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Property Investment 101: when to invest in property over shares

Wednesday, 09th November 2016

Originally published on The Frontier Investor

When it comes to choosing property over shares, it's not always an either / or proposition. In fact, with all your due diligence undertaken, there's no reason why you can't do both. But at the end of the day, there are undeniable advantages to investing in Australian residential real estate, as discussed by Smarter Property Investing principal and portfolio specialist Christine Williams

As one of approximately 14,329 Australians to own 6 or more residential investments, it's no surprise that I consider real estate as a solid wealth building vehicle. My love affair with property began three decades ago, when I realised the gains to be made following the sale of my first house. Happily, I can report it's been onward and upward ever since.

I believe in the fundamental principles of investing your money to make it grow and provide you with the gains to achieve prosperity. While you can achieve this through both property and shares, there are undeniable reasons why I've chosen real estate time and time again.

Investing in property is not a get rich quick scheme

My investment philosophy when it comes to residential real estate is that it isn't a get rich quick scheme. I'm a buy and hold kind of girl who lets the taxman, tenants and time pay for my investments, while I enjoy the finer things in life.

While we've all heard about people buying and flipping property in order to make a quick buck, they're the exception rather than the rule (which is, of course, why they hit the headlines!). There's too much risk involved with this type of strategy and it's just not my thing.

Instead, I recommend bricks and mortar as a long-term investment to enjoy the full benefit of capital growth, combined with the ongoing rewards from taxation (including potential reductions in tax obligations, depreciation claims and tax variation), all while your tenants cover most payments through rent.

Buying and selling property comes at a price

When you purchase a new investment property, there's Stamp Duty, mortgage fees and building inspections where applicable. You'll also face a charge to let the property via your Property Manager, usually the sum of one week's rent.

When it comes time to sell, real estate agents fees and Capital Gains Tax come into play.

And with both selling and buying, there are conveyancing costs to contend with for the property to be legally transferred into (or out of) your name.

These sums soon add up and eat into your profits - which is why it's essential to do your due diligence when you add a property to your portfolio. Make sure it aligns to your overall financial goals, that your risk mitigation strategies are firmly in place (especially your cash buffer, as detailed below) and you've had a property portfolio specialist, financial advisor and accountant go through the checks and balances.

If you buy well in the beginning - and mitigate risks - there will be no need to sell

My clients succeed because I stress the need to buy and hold. I make sure the research is spot on and matched to long-term goals and the needs of their portfolio. This may mean purchasing a house and land in one area, while buying an apartment in another - fitting together pieces of an overall puzzle for strategic growth purposes.

We also ensure to effect the right risk minimisation strategies into place including a cash buffer and appropriate insurances. One of the secrets to my investment success, my suggested cash buffer is calculated on up to 3, 6, 9 or 12 months' worth of rental property expenses to guard against tenants being lost, investor unemployment or anything else that affects the property's cash flow. The nominated sum is then held in an offset account - either against the actual investment, or the property owner's home.

A cash buffer then puts you in the position of deciding when to sell your asset, rather than having your hand forced out of circumstance - you buy a property with a view to holding it for 10 years and you've set yourself up with exactly what you need to do so.

The longer you hold, the better growth your property portfolio will achieve

What better reason could there be to hold property than the fact that it doubles in value over every 10 year period? Depending on your exact investment location and the state of the market when you buy, there will be exceptions to this, but as a general rule it's fairly close to the mark. It comes back to the actual investment and is a clear example why you need to work with a property portfolio specialist such as myself from the get-go. You need to make sure you buy in the right place at the right time to get these kinds of gains.