Research by CommBank1 has shown that 43% of millennials are investing to create wealth so they will be financially independent, with 45% favouring property investment, followed closely by the stock market at 38%.
These figures will likely come as no surprise, given Australians’ love for property ownership, in the land of the ‘Great Australian Dream, but what drives young investors to property vs portfolio? And could these drivers be drawbacks?
It’s Tangible
For most people, residential property is an easy first step when looking to get started with investing. This is because of its tangibility. We can see houses, touch them, have lived in one, likely rented one, and might have seen parents get a mortgage and buy one (or two), so we have a better understanding of the process and the investment. That background knowledge gives us extra confidence and comfort with the asset class.
Intangible assets, such as shares, aren’t as familiar, and investors might be more hesitant to invest if they don’t understand the mechanics of how the share market works.
While property might be favoured due to its tangibility and our comfort with the asset type, it might not be the best investment strategy for you.
When getting started with any investment, it’s essential to start with your goals first and then put together an investment strategy that best achieves these.
It’s Trendy
The Block, House Rules, Fixer Upper… there is no shortage of real estate and renovation reality television series to binge-watch.
And if you’ve ever watched one of these shows, you’ve likely contemplated your own plans to become a property flipper… buy, renovate, sell, cha-ching!
A positive of property as an investment type is that it does provide investors with a level of control over the performance and outcome of their investment. Investors can add capital value through various strategies such as renovation or development. However, renovations require a lot of hard work, time, and planning, and it’s important to ensure investors don’t overcapitalise.
While it can be financially rewarding when done correctly, property flipping isn’t a foolproof strategy, and, as with any investment, proper due diligence must still be done
There’s always the added caveat that property investment should be seen as a longer term investment, due to the high transaction costs when buying or selling. Plus, it’s impossible to sell off a bedroom if you need cashflow in a hurry! It always goes up in value (and other misconceptions)
There are a number of misconceptions about the level of risk and return relative to property investments.
Investors can tend to have lower levels of perceived risk about property as an asset class and investment. Again, this likely stems from our familiarity with property, combined with the volatility we may associate with the stock market as we can see it’s price fluctuations every minute the stock market is trading, where we only know the real value of property when it’s bought or sold.
However, investing in property can be quite high risk:
- It typically consists of purchasing one single asset with a significant value. This doesn’t provide diversification within your portfolio, meaning all your eggs are in one basket.
- Borrowing money to invest, which is often the case for property investing, is known as gearing. A common rule is that while gearing magnifies gains, it also magnifies losses. Particularly as interest rates rise, if the investment doesn’t perform as hoped, you will still be responsible for any borrowings used to fund the purchase.
- Property is a growth asset, which generally means it’s considered to be a higher risk for higher return, potentially over the long term.
While Australian housing prices have increased on average by 7.25% per year over the past 30 years, it’s important to remember that this is often cyclical and that all properties don’t perform equally.
While risk is a necessary consideration in wealth accumulation. Risk must be appropriately understood and managed through due diligence and a suitable investment strategy.
Whether you consider portfolio or property investment to be the most appealing investment option, reach out today to discuss whether they are the right investment to help you reach your goals!
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
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