Investors are often confronted with a choice between shares and property, but if you're investing for the long term, there is one clear winner.
Blogger: Troy Gunasekera, national manager, The Property Club
Not that many of us needed much convincing, but good to see the actual proof being in the numbers, that residential property has delivered better and more steady returns over the longer term, compared to shares as per the above graph.
Comparing the total returns - after fees and including income payments - over the past 10 years to December 2013, Australian shares unsurprisingly led at 9.2 per cent, even after the crash associated with the GFC, according to the latest Russell Investments Long-term Investing Report The results over the past 20 years also look quite different: an investment in residential property returned a 9.9 per cent gain, beating both Australian shares at 8.7 per cent and global shares at 8.0 per cent.
However, despite the strong performance of property, first time investors still need to ensure that don’t make simple mistakes that will undermine the performance of their properties over the long term.
As we’re experiencing one of the best growth cycles in property in the last 50 years, many investors are flocking to the market to begin, or to add to, their portfolio – but many will still be unsuccessful.
Whilst a large number of Australians dream of having more than one investment property, many first time investors tend to stop at one purchase, largely because of financial difficulty in keeping up with finance commitments and in some circumstances are forced to sell or refinance their property.
Anyone looking to invest in property during the coming financial year needs to be mindful of the most common and easily avoidable mistakes people make.
Too many property investors make simple mistakes with their investments, and then don’t understand down the track why the journey is so difficult and why things go wrong.
Many investors would be much more successful if they took the time to learn about the market, sought solid, professional advice and developed the correct business mindset.
7 wrongs property investors should avoid
1. Wrong property. The wrong property may lead to long vacancy periods, low rental yields and difficult tenants. Research what the rental demand is for in the area, and invest in what tenants will want rather than what you personally prefer. You may prefer to invest in a house, however there may be more rental demand for units in areas 10km from the CBD. You might also think one-bedders are too small, but these may be preferred in inner-city areas.
2. Wrong location. The right location should experience capital growth and good rental yields – and is more important than the property. The latter can be improved – the location can’t. “Location is so important that at Property Club, we research the market weekly for areas that are due for growth. Clues to look out for are growth in infrastructure such as roads and public transport, or changes such as population growth. Essentially, it’s areas that are due to have property undersupply, with relatively low future supply coming through, and yet buyer demand is growing,” Troy says.
3. Wrong tax planning. Ensure you seek an accountant who specialises in property investments, as this will make a significant difference to your cash flow. They should know, for instance, that using the principal part of your repayment to fund a second property will make more money than you will otherwise save in tax.
4. Wrong funding. Many investors get caught with the wrong loan by committing to a high-fixed interest rate, being charged extra unnecessary fees or having high-break fees and hidden penalties. “I recall Property Club discussing with one investor about the benefits of selecting a 7.5% variable rate which was predicted to come down. He was instead talked into fixing for five years at 12% by the bank manager. It pays to do your research, get professional advice and stick to it,” Troy says.
5. Wrong tenant. Many investors experience the nightmare of having a tenant that can’t be evicted or does damage to their property. Look for a property manager who knows how to spot a bad tenant, attends to your every request, is unflappable, can advise you on maximising your rental returns, and has investment properties of their own. When you have a good tenant, consider locking them into to a 12-month agreement, as this will help guarantee your rental income.
6. Wrong mindset. Investors need to keep a financial perspective, have a firm understanding of the market and make factual decisions. “Property investing is a business – very different from buying your own property. It’s important to maintain a business mindset, where you keep track of the property’s value and rental growth, maintain accurate records, conduct an inspection at least yearly and attend to any council or strata matters that affect the property value and rental returns,” Troy said.
7. Wrong advice. Most people would never allow a friend or family member do their tax, service their car or even cut their hair. So why, then, when it comes to purchasing a property do so many choose not to seek professional help and instead take advice from family and friends who lack the expertise? Investors need to take advantage of professionals who are active property investors and are experts in their field.
About Troy Gunaskera
Troy Gunasekera is the National Manager of The Property Club, Australia’s largest independent property group guiding members of all ages to become financially independent through investing in property.
With his wife, Troy has an impressive portfolio of properties worth over $5m diversified across Australia. His own investments are the result of his continual research into the latest developments in property finance, interest rates and property markets Australia wide.