The question of “is property a good investment” does not have a simple yes or no answer. A better question to ask might be, is rental property a good investment?
Property is simply an investment vehicle that can give good returns if you do your research. It can also be a horrible investment if you get it wrong.
For a property to be an investment, it generally means that you will not live in it but will rent it out to other people. For the sake of this article, we will be referring to residential investment property.
Is Property Investing Risky?
Some types of property, vacant land for example, may not be able to generate an income and therefore you are looking at only making wealth through capital growth.
However, it is much less risky to find a real estate investment that does give you an income as well as having a good potential for capital gains.
To determine if anything is a good investment, you should look at the risk versus return factor.
If you put your money into something that is high risk and only get a small return, then this is not a good investment. On the other hand, if you invest in something that is low risk with a high return, then that is a good investment.
Investing in Cash?
One of the safest investments you can have is cash in the bank. You will get an agreed upon return (eg. 5% per annum) and will receive those regular interest payments consistently.
The recent Global Financial Crisis has seen people lose trust in banks, but in general you would have to be very unlucky to not able to recover you money from a bank account.
In the case of the Australian government, during the GFC, they initiated a guarantee of up to $1,000,000 for each bank account that would be payed out for any bank accounts that may suffer through a bank collapse.
Fortunately, Australia’s banking system remained quite strong through that period and the guarantee was not required.
Investing in Shares?
When you invest in shares, sometimes called equities, you are buying a part ownership of a business. Investing in publicly listed companines is the easiest way of doing this and does not require much money to start.
You can start investing in shares with only a few hundred dollars, however it is better to start with a few thousand dollars to make it worth while.
Investing in shares, when you do not really understand the share market or the businesses you invest in, can be very risky. The share market can be very volatile with some stocks moving up or down by 10% on a daily basis.
If you are the type of person to panic when you see your portfolio drop by 10% or 20% then you may not have the stomach for share investing.
Investing in Managed Funds
However, you can reduce your risk in shares by investing in managed funds. These funds are managed by stockbrokers who should know what they are doing (but not necessarily) and aim to give you a steady return on your money.
If you can average a growth return of 10% per annum with shares, you are doing very well. Even the best of the best, would not do better than a 20% average return over a long period in the market.
The other bonus of investing in shares is the dividends paid to you. Dividends are your share of the companies annual profit and are often paid out twice per year.
You should note that dividends will normally only get paid for a company that is making a profit, so if you invest in small cap stocks that have a good story but aren’t actually making any money, you will not get any dividends and will be relying soley on capital gains to make any money.
Investing in Real Estate?
In my opinion, a good property investment would have the following attributes:
- Pays for itself. That is, I don’t need to put in any money on a month to month basis.
- Has growth that exceeds the rate of inflation.
- Is in an area where the population is increasing, providing a broad range of employment opportunities, with good access to those employers via transport links.
I see this type of investment as having a reasonably low risk factor, but with a good chance of making a positive return in the next 5 to 10 years.
What if the Economy Goes Bad?
The state of the economy is something that we cannot control. As was seen during the GFC, property is not immune to crashing.
By seeking property that is contantly in demand, you are lowering risk and should be able to manage through the tough times.
And when times are good, your real estate investment should see the growth that will make you the returns that you’ve been hoping for.