Why property is a smart long-term investment
If you're thinking of making an investment, consider the property market. As with any significant financial decision, you'll need to assess the risks before making any long-term decisions. However, there are many benefits to buying property that other investment options don't have.
When you buy a property, it's something you can see and touch.
Unlike shares, that represent your part-ownership in a business, property is physical.
Many people take out a mortgage toward a rental property for this reason. You can see your investment and even its progress. For example, if you renovate an investment property, you can visually see the improvement - and hopefully gain a better return by raising rental costs.
Property, shares and managed funds all confer some kind of ownership. However, the physical ownership of property makes it a psychologically attractive option to many investors.
While investing in property does require some financial awareness and ongoing maintenance commitments, you may find it a lot more understandable as an investment concept than bonds, stocks or other securities.
When you take out a home mortgage, the property you're investing in is the security on the debt (ie to the lender).
Once you have paid off the principal and interest of the mortgage, you own the property outright.
You can control it
Some people opt to invest in a managed fund. Their money is pooled with that of other investors.
A fund manager buys and sells shares on behalf of the investors, who are entitled to periodic distributions.
Such an investment is diversified, however you can pay for the convenience. There can be higher fees than other investment types and an inability to liquidate funds. You will also need to carefully read the product disclosure statement. Furthermore, if the investment is sold on a secondary market, you will need to monitor any applicable market announcements.
In a managed fund, your investment is in someone else's hands. Though this appeals to some, it removes the investment from your control. You are not controlling the investment decisions and instead rely on someone else's judgment and skill.
Property, on the other hand, can be entirely in your control. Though you might hire a professional property manager in the early stages to ensure you meet your legal obligations as a landlord, you can always choose to control this asset yourself.
You can choose where to invest. This will also impact the kind of tenants you take on, depending on whether the suburb appeals to young couples, families or students, for example.
Self managed super fund investment (SMSF) is a popular option too. You could buy a rental property and have the rental income go straight into your nest egg.
Whether you want to take a hands-on or hands-off approach to investment property, it's good to know that the option to have full control of your asset exists.
By contrast, a managed fund does not provide you with the same kind of choice.
You'll also need to budget carefully so you know you can afford the repayments. However, there are options like gearing that enable investment by borrowing. Positive gearing is a safer strategy than negative gearing - this means the income from the investment outweighs any costs (property maintenance, for example).
Invest in an area where you're likely to find tenants. Commonly sought-after features such as an extra bathroom, good views or close access to public transport may increase your chances of finding the right tenants. However, if you have some knowledge of the property market, you may well have an idea what to look out for. Consider what areas are high-growth, so you can benefit from any capital gains, too.