Is property the right investment class for you?

One of the most important steps you take, very early on in your investment career, is to identify and decide what type or class of investment is going to work best for you. Those who don't seek professional advisers conduct their own intensive research and due diligence. Basically, those who educate themselves and learn as much as possible will always have the best start to investing compared to those who don’t.

But beyond that, it is those individuals who are able to maintain a momentum over the years – and not just treat their investing life as a ‘set and forget’ approach that should be left to gather dust – who fare better as investors and are almost always rewarded more handsomely for it.

Before even thinking specifically about property as a class, you need to consider it against other investment classes, to work out if it is right for you. Perhaps the best way to do this is to work backwards. Start first by giving yourself answers to the below three main investment factors:

1. Personal life timing and situational variables - These are things like your current age, income and means, borrowing capacity to invest, perhaps marriage or family commitment status and so on – how will these factors affect my time and energy I can put into any investment?

2. Knowledge and time limits - Your previous exposure to existing investment classes and/or your willingness to learn, and level of pro-activity and effort you can feasibly to put into researching and educating yourself with – how committed am I and how much time am I willing to dedicate?

3. Your risk profile - Your level of risk you are willing to live with, remembering that all investments will always carry some degree of risk with it. Can I sleep easily at night, knowing a portion of my savings are tied up in something that is constantly changing?

The investment class you decide on will be shortlisted simply by the way you answer the three above areas.

I’ll give a brief overview of the main investment classes that many people choose from. Through this, it may give you an idea of the commitment level involved, and top-line risks associated with some of the major investment classes. Though there are many more investment types beyond what is listed, it will give you a good starting place to learn more about asset classes. As mentioned above, seeking the advice of a professional adviser is arguably one of the best courses of action you can take.

Shares:

-          Easy entry/exit process, and minimal costs to do so;

-          Works well for investors with not much starting capital – you can purchase shares online yourself through many online platforms such as E*Trade, iShares, and CommSec;

-          Risk flexibility is possible because you can opt for ‘safer’ blue-chip, ASX 200 companies with high pedigree and proven long term performance. Or, if your risk profile is higher, you can opt for more dynamic start-up or rapid-growth companies where the risk is greater, but so is the return

-          Shares do not work well for those who will have trouble getting to sleep each day without some kind of ‘status update’ from their share portfolio. Whilst such updates are available in real-time, checking them frequently daily is probably not a good mental space to be in, if you are the instant-gratification persona type.

Gold:

-          Finite global supply, increasing global demand. This makes for a solid investment type;

-          Risk profile is moderate for gold, as macro-economic market influences can greatly skew or influence performance of gold at any moment;

-          Gold used to be one of the safest investment classes. However, its connection with share market volatility leaves it open to greater influence and fluctuation;

-          Despite this, gold is a proven performer when the global economy weakens – and especially when major currencies weaken.

Cash and fixed interest accounts:

-          One of the ‘safer’ investment classes mainly because these come with the assurance and backing of financial institutions such as the big-four banks;

-          Fixed interest accounts come mostly in the form of government and corporate bonds, effectively operating in the same way as loans;

-          Interest payments are regular, enabling investors to re-invest the proceeds and add a compounded growth effect to their investment;

-          With lower risk does come lower reward as earnings over time are more modest in comparison to other asset classes such as gold, property, and shares.

Property:

-          There are a number of sub-classes of property. Most people immediately think ‘buying a residential property’ as property investment, and for most people this is true;

-          However, this class includes commercial and industrial properties as well (full ownership per investor), as well as investing in property securities, whereby an investor commits to a larger pool of like-minded investors who invest in a group that secures hundreds and thousands of various properties across different property classes;

-          Whatever the investment approach, property is certainly a medium-long term investment class for most people as the entry and exit costs and process and expensive and slow. This means if you were to get in and then out again within a year administrative fees would likely wipe out any gains made;

-          With the exception of property development, those who are looking to make a quick buck are out of luck here. As mentioned above, the entry and exit costs for single-title-owner properties are to prohibitive to do so without making a complete loss on the investment overall. So this is a caution to those who prefer a faster paced performance class like shares.

So why choose property over other classes?

This is a question open entirely to different views, opinions, and belief. In short, property works for those who find it suits their risk profile and objectives, over a medium-to-long period of time. It won’t work for those with a get rich quickmindset. Personally, I value the complete ownership of a property, as the key unique advantage of this class. When I own a house or apartment, I own it entirely and am able to make all of the operational decisions on that property.

This is different to, say, purchasing shares in just one company, like, for example, McDonald’s. You may have bought your shares with the understanding that McDonald’s is a sound investment due to the products it produces being in high demand by consumers. But what if, overnight, McDonald’s chose to make all restaurants vegetarian-only? As an shareholding investor, you have no control over how the company actually operates. McDonald’s could lose two thirds of its customer base overnight because of the decision, and you as a shareholder would suffer the loss. An extreme and unlikely example, sure, however when blue-chip companies acquire and merge with others, changes to the company product lines and demand often result.

With property, even though operational decisions (for apartments and units anyway) are made in collaboration with a majority-agreed strata committee, this is usually on a much smaller scale, meaning your voice in any operating decision changes is that much louder. With houses of course, investors have 100% decision-making control over the ongoing management of that asset. So, with the right kinds of property purchases, an investor is able to have a real voice in the management of the running of the investment.

Considering the investment class that will work best for you is all about knowing the facts about each class and making an informed decision before diving into anything. Do not rely solely upon the verbal advice of friends or passing comments at dinner parties; do you  due diligence, seek professional insights, and go from there.