Anecdotal evidence would suggest that more and more people are turning to property to make money - but is it the best wealth-creation vehicle for you?
Blogger: Philippe Brach, CEO, Multifocus Properties & Finance
Let’s face it, we are all looking to improve our current financial position.
It might be because we find our standard of living to be average, because we want to live a better life when we retire or, as is becoming more frequent, we want to prepare a nest egg for our children to help them get ahead in life.
WHAT ARE THE CHOICES?
Really, it boils down to three options:
1. INVEST IN A SAVINGS ACCOUNT
This is very safe but it is not going to make you rich. You can’t borrow efficiently against it, for example.
2. INVEST IN SHARES
This is more helpful. Returns are statistically much better than cash but this is because of the increased risk you take, and you need to accept the short-term volatility of your investment. You can also borrow against shares, which provides leverage on your return. Volatility is driven by the fact that 100 per cent of share traders are investors. When there is a change in market sentiment, everyone takes quick action and creates panic, as it is easy to buy or dispose of shares.
3. INVEST IN PROPERTY
Returns are statistically similar to shares but there are three main points of difference:
a. Leverage – You can borrow a lot more against property (80 to 90 per cent instead of 60 per cent with shares)
b. It takes longer to buy or sell property
c. Only 30 per cent of property owners are investors; the rest are owner occupiers. This reduces volatility so that when market sentiment is uneasy, most property owners stay put rather than panicking and selling.
This makes it easy to understand why investors flock to property. This is not because property is necessarily a better asset class but because they have seen share markets fall by almost half, while property has only been slightly affected by the aftermath of the global financial crisis. While there were some locations severely affected, such as Cairns, other property markets – Sydney and Melbourne in particular – have had positive outcomes.
For most of us, we need to be able to invest with minimum disruption to our busy working lives and, more importantly, we need to be able to sleep at night. From a risk management and return potential point of view, property is the asset class that gives me the most comfort and the least amount of stress. So how do we gain this comfort?
The first step to investing in property is to understand how the numbers work, how to structure your finances and what type of location/property makes the most sense so that you can achieve the desired result.
WHERE DO WE FIND THIS EDUCATION?
It’s time to turn to the experienced property professional; self-education is part of it, but not enough.
There are a few rules about who to choose to mentor you. Mainly, you want to select a mentor who is a multiple-property investor, competent in all aspects of property transactions. There are many ‘experts’ out there, but very few have an overall competence in these various fields. More importantly, you need to ‘connect’ with your mentor and feel comfortable in his/her ability to help you.
In order to invest confidently in property, the next step is to work with your professional to create a portfolio development strategy, with sound risk management as the startingpoint.