Recent research by CommBank (April 2021) has shown that almost half (45 per cent) of millennials consider property investment the most appealing investment option, followed by the stock market at 38 per cent.
These figures will likely come as no surprise, given Australians’ love for property ownership (“Great Australian Dream” anyone?), but what drives young investors to property? And could these drivers be drawbacks?
It’s Tangible
For most people, residential property is an easy first step when looking to get started with investing. This is because of its tangibility.
We can see houses, touch them, have lived in one, likely rented one and might have seen parents get a mortgage and buy one (or two), so we have a better understanding of the process and the investment. That background knowledge gives us extra confidence and comfort with the asset class.
Intangible assets, such as shares, aren’t as familiar, and investors might be more hesitant to invest if they don’t understand the mechanics of how the share market works.
While property might be favoured due to its tangibility and our comfort with the asset type, it might not be the best investment strategy for the individual and their goals.
When getting started with any investment, it’s essential to start with your goals first and then put together an investment strategy that best achieves these.
It’s Trendy
The Block, House Rules, Fixer Upper… there is no shortage of real estate and renovation television series to binge-watch.
And if you’ve ever watched one of these shows, you’ve likely contemplated your own plans to become a property flipper… buy, renovate, sell, cha-ching!
A positive of property as an investment type is that it does provide investors with a level of control over the performance and outcome of their investment. Investors can add capital value through various strategies such as renovation or development.
However, renovations require a lot of hard work, time, and planning, and it’s important to ensure investors don’t overcapitalise in the process.
While it can be financially rewarding when done correctly, property flipping isn’t a foolproof strategy, and, as with any investment, proper due diligence must still be done.
It always goes up in value (and other misconceptions)
There are a number of misconceptions about the level of risk and return relative to property investments.
Investors can tend to have lower levels of perceived risk with regard to property as an asset class and investment. Again, this likely stems from our familiarity with property.
However, investing in property can be quite high risk:
- It typically consists of purchasing one single asset with a significant value. This doesn’t provide diversification within an investor’s portfolio, meaning all the eggs are in one basket. If the investment doesn’t perform as hoped, this represents a significant portion of the portfolio that hasn’t performed.
- Borrowing money to invest, which is often the case for property investing, is known as gearing. A common rule is that while gearing magnifies gains, it also magnifies losses. Again, if the investment doesn’t perform as hoped, you will still be responsible for any borrowings used to fund the purchase.
- Property is a growth asset, which generally means it’s considered to be a higher risk for higher return, potentially over the long term.
While Australian housing prices have increased on average by 7.25% per year over the past 30 years, it’s important to remember that this is often cyclical and that all properties don’t perform equally.
For example, 4 bed/2 bath properties in the CBD and a house in a booming mining town will have two very different performance trajectories.
While risk is often a necessary part of wealth accumulation, it’s important that risk is appropriately understood and managed through due diligence and a suitable investment strategy.
If you’re unsure how to get started, there are a number of professionals you can engage to assist with the property investment process –
- A mortgage broker can assist with comparing a range of lenders and securing the best home loan structure, including ensuring you get a quality interest rate and suitable product features for your needs.
- An accountant can assist with any relevant tax planning, including income tax and capital gains tax calculations.
- A financial adviser can assist with planning and putting together a purchase and debt management strategy, including forward planning to ensure your investment loan is affordable both now and into the future.
If you’re an investor that considers property investment to be the most appealing investment option, reach out today to discuss whether property is the right investment for your goals!
