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Help a first-time property investor?
March 28, 2012 9:41 PM   Subscribe

I’ve been working and saving money for years, and I think I should probably invest it. I’m pretty sure that investment property is the right move, but there are a few things I’m not sure about and would appreciate some advice on.

So, I’ve been working for a while now but generally live fairly frugally so I’ve just been putting my savings aside in term deposits. I don't have any dependants, and rent fairly cheaply. I live in Australia so the term deposit rate at the moment is ~ 5.4%. I currently have ~$130,000 sitting in the bank and it seems it would be wiser to start investing it elsewhere. Ideally, this investment would provide a modest cashflow as well as seeing some capital growth, and be relatively hassle-free. I’m prepared to borrow to purchase something up to $230,000, but reluctant to borrow more than that as I’m anticipating a decent stretch (at least a year) without employment in the next 2-4 years.

Here’s what I’ve looked into so far:

Student accommodation – I could buy a student apartment in a capital city for ~$150k, and they appear to give roughly 7% return after outgoings. That’s great for cashflow, but I’m told they’re generally not a good investment because they’re hard to resell and rarely show capital growth. How true is that?

Serviced apartments – similar to student accommodation, and give a reliable 6.5% return with very little hassle and guaranteed tenancy. However, it appears they have very little capital growth too.

A small residential unit/apartment – probably more maintenance involved, and a lower return (roughly 4-5%?), but I guess it’d have more chance of capital growth?

I’m hesitant about shares, because I simply don’t know that much about them. I looked into index funds, but there seems to be a bit of volatility there, even over a ~10 year period (like here), so that doesn’t seem like a great idea.

This is the first time I’ve ever really looked into investing, and the amount of information and material out there is pretty intimidating. I’m leaning towards the serviced apartment thing because it seems the safest with the least hassle, but I’m far from certain about that. I’m planning to talk to a financial advisor as well, but even then I’m not sure how to go about finding the right person.

I guess the question is: do you have any experience with investing in real estate? Any advice to offer on the things I mentioned above? Or, more broadly, if you wanted a bit of cashflow and some capital growth for $150 – 200k, what would you be looking into?

PS – posting from a sock puppet so I can answer follow-up questions if necessary.
posted by A Very Muddled Alpaca to Work & Money (11 answers total) 4 users marked this as a favorite
 
Becoming a landlord without any experience or desire to manage the property is a really terrible idea. Can not stress enough that you should not do this.

Diversified index fund and/or bonds.

I am not a financial planner.
posted by kavasa at 10:07 PM on March 28, 2012 [2 favorites]


Managing real estate can be a time-intensive and expensive process, with rather paltry investment returns. Or it can be a way to print money. If its something you want to do, it's best to partner with someone more experienced, and who you trust implicitly, in order that you can learn the ropes.

It's also an illiquid investment and so a somewhat risky one. You should be compensated for taking on that risk by earning a greater retun on your investment than you could receive elsewhere. The prospects of earning that greater return are dependent on innumerable variables, many of which are specific to a particular real estate market.
posted by dfriedman at 10:13 PM on March 28, 2012


One consideration is that if you ever plan to own your own house, having owned rental property will (I'm pretty sure) make you ineligible for the First Home Owner's Grant, and maybe will affect things like property taxes and capital gains taxes on your own home.

I don't know whether the other answerers here are in Australia, but one consideration they might not be making is that the ability to negative gear investment property here (illegal in most other countries) makes investment property a much better deal than it is overseas.

In sum, there are pluses and minuses. You can always talk to a mortgage broker for free (and maybe a financial planner at your bank) and then use that info to do more research. (Don't believe anything they say that is in favour of their own products, of course, but you might still get helpful info.)
posted by lollusc at 10:49 PM on March 28, 2012 [1 favorite]


You should diversify your investments to minimize risk.
posted by mr_roboto at 11:52 PM on March 28, 2012


The lack of landlord experience is why I was leaning towards the serviced apartments, which are entirely handled by someone else. The reason I'm not certain is because the capital returns seem very low at best.

I know very little about index funds and bonds, but from what I can tell they're more for long term (>10 years) investment, whereas I'm hoping to find something that will provide a little cashflow in the shorter term.

lollusc, I hadn't thought about the first home owner's grant - I'll look into that, though I'm pretty sure I won't be buying a home for myself for several years yet.
posted by A Very Muddled Alpaca at 12:46 AM on March 29, 2012


The problem with serviced apartments and student accommodation is that there is a limited pool of buyers, i.e. other investors. You will always have more buyers for a property that is available to both owner occupiers and to investors.

Student accommodation etc also doesn't tend to have the scarcity factor - there can be a lot of the same thing on the market at once, so why would someone buy your unit in particular.

You may find that your money would work well in a strong regional market, rather than the capital cities where you are going to be buying at the very bottom of what is possible.

Negative gearing only works well if you have other income to subtract your loss from - if you are planning on a period of not working, you really would want neutral or positively geared property.

In general, it is said that you should hold property for 5-7 years to give yourself an adequate window to ride out ups and downs, and because of the high transaction costs. What is your time window for this investment?

A good mortgage broker can definitely help you with some of the initial number crunching - ask around to see who thought their broker was good (not so many people have financial advisers, but lots of people use mortgage brokers).

You might also try the Somersoft forums for getting a whole range of property investment advice.
posted by AnnaRat at 2:49 AM on March 29, 2012 [1 favorite]


I think part of the problem is that rental apartments are very low liquidity -- in other words, the money you took to buy them won't be there at the drop of a hat if you needed to get out -- and moderate volatility, based on the local property market -- but your actual return on your investment would be only just above what it is in the term deposit. Am I reading that right? 4-5% return on a small apartment unit, with *maybe* some capital growth, when you're getting 5.4% right now in a term deposit? Admittedly rates may go down over time on the term deposit, but that still isn't a great deal.

If you're not positive you'd like to get into the property market, I'd take a little time to learn more about all the other possible investments that might be a better fit for you. Yes, stock funds are much more volatile, but they're also more diversified than owning one piece of property, the returns are higher, and they require very little effort on your part. They may be a better match for your situation. Bonds might also be a good match and could provide cash flow. A combination of the two may be a less stressful way to meet your goals. Reading The Bogleheads Guide to Investing is a good start and should also help you figure out a percentage of stocks that would match your risk tolerance. (Your money doesn't all have to go in to one thing -- in fact it's better if it doesn't.)
posted by pie ninja at 4:02 AM on March 29, 2012


I would recommend a financial advisor. They can help divy up your asset investments so that it fits your risk profile aligned against your return desires. They'll also focus on your long-term plans.

$130 k is an amount that shouldn't just be sitting in a bank account. You should be investing it in something that gives more than the basic bank rates.

As for investment property - there are a lot of hidden costs in there that can eat up your funds if the rental returns don't stay constant or meet your expense needs for fixing the property, insurance, lawyers and whatnot.
posted by rich at 6:13 AM on March 29, 2012


So you want to give up a safe, guaranteed 5.4% to have to deal with real estate that, at the best, will pay you 7% per year. I would just sit on the money where it is. This is coming from someone in the US where savings accounts yield almost nothing. Take your time and learn what investments are out there and what the risks are...you are not missing out on anything.
posted by Busmick at 6:14 AM on March 29, 2012


I'm hoping to find something that will provide a little cashflow in the shorter term. With real estate, there's always transfer costs: taxes, commission, property inspection, appraisal. Do not buy property with appraisal, inspection and title search, even if here's no bank to require it. The high transfer costs make real estate a poor choice for short-term investment.
posted by theora55 at 9:57 AM on March 29, 2012


Another piece of advice (I was in your situation a few years ago, but with a bit more in the term deposits and looked into a bunch of possibilities):

When you compare different options, don't forget to take tax into account. If you are on a reasonable income, those term deposits don't have a real return of 5.4, because the interest is taxed at around 30%. Some other investments are not. You may be able to increase your earnings off that money much more by trying to minimise tax on the interest than by chasing down slightly higher interest rates.
posted by lollusc at 4:17 PM on March 29, 2012


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