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Investment property or property fund

Q. “I’m looking at property as a next investment step. What are the pros and cons of purchasing an investment property versus investing in a property fund.” Christine

 

Answer

Regardless of whether you buy direct property or invest in a Real Estate Investment Trust (REIT), you should always be investing in property that will rent and sell easily, which basically boils down to LOCATION LOCATION LOCATION.

Direct Property

Advantages
  • It’s a solid, tangible form of investment. You can see it, touch it and understand it.
  • You choose your own investment
  • Returns appear to be less volatile than the share market, because direct property is not valued daily.
  • It’s easy to research the direct property market with publicly available websites like Real Estate Institute of Victoria (REIV) and onthehouse.com.au
Disadvantages
  • Direct property can’t be sold quickly or easily. It may take at least three months to sell a property, and it could take a lot longer.
  • It’s illiquid – you cannot sell part of a property.
  • It’s very difficult to diversify your portfolio when property prices are so high.
  • Costs to enter and exit the property market are high and may include stamp duty, agents fees, auctioneer’s fees.
  • Management and maintenance costs can be expensive.

Real Estate Investment Trusts (REIT)

In a REIT a fund manager selects the investment properties and is responsible for all maintenance, administration, rentals and improvements on the property. You buy units in the trust and leave all of the decisions to the fund manager. The type of real estate can include property across a diversity of geographic regions, lease lengths and tenant types, including:

  • Industrial - investment in warehouses, factories, and industrial parks.
  • Office - investment in large to medium scale office buildings generally in and around major cities.
  • Hotel / Leisure - investment in hotels, cinemas and theme parks.
  • Retail - investment in shopping centres.
Advantages
  • Low cost - REITs offer access to the property market with professional investment management at a relatively low transaction and management cost.
  • Liquidity - REITs can be bought and sold with the proceeds of sales received in three days. Unlike most property investments, part or all of your REIT holdings can be sold at short notice.
  • Diversification – As you can see from above, it is a lot easier to diversify your portfolio with a REIT and you have access to areas of the property market you would not otherwise be able to afford, eg offices, hotels, shopping centres, industrial estates.
Disadvantages
  • Market risk - Market risk is the risk of investing in an asset class which may decline in value. For REITs this could be caused by market sentiment owing to asset devaluations, and funds being frozen as was recently seen in the Global Financial Crisis.
  • Gearing risk - Some REITs may borrow funds to increase potential returns, which can magnify both returns and losses.
  • Income risk - Past distributions by REITs can and may vary over time. Residential direct property may have a more stable income return.

 

Author: Nicole Heales

Nicole Heales is an Authorised Representative Wealthsure Pty Ltd, Australian Financial Services Licence No 238030.
General Advice Warning: The information contained within this article is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material, Nicole Heales and Nicole Heales Financial will not bear responsibility or liability for any action taken by any person, persons, or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Q. “I’m looking at property as a next investment step. What are the pros and cons of purchasing an investment property versus investing in a property fund.” Christine

 

Answer

Regardless of whether you buy direct property or invest in a Real Estate Investment Trust (REIT), you should always be investing in property that will rent and sell easily, which basically boils down to LOCATION LOCATION LOCATION.

Direct Property

Advantages
  • It’s a solid, tangible form of investment. You can see it, touch it and understand it.
  • You choose your own investment
  • Returns appear to be less volatile than the share market, because direct property is not valued daily.
  • It’s easy to research the direct property market with publicly available websites like Real Estate Institute of Victoria (REIV) and onthehouse.com.au
Disadvantages
  • Direct property can’t be sold quickly or easily. It may take at least three months to sell a property, and it could take a lot longer.
  • It’s illiquid – you cannot sell part of a property.
  • It’s very difficult to diversify your portfolio when property prices are so high.
  • Costs to enter and exit the property market are high and may include stamp duty, agents fees, auctioneer’s fees.
  • Management and maintenance costs can be expensive.

Real Estate Investment Trusts (REIT)

In a REIT a fund manager selects the investment properties and is responsible for all maintenance, administration, rentals and improvements on the property. You buy units in the trust and leave all of the decisions to the fund manager. The type of real estate can include property across a diversity of geographic regions, lease lengths and tenant types, including:

  • Industrial - investment in warehouses, factories, and industrial parks.
  • Office - investment in large to medium scale office buildings generally in and around major cities.
  • Hotel / Leisure - investment in hotels, cinemas and theme parks.
  • Retail - investment in shopping centres.
Advantages
  • Low cost - REITs offer access to the property market with professional investment management at a relatively low transaction and management cost.
  • Liquidity - REITs can be bought and sold with the proceeds of sales received in three days. Unlike most property investments, part or all of your REIT holdings can be sold at short notice.
  • Diversification – As you can see from above, it is a lot easier to diversify your portfolio with a REIT and you have access to areas of the property market you would not otherwise be able to afford, eg offices, hotels, shopping centres, industrial estates.
Disadvantages
  • Market risk - Market risk is the risk of investing in an asset class which may decline in value. For REITs this could be caused by market sentiment owing to asset devaluations, and funds being frozen as was recently seen in the Global Financial Crisis.
  • Gearing risk - Some REITs may borrow funds to increase potential returns, which can magnify both returns and losses.
  • Income risk - Past distributions by REITs can and may vary over time. Residential direct property may have a more stable income return.

 

Author: Nicole Heales

Nicole Heales is an Authorised Representative Wealthsure Pty Ltd, Australian Financial Services Licence No 238030.
General Advice Warning: The information contained within this article is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material, Nicole Heales and Nicole Heales Financial will not bear responsibility or liability for any action taken by any person, persons, or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.