Real estate as a long term investment

I have just purchased another investment property. After all the excitement has calm down, I realized that real estate represents the majority of the my asset. Since I am in the insurance business by day job, alarm bells about risk/diversification start going off crazy in my head. So wanted to go back to the roots and examine if real estate investment is ok long term. Here is my thoughts, some feedback from you guys would be awesome :)

First, looking at the demand/supply side of things.The basic needs of people are Food/Clothes/Transportation/Shelter. In the old days Food/Clothes eats up most of the income, thats why housing in the 70s seem so cheap compare to income. These days food and clothing are mass produced so cheap. Even at the exotic end, someone on minimum pay ($2500 p/m) can still afford to eat at Tesuya ($500) or buy Armani suit (<$1000). Transport means cars, which can be expensive, but to get a decent usable 2nd hand car only $5000, a very good jap/korean car for $50000, plus the general social attitude of flashy_car=waste_of_money, its not going to be huge.

So after all the other 3 basic needs are satisfied, all the rest tend to go to shelter. On the demand side, its almost limitless, people will always want to live a bigger house in a better suburb (I personally hate that idea, enough is enough, but I am in the minority...). House is a "dream", there is an Australian version, an American version, Chinese and pretty much everywhere in the world! On the supply side, no one has yet to invent mass production of houses. Habitable land, cost of raw materials, huge labor effort, high capital requirement and strict government regulation combined means supply will in most cases remain steady.

Second is to do with support. "Do not let house price fall" is one of those rare goals that has the Government, Business and ordinary people are all aligned! According to ABS, 67% of people either own or owning a property, thats majority of voters. Lots of big business directly or indirectly depend on the housing market, banks, developers, retailers etc. Government wants voters and tax so falling housing market hurts. This is lead to the extraordinary incentives various governments (Oz/US/Europe) give to prop up the market after GFC. There is NO other industry that gets this much support!

Third is to do with income-generation. You can rent out property to get rent. Apart from shares/bonds/cash, there aren't many other investment assets that can generate income while having capital gains, eg. gold, antiques

Fourth is to do with leverage. I can easily and safely gear up to 95% LVR (or 1-20 leverage) in property and still sleep soundly at night. Shares would be max 80% (1-5) while dreading the margin call. Cash and bonds have no leverage.

You can probably tell by now that I am biased towards real estate investment. So my own reflection is not reliable. Please please point out my flaws :)

On the risk/mitigation side, I can see the following

Big property price boom - ironically this is my biggest fear, a huge boom like the sub prime breaks the supply shackle, really hurts people that rents and getting on the wrong side of government and central bank policies. To mitigate that probably sell down a few properties in times like this, but hard to tell... Ideal market would be steady growth at or a little higher than CPI

Maintenance cost: having good PM, landlord insurance, pick low maintenance property to start with

Deflation - unlikely, but thats why I try to build up a cash reserve at the same time to hedge this risk (cash is king in general anyway)
 
I don't really disagree with you, but there are some observations:

* Demand is not always limitless. There are plenty of areas, especially regional which have declining populations and an abundance of supply. At certain times in market cycles even some areas of capital cities have a supply that far outstrips the demand. Whilst the urban areas are likely to recover, it can take a very long time.

* I don't believe that everyone always wants a bigger house. There is a definite increase in demand for smaller dwellings as people are retiring or remaining single for longer. Different areas have different demographics driving demand.

* House prices fall all the time. I purchased my first property in Melbourne almost 13 years ago. In that time there has been at least 3 market cycles where house prices have dropped as an average across Melbourne. The nice thing is that on average prices have gone up substantially, but if you're looking at a short term strategy you might find yourself in trouble.

* Leverage. I'd say that 95% gearing in property is extremely high risk. It's substantially mittigated by the lack of margin calls, but if you loose your job you can be in real trouble very quickly. However I do understand better than most why people are willing or need to leverage this highly.

* Tax is probably the biggest disadvantage for property as an asset class. Negative gearing is nice, but you can do that with any leveraged investment. Property taxes you on the way in (stamp duty), whilst you hold it (land tax), and on the way out (captial gains). Compare this to shares where you tend to only pay CGT. Dividends are usually fully franked and it's easier to invest through tax friendlier structures such as insurance bonds and super.

* Holding costs can be high. What other asset class do you have to pay management fees, maintenance, rates, have vacancies, etc? Tenancy legislation certainly doesn't favour the landlord either.

I'm certainly not against property, it's also my predominant investment of choice. I'm just playing the devils advocate given that you asked :)
 
real estate is awesome

Hi, I believe real estate is the way to go. of course you cant just buy anything and say it will increase in value in xx years.

With research and due diligence real estate is the way to go. Great thing is also you can increase capital growth yourself (reno, subdivision etc) rather than waiting for the market to do it for you. Good to have a plan as to how you want to do it too:eek:
 
thanks PT_bear, very valuable opinions, exactly what I am looking for given my own bias :)

my strategy basically is 2br unit in sydney, yield ~ 7%, close to station and newish with lots of depreciation. Lets see how it stands upto the issues you have pointed out.

* Demand is not always limitless.

This is definitely true. So no regional town, beach holiday destination or even the rich area of Sydney. Stripping down property selection, to its core basic appeal, to put a roof over your head

* I don't believe that everyone always wants a bigger house.

the increase in smaller property demand is driven by inability to afford bigger property, not desire. In any case, my target is exactly the smaller 2br units

* House prices fall all the time.

Absolutely agree, "property value always goes up" is the greatest misleading advice ever. its only true for long term, and my plans are always holdng 10+ years minimum. I only need the property to rise along CPI (hence deflation is a threat)

* Leverage.

Again, can't agree more. Real estate investment for me now is just a side gig now. Cutting cost, increase income and saving cash is my focus at the moment, and its much more fulfilling life to be honest

* Tax

Yep yep, I am starting to study about investing in dividend shares, its looking very attractive. Probably will go down that path once hoarding enough cash :)

* Holding costs

Yes again, this is a pain, mitigated somewhat with high rental yield and depreciation, but still annoying getting emails from agent that I have to pay this and that...


Now come to think of it, cash (capital) is the only thing that trumpts the mighty real estate
 
Hi, I believe real estate is the way to go. of course you cant just buy anything and say it will increase in value in xx years.

With research and due diligence real estate is the way to go. Great thing is also you can increase capital growth yourself (reno, subdivision etc) rather than waiting for the market to do it for you. Good to have a plan as to how you want to do it too:eek:

I would love to do reno/subdivision.. but I am usually time poor (*cough* lazy *cough*) :)
 
* Leverage.

Again, can't agree more. Real estate investment for me now is just a side gig now. Cutting cost, increase income and saving cash is my focus at the moment, and its much more fulfilling life to be honest

* Tax

Yep yep, I am starting to study about investing in dividend shares, its looking very attractive. Probably will go down that path once hoarding enough cash :)


Now come to think of it, cash (capital) is the only thing that trumpts the mighty real estate

Why do you consider saving cash as "more fulfilling"? Why do you consider share investing the way to go after hoarding enough cash - if you believe in property as the investment vehicle of choice - why not keep going down that path wherein you have most expertise.

I don't think that cash automatically trumps real estate as there is no hedge against inflation and yield from cash over a ten year period will always be lower than shares or property.
 
Why do you consider saving cash as "more fulfilling"? Why do you consider share investing the way to go after hoarding enough cash - if you believe in property as the investment vehicle of choice - why not keep going down that path wherein you have most expertise.

I don't think that cash automatically trumps real estate as there is no hedge against inflation and yield from cash over a ten year period will always be lower than shares or property.

The fulfilling part is living a simple (relatively anyway) life without too much consumerism. The cost of keeping stuff and the constant comparison to the Jones is tiring. Cutting cost and more savings is just a nice side effect

While resi real estate is good for earning unrealized income through capital gain. As pointed out by many, its not as good for generating a constant stream of income at retirement time. Living on equity sounds risky, living on rent perhaps but still have to deal with property maintenance cost, and commercial property is not something I know much about. For share investment, I am only interested at learning the dividend kind, since it gives good steady income holds value against inflation

Cash doesn't trump real estate in the pure investment sense. But its the sleeping well at night effect, not needing to worry about my job and able to handle most curveballs life throws at me (biggest one being medical cost to family member fallen ill). I fell for the negative gearing trap when I first started, living paycheck to paycheck is not fun at all!
 
The fulfilling part is living a simple (relatively anyway) life without too much consumerism. The cost of keeping stuff and the constant comparison to the Jones is tiring. Cutting cost and more savings is just a nice side effect

While resi real estate is good for earning unrealized income through capital gain. As pointed out by many, its not as good for generating a constant stream of income at retirement time. Living on equity sounds risky, living on rent perhaps but still have to deal with property maintenance cost, and commercial property is not something I know much about. For share investment, I am only interested at learning the dividend kind, since it gives good steady income holds value against inflation

Cash doesn't trump real estate in the pure investment sense. But its the sleeping well at night effect, not needing to worry about my job and able to handle most curveballs life throws at me (biggest one being medical cost to family member fallen ill). I fell for the negative gearing trap when I first started, living paycheck to paycheck is not fun at all!

So what you are saying is that ultimately, to be comfortable and retired, you would aim to have constant cashflow, hedged against inflation without needing worry about property maintenance and that accumulating a largeddividend paying shares portfolio / cash holdings is the long term goal. Which means that over the long term, you would be moving resources out of resi IP into shares and cash?

I believe that it comes down to risk being related to reward. Whilst direct share investment carries less fuss than direct property investment, I believe that there is a lot more uncertainty in that your net worth could suddenly plummet - no sleep at night during GC whereas unless we have an american style property crash - there should be less volatility in terms of net worth if more holdings are kept in property. So perhaps, there needs to be a mix in asset classes but slightly more heavy weight in shares in the longer term?
 
yep its getting clearer and clearer in my mind now that this is my future direction. It will be a balance of neutral-positive property, cash and dividend yielding shares.

I won't be cashing out my current property portfolio any time soon, more likely just adding to it slowly. And only with neutral geared easy to rent property, using banks money for every last cent of the purchase cost.

For dividend sharing, I am intrigued by the Dividend Aristocrats concept. There are companies out there that increased dividend yield for the last 25 years. So if I buy them at a decent price, I won't have to worry about losing share value even in the worst of GFCs, too good to be true???

http://www.standardandpoors.com/ind...rats/en/us/?indexId=spusa-500dusdff--p-us----
 
For dividend sharing, I am intrigued by the Dividend Aristocrats concept. There are companies out there that increased dividend yield for the last 25 years. So if I buy them at a decent price, I won't have to worry about losing share value even in the worst of GFCs, too good to be true???

Do not forget that yield is a function of two things - dividend and price. Yield goes up if dividend goes up and/or if price falls.

I used to trade shares all the time and what I can say is that it is a more volatile way of making money - in both the good and bad sense. Sure, it's less 'maintenance' in the strict sense than real estate but the issue is you do not have control over your investment. You are trusting it to a bunch of individuals on the board of directors (and their managers below) Personally I do not have such faith in these people as if they were any good they would have done their own business already rather than be an employee. Plus with these big companies you see how grossly inefficient they are. Of course the exception is if the person running it is the founder of the company like a Murdoch etc.
 
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