Let’s face it, we're all looking at improving our current financial position.
It can be because we find our standard of living to be average or 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. Maybe we are looking at satisfying all of the above!
What are the choices?
Unless you're into gambling or sophisticated investment products such as derivatives or cryptocurrency, it boils down to three alternatives:
Invest in a savings account
This is very safe but is not going to make you rich, especially with the current record low interest rates, you are actually going backwards after factoring in inflation!
Invest in shares
This is more helpful. Returns are statistically much better than cash, but this is due to the increased risk you take, and you need to accept the short term volatility of your investment. You can also borrow against shares (usually around 50% - 60% if you use margin lending) which provides a leverage on your return. However it also magnifies your risk. In addition, margin lending allows the lender to call the loan back when shares go down.
Volatility is driven by the fact that 100% of share traders are investors. When there is a change in market sentiment, everyone takes action which can result in a downward spiral as it is easy to buy or dispose of shares quickly.
Invest in property
Returns are statistically similar to shares but there are three main points of difference:
So, it’s easy to understand why, in the aftermath of the GFC, investors flocked to property. It’s not because property is necessarily a better asset class but, instead, because they have seen share markets fall by almost half whilst property, on average, has only been slightly affected.18 months after the GFC, prices had caught up with the long-term upward trend line.
In the capital city markets of Sydney and Melbourne, much has been said in the media about the recent “massive price correction”. It’s true that prices have been correcting by around 15%, but this is after having surged by close to 80% in the preceding years. Unless you are forced to sell, just keep collecting the rent and claim your tax benefits and wait for the market to turn around.
Multifocus Properties CEO, Philippe Brach, says “For most of us, we want 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 potential return point of view, property is the asset class that gives me the most comfort and the least amount of stress”.
So how do you gain this comfort?
The first step to investing in property is to understand how the numbers work, how to structure your finances, what type of location and property makes the most sense so that you can achieve the desired result. In other words you need education in terms of strategy, financing and especially risk management.
Once you understand the above, you are ready to invest.
Where can you find this education?
Unfortunately, it’s not part of the school curriculum, so you have to look elsewhere. An experienced property professional should be your first port of call. Self-education (reading, sharing experiences, etc.) is part of it; not enough but still very useful. Many people who tried to do it on their own, because they didn’t trust anyone to help them, ended up having to restructure their portfolio later – at a cost - or even selling and wasting years of investments.Everyone has their skill-set and if you’re not in the property industry go to a professional in that area to advise you.
There are a few rules about who to choose for mentoring. Look for someone who is a multiple-properties investor, competent in all aspects of property transactions (including how to structure finances), someone who has been there and done that. There are many ‘experts’ out there but very few with an overall competence in these various fields. Most 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, creating a portfolio development strategy with sound risk management practices is the starting point for any successful investment journey.