We’re constantly reminded by the media about the property market and it’s ups and downs. The reality is Australians love bricks and mortar, and property investors like any other investor should be fully informed about the risks and rewards before making a purchase. After all, investment in direct property is relatively more expensive than shares, meaning that typically an investor needs more to get into the direct property market.

How does an investment in direct property stack up against shares over the long term? Accepted wisdom is that a higher return is only possible with a higher level of risk and there is no such thing as a guaranteed return. How do the different types of property perform, residential compared to commercial, new versus old, house versus apartment, city versus country, state versus state, suburb versus suburb, and so on?

These are not the only matters a savvy investor should consider about the inclusion of direct property into their investment portfolio. Until recently, there seemed to be a misguided perception that you could never lose with property. This simply isn’t true. Just like the world isn’t flat, property doesn’t always go up in value.

A direct property strategy can:

  • Provide positive cash flow
  • Help build long-term capital growth
  • Improve tax efficiency of income; and you can
  • Add value through transformation (of the property) to increase return on investment; and use the strategy to help create personal wealth and provide benefits to a retirement strategy.

But, it needs to be remembered that property:

  • Generally, lacks diversification and is illiquid. Meaning it may be an investors’ only investment and require a full redemption (sale) if the capital invested is required for other purposes
  • There are substantially higher costs associated with buying, holding and selling direct property than for other forms of investment
  • If the investment is not self-sufficient, investors will need to dip into their own money to pay for services to keep the asset running
  • The higher the cost ratio the greater the performance must be to avoid losses
  • Property should be viewed with a long-term investment timeframe
  • When it comes time to sell, depending on demand it may take substantially longer to sell and settle (than shares); and
  • Gearing for any type of investment has the potential to increase gains in a rising market, but also magnify loss in a falling market.

When an investor understands these points, they’ll see what is possible and what isn’t.

At Finesse we educate our clients so they understand why particular investments are suitable for them, how they are to be structured, what the benefits and the potential risks are, before inclusion in their investment plan.