Why property investment is No. 1 in more ways than one
In the 25 years of advising clients in investment structures and tax planning, I have been persistent in my advice: Start with a property, writes Ben Johnston, managing director of Johnston Advisory.
No matter whether it be to young people, or anyone new to investing for that matter, in my opinion a property, and preferably your own residence, should be the foundation for any personal asset portfolio. There are many reasons why I feel so strongly about providing advice in this space, and it has proven to be a successful strategy both for my clients and for myself. I bought my first property at the age of 21 (a one-bedroom unit for $140,000), upgraded it within a year, and still regard it as one of my best decisions all those years ago.
Firstly, in today’s society, many people rely on debt to fund their investment purchases and businesses, rightly or wrongly, this is just a fact of the modern economy. This is where the key importance of property and growing equity in a property comes into play. To access this debt and to get favourable interest rates on this debt, lenders want tangible security in the form of real property. Hence, owning real estate and building up equity in that real estate is imperative if you wish to grow your asset portfolio by investing in additional property or shares through gearing. Many entrepreneurs struggle to get business loans or cash flow solutions to grow their business because they do not have property to offer as security for a loan. Sure, there are unsecured loans, but these often come with relatively low caps to how much you can borrow combined with high interest rates.
Secondly, of course investments should be about making money, but not at the expense of the investor’s wellbeing. Many investors simply do not understand equity markets, they don’t feel comfortable with riding out the fluctuations that come with investing in shares.
Lastly and unfortunately, there seems to be a lack of trust with advisers broadly and consumers now seem reluctant to trust advisors looking after their money, as highlighted by the recent royal commission. Investors should feel comfortable and informed, and ultimately in control. Not being able to sleep at night due to the stress of uncertainty is not what making money should look or feel like. That’s where property comes in to play, as people feel comfortable with having their money invested in something they can see, use and touch. It’s real! Australian investors have also been fortunate to have enjoyed significant gains from owning property over a long period of time that has seen recession, war and now a pandemic. Property as an asset is incredibly resilient.
The reason I am a fan of having your own home as your first or primary property asset is due to the preferable tax treatment of gains, being that there is none! You can make exponential profit on your own home and its free from tax under the principal place of residence exemption afforded to it through our current tax system. It makes it even more attractive to know that under this exemption, you can move out of your own home and have it rented out as an investment property and it remains tax-free for up to six years from the date you move out (providing you don’t purchase and reside in another property).
Property investment doesn’t come without risk, and I am always sceptical when people are guided by their advisers on a specific property, as it usually means that there is some element of self-interest at play. Likewise, I am sceptical about speculative purchases in areas that are earmarked for quick returns such as mining towns or proposed government infrastructure. Investors need to do their due diligence in these areas before investing. Property investment is about the long game and not a quick gain, quick returns from property investment usually spells risk at an elevated level.
Let me share some tips to effective property investment:
• Having a property in your investment portfolio is important, preferably your own home.
• Avoid chasing quick property gains, purchase property you expect to have long-term, sustained growth.
• Purchase in area that you know and know well, the difference of one suburb, let alone one street, can make a difference to a property’s value and desirability.
• Purchase to make money, don’t get caught up in negative gearing, it’s better to make money and owe tax than to lose money and wait to get a tax refund (this issue is often very misunderstood).
• Do your research and don’t overcommit. Avoid FOMO and be patient. Purchasing a property is too expensive to rush into and you should be thinking long term, so what difference does six months make?
• Get your finance approved before you go house hunting, you could be looking at the wrong market, both too cheap or too expensive, plus its very stressful when you commit to a property and your finance isn’t approved in full or is delayed.
