Investment in Property

Property is one of the main asset classes, the first investment most people make, and usually their biggest asset. 

Investment in property offers the promise of

• an appreciation (or increase) in capital and
• a regular income in the form of rental payments. 

That means that property, like equities, can beat inflation over time.

But you must also be aware that the capital value of your property can depreciate (or decrease) over time, therefore property is a medium- to high-risk investment.

One of the advantages of investment in property is gearing or leverage.  This is the use of debt in the form of mortgage bond finance to 'leverage' you or help you to acquire an asset you would not otherwise be able to afford.

With a little financial help from your banking friends, you will, it is hoped, make a good capital gain on your investment one day.

There are different ways of investing in property. 

• On the one hand, you can simply own your own home in which you live. 
• On the other hand, you can own an investment portfolio of different properites with a view to earning a rental income or capital profit from them. 
• A third way to invest in property is through the stock market.

Your own home

An own home is often the biggest asset in one's investment portfolio. 

For most people, paying off their house takes up most of their earnings.  They are using their mortgage bond to leverage them, possibly with the hope of making a capital gain one day.

Paying off a mortgage on your own home is one of the best investments you can make, and a golden rule to remember is that you should pay off your mortgage bond before you start thinking about investing in other asset classes.

As an own home can be a medium- to high-risk investment,  you should be aware of the following dangers:

• Property is highly illiquid.  This means you do not have immediate access to the value of your property should you need cash (although you could use your mortgage bond facility), and if you decide to sell your house, there is no guarantee that you will be able to do so quickly.
• The value of your house is influenced by many factors over which you have no control, such as political factors and economic and interest rate cycles.

An investment portfolio of properties

Buying a property with a view to letting it and using the rental income to cover your mortgage bond payments (with the mortgage interest often tax-deductibe) while you benefit from the capital appreciation of the property sounds like a great investment strategy.  So why do not more people do it?

The reason is perhaps because there are so many pitfalls in propety investment.  Some of these are:

• Large amounts are required to invest in property.
• Properties need to be managed.  Difficulties include problems with tenants, payments on time, maintenance, etc.  and these must all be factored into your calculations.
• There is a high risk of bad timing in property investment.  Certainly, you can make substantial capital gains, but only if you buy and sell the property at the right time.

Property investing on the stock market

Property investing on the stock market gives the small investor the chance to invest in property in a more liquid way.  You can sell your investment without having to sell a physical property, and you gain access to the propety expertise and scale benefits of large projects.  There are three sectors in the stock market property division in which you can invest, namely:

• property companies,
• property loan stocks, and
• property unit trusts or REITS

You can buy shares or units directly in these entities that own a diversified range of properties.  Each of these will have a different risk profile depending on factors such as

• the age,
• location and
• type of property in which it invests.

These entities normally perform well in a falling interest rate environment, but, as with all property investments, are vulnerable to

• interest rate cycles and
• economic and political change. 

These investments can therefore be fairly volatile and are recommended only for investors with specialised knowledge. 



Additional notes:

The concept of gearing:  This can be explained by the following example.  Say you have put down a deposit of $200,000 to buy a property of $1 million.  Within two years, the property's value increases by 10% to $1.1 million.  This means you have actually used $200,000 to earn $100,000 (i.e. 50% return) with the help of your bank manager!

Beware of property gains tax:  This can reduce the attractiveness of investment property.  Property gains tax can take a significant chunk of your capital gain when you sell property and will make it more difficult for this investment to beat inflation.