As a Wealth Advisor, one of the most common questions I am asked most is “Should I buy shares or property?” The right answer is in fact both, as they can both be excellent long term investments. However not all of us have the luxury of buying both and so a decision needs to be made!
While property is a great investment due to its perceived lower volatility and good long term returns, it is important to be mindful of some (but not all) of the key points when investing in property:
- The cost of purchasing a property is high. As a rule of thumb, allow for 5% in purchase costs for taxes, bank and conveyancing fees.
- Expenses are tax deductible. One of the benefits of borrowing to invest is you get a tax deduction if your expenses are greater than your rental income (negative gearing). It is obviously better if your rental income is more than your expenses, but at least you get a tax deduction if it is not.
- Cash flow is important. You need to pay managers, insurance, council rates, maintenance, etc and these expenses can happen at any time without a rental income to cover them, not to mention periods of vacancy. Ensure that you have surplus cash flow to meet these expenses.
- Land Tax can be the stinger in the tail of any successful property investor and a surprise to many. You need to investigate ways to minimise this if you can.
- Property is not liquid so always remember that it will take time to sell and you may not be able to sell at the time for what you perceive it to be worth. Allow about 2-3% for selling costs.
Making the decision for a client depends on a variety of factors – what investments do they feel comfortable with, what cash flow do they have, how much is saved up now and what tax entity are we looking at using. My advice on creating the perfect investment portfolio is simply to diversify. Over time, if you can build a mix of assets such as property and shares, it will give you freedom and flexibility in your future planning and allow you to benefit from growth in either markets. It all comes down to appropriate advice on how to structure and manage this in the best way that you can.
If you have any questions about your wealth accumulation please feel free to contact me at firstname.lastname@example.org or call (08) 8409 4333.
By ANDREW BARLOW, SENIOR ADVISOR, WEALTH ADVISORY | ADELAIDE
Andrew is a Wealth Advisor at William Buck, combining his friendly nature and technical skill to achieve great results for his clients in their personal wealth strategies. His two greatest passions are finance and the Adelaide Crows.