Aunt Sue answers some of the questions that she often gets asked about buying property.
Is your own home an investment, as such?
If we define investment as “the action or process of investing money for profit”, then it is an investment, albeit a special case. I say that because it will usually grow in capital value over time, but if you intend to live in it, then you don’t always ‘realise’ the profit – which usually occurs when you sell. Nor do you get tax breaks for a range of costs, including the interest on the loan. Nevertheless, as your equity in the property grows, you can borrow against that equity for other investments, so you can realise the profit before selling to some extent. If you wish to explore this method of investment you should discuss your current financial situation and your goals with a Financial Planner to ensure you fully understand the benefits and pitfalls of such a strategy. At the end of the day though, the stability and financial credibility of being a home-owner are valuable aspects of owning the house you live in, and they should not be underestimated.
I want to start an investment portfolio – should I start with a property?
Your personal financial situation will have an important bearing on what you choose to have in an investment portfolio, as will your ‘risk profile’. A risk profile is an assessment of your willingness to take financial risks. Property is generally considered one of the lower-risk investments, provided time is not of the essence in realising the profits. That’s because populations usually grow, therefore more houses and land are required, and as demand outstrips supply (especially in land), property prices rise. But don’t forget that they can also fall. A major downside to property investment is that if you need to realise the money tied up in the property quickly, it may not happen, as property sales can take weeks or months, even in good times. I recommend gaining an understanding of your appetite for risk and how much money you have available to invest, then researching carefully whether the property is right for you at this time, and the particulars of the type and location of properties that are likely to be good investments.
I have heard of managed property funds – what do you think about them?
Managed funds can be very useful investment tools when you can’t raise a significant sum upfront for an investment, such as a deposit to buy a property. Some funds allow you to start with a minimum investment and continue to contribute a monthly amount, so your investment is growing via contributions as well as the growth of the assets. You also need to take into account the fees you will be paying, over time, to help you in deciding if a managed fund is a worthwhile investment. Always remember though, that with all investments, past performance is NOT an indicator of future performance and I highly recommend that you read the Product Disclosure Statement (PDS) to ensure you are fully informed before you decide to invest.