Why is that, when property and shares seem to have about the same returns over a period of time?
Well it seems that, unlike direct shares, direct property is an illiquid investment, and, such, tends to be held for longer periods of time without meddling, so giving capital growth funds a chance to accumulate. In addition, banks like to lend against bricks and mortar, so investors can use other people’s money to buy property worth more than their own savings would otherwise allow.
But the costs of entry and exit (buying and selling a property) are much higher, so it is wise to get advice at every step. Your investment is a reflection of you. As with any direct investments, the investor needs to take responsibility for the acquisition, holding and ultimate disposal of the property. There are some important things to consider:
Property is a big commitment, so do the research well before taking the plunge. A real estate agent acts on behalf of the vendor, so it’s well worth considering the services of a good buyer advocate to act on your behalf. They could negotiation a better purchase outcome. Most investors employ real estate agents and real estate attorneys to assist with the acquisition process, as it can be quite complex and improperly executed transactions can be very costly. During the acquisition of a property, an investor will typically make a formal offer to buy including payment of “earnest money” to the seller at the start of negotiation to reserve the investor’s right to complete the transaction if price and terms can be satisfactorily negotiated. This earnest money may or may not be refundable, and is considered to be a signal of the seriousness of the investor’s intent to purchase.
The costs of holding direct property include bank interest, agent’s fees, general rates, water rates, body corporate fees, if applicable, property maintenance and, of course, insurance. Always adequately insure the property. The Property Manager leads the team, oversees management of your property and is responsible for daily property management issues, including tenant selection, vacating, and maintenance and arrears control.
Beware of trying to manage the property without using an agent. If you are lucky enough to secure a tenant from heaven, look after them: Complete repairs on time, try to keep rental increases to a minimum and give them freedom to repaint the walls and improve the gardens, etc. This all improves the value of your house.
But there are also tenants from hell. And, for the cost of around seven per cent of any rentals collected, a good agent will ensure all the legal requirements of a tenancy agreement are met so that you, as the landlord, are in the strongest position to collect monies due and evict tenants as needed. The agent also takes on any emotional fallout arising from any rental negotiation or dispute.
The returns from direct property ownership come in two forms: Rental yield and capital growth. But you have to sell before you can realize the latter. Remember, if you simply accumulate properties, then your land tax bill and your maintenance costs of holding too high. Be prepared to sell when the time is right. For that reason, it’s worth keeping in touch with a real estate agent who can provide you with updates about the property market. With the right knowledge and information at your disposal, you can more easily determine which type of property will give you greater capital growth and rental returns.
Where to from here?
“It is better to get it right, than right away” – a bit of caution before you sign on that home buying commitment can save you a lot of frustration and increase your exhilarating side. Property is a big commitment. Remember, if you borrow money to invest, you are increasing your risk. But, if direct property is something that interests you, then discuss its place in your overall investment portfolio with your financial planner. Work out the number with your mortgage broker and accountant. Then ask around for a referral to a good, buyer advocate and a good, rental property manager. And next, you just start looking.