Planning your financial futureI think most people see property as a growth asset and that would also include the funds management industry.  Possibly the reason for this is because of the generally high capital growth that has been experienced for almost 2 decades. On a long term historical measure this is unusual as the average growth rates have tended to track the inflation rate.  I could gone on and explain why this is the case but I’ll leave that topic for another comment.

We don’t hold this same view.  In our mind property would have to be the classic income producing investment.  Without income there would be very few property investors since most rely on this to manage the debt and associated costs.  I often hear property investors who are heading to retirement state the rentals will be their source of retirement income.

What concerns us is that the current expected income from residential property, in particular, is very low and most times won’t support the costs and loan repayments.  This is where the investor(s) have to tip in some of their own funds to pay the costs.  What this indicates is that the value of property is either too high or the income needs to be greater.  It’s more likely the former is the problem since rents reflect what the market will pay.

People are attracted to residential property and rarely consider commercial, office, warehouse or farm land as an investment and perhaps this is because they are not familiar with these investments or the outlay might be un-affordable.

My recommendation is that if you’re going to invest in real estate of any sort then you should do your homework first so that you are making an informed decision that’s not based on emotion or the belief that the price of property only goes up.

 

Use superannuaton to buy investment propertyI’m sure that most people would think that cash is the only way to contribute to superannuation.  This is by far the most common way but isn’t the only method.  Assets such as shares and real estate can also be contributed to superannuation as an in-specie transfer.  This can be a handy strategy if you don’t have the available cash to contribute and don’t want to sell assets.  The contributed asset might also qualify for a tax deduction up to the limit of $25,000 per year for someone under 60 and $35,000 for those older.

While this sounds easy enough you should do your homework first and assess the advantages and disadvantages.  Assets other than cash could be subject to capital gains tax because there is a change of ownership and this could be costly.  Stamp duty, as well, will be charged on most property transfers.

One of the major factors to consider are the maximum member contribution limits.  Contributing an asset like property could potentially throw the member into excess contribution territory.  This is something to avoid because penalty tax could be charged and make the exercise a disaster.

One of the benefits of contributing assets other than cash is that the earnings of the fund are taxed at a maximum rate of 15% and 0% when held in a pension fund.  Most retail and industry super funds don’t cater for in specie asset transfers so you’d need a self managed super fund to take advantage of the strategy.

 

Balancing investment property risk vs gainThere’s been a swag of articles recently about the huge increase in investment property ownership which is now more significant than the first home buyers or second home buyers market combined.  I suspect that self managed super is becoming an increasingly popular method of purchase which might reflect the large amount of advertising and promotion by developers and property marketers around super as a way to get into the property market.

I wonder how many of these investors took the time to do their homework and consider all aspects of their property investment?

From our experience we know this is rarely done because property is a very emotive investment and everyone knows you can’t go wrong with property (???).

We are able to calculate the internal rate of return (or average yearly return) of holding a property over a given time frame using the expected cash flows.  This will include but is not limited to; the initial purchase, rental income, tax advantages, holding costs and sale proceeds.  Many people incorrectly base their overall return on simply the purchase price and sale price and give no consideration to the net cash flows that occur each year over the term of the investment.  Doing this exercise correctly provides a more measurable and realistic assessment on which to base a decision.

After all, it’s a major outlay – especially if there’s debt involved, so purchasers should be making informed decisions based on the facts and not emotion.  Unfortunately, if commissions and brokerage are part of the deal then there is likely to be bias in the sales process.

The key point is to do your homework first on any investment purchase based on what you want to achieve (your objectives) and then consider all the factors to ascertain the potential risk return reward.  Your decisions will be based on investment principles and not just emotion.

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