Is an investment property an income or capital growth asset?

Posted on: February 12, 2014
Posted by: Bob Budreika

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.

 

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