the land, not necessarily the building, which makes getting the location right particularly important.

HIGH DEMAND

Everyone needs a place to live. For this reason, property, especially well-located property, will always be in demand. But while demand for property is steadily increasing, supply is unable to keep up with it. If this situation continues, prices are likely to increase sharply in the near future.