Should I look at property investment?

Hey guys,

I heard good things about this forum and wanted to ask for some opinions/advice.

I'm a software developer in my 20's. Very career focussed. Been working full-time for 5 years and making decent money.

At the moment my savings are $50k, which I've split across 2 savings accounts that are making 5.11% and 4.5% interest.

I have no debt and not planning on it either.

My goal is to generate enough yearly interest to allow me to survive (very modestly) either without working, only part-time, or only working 6 months a year, so I can spend more time doing things I enjoy.

I'm very busy so I want any investment to be fairy easy to manage and not consume too much time.

Do you think I could be getting more out of my money by investing in property? Or would I be better off getting a managed fund?
 
I'm a software developer in my 20's. Very career focussed. Been working full-time for 5 years and making decent money.
Hi & welcome. Quite a few of us on the forum here have an IT background of one sort or another.

At the moment my savings are $50k, which I've split across 2 savings accounts that are making 5.11% and 4.5% interest.
OK, good disciplined work on the savings front, but really after paying tax on the interest income & inflation eating away at your principal, then you are not making much at all. :(

I have no debt and not planning on it either.
I hope you mean bad debt and not good debt associated with borrowing for quality growth assets.

My goal is to generate enough yearly interest to allow me to survive (very modestly) either without working, only part-time, or only working 6 months a year, so I can spend more time doing things I enjoy.
Good goal re not needing to work. Not so sure about the strategy of getting to the goal by living off interest (presumably on savings) though.

I'm very busy so I want any investment to be fairy easy to manage and not consume too much time.
So you just want to throw money at something and have it give you a good return with virtually no involvement? ....not so sure you can get a high return from doing that. You will need to pay some fees to a professional in either the real estate or share market - i.e. a Buyers Agent to find a property & a Property Manager to manage it for RE or a Financial Planner / Fund Manager for a Share Market investment. Ideally you'd do both for a bit of diversification of asset class.

Do you think I could be getting more out of my money by investing in property?
Direct property investment, in the right kind of property over the long term, can do (and has done) very well. With the right kind of leverage (i.e. debt) it can do even better.

Or would I be better off getting a managed fund?
Managed funds can be good. They let you throw money at it and let someone else make the decisions. If you choose a good managed funds manager that also chooses good investments then fine. In reality it does not always turn out like that - and you still have to pay the fund manager's fees.
 
Hi there Jonathan,

He he, you are on a Forum full of active, pasionate investors and you are asking us whether you should invest in property?

From an unprofessional point of view...hell yes!:D

From a Professional point of view... it all depends on whether you can service the debt, whether you are comfortable with debt and how passionate you are to get ahead.

How much do you know about Managed Funds and Fixed Deposit Accounts?

Kudos for you for saving 50k and only 20! Well done. You obviously know how to manage your finances.

If you consider that you are earning 5.11% interest - Inflation Rate of 1.5%, you are making 3.61% on your money currently.

When you then consider that your money is not in a fixed deposit account (or are they?)....so the 5.11% interest will invariably drop and inflation will most definately rise...the margin of profit you will make will diminish.

Now if we take the average growth in property over a period of ten years at 10%pa...does this seem like a better option?:D

Education is the key. Property is the Vehicle.:)


Regards JO
 
Should you look at property investment?
For sure!!
And any other investment vehicle that may potentially resonate with you.
Go with your flow ...
 
He he, you are on a Forum full of active, pasionate investors and you are asking us whether you should invest in property?

From an unprofessional point of view...hell yes!:D

I agree, but since you're not willing to put much time into it, I'd be learning more about investing in your super. Reasons

1) tax effective
2) co-contributions from the gov - not sure what the latest is on this?
3) industry super funds have no commission
4) super funds can regularly outperform the index, unlike managed funds that have ridiculous commissions to boot.
4) can leverage in super
5) minimum effort.

Sorry, I'm not too up to speed with the co-contributions and leveraging part.. but just thought I'd give some balance ;)
 
I agree, but since you're not willing to put much time into it, I'd be learning more about investing in your super. Reasons

1) tax effective
2) co-contributions from the gov - not sure what the latest is on this?
3) industry super funds have no commission
4) super funds can regularly outperform the index, unlike managed funds that have ridiculous commissions to boot.
4) can leverage in super
5) minimum effort.

Sorry, I'm not too up to speed with the co-contributions and leveraging part.. but just thought I'd give some balance ;)

Really? At 20 I reckon even with little interaction he could find better avenues than super which is what, 30-40yrs away before he can access it (assuming govt. doesn't play around with the rules further as they like to)?

Managed Funds with leverage if you don't feel confident in investing in equities directly, or property with a good PM (& BA if you're not confident in picking) both don't require a whole lot of involvement if you don't want there to be.

If however you're not planning on getting any debt Jonathan, the whole process will be slowed down dramatically and could be very difficult to secure a passive income stream for you to retire on any time before say 55-60yo. There's nothing wrong with debt if used wisely, read up on it here on SS.
 
Just so far as taking inflation out of the equation when discussing returns on a savings account; do you consider the same when looking at returns on property, as well?
 
Really? At 20 I reckon even with little interaction he could find better avenues than super which is what, 30-40yrs away before he can access it (assuming govt. doesn't play around with the rules further as they like to)?

I thought there may have been early access.. Checked ATO's rules on accessing super.. we have to till 60 :eek:

I'm very busy so I want any investment to be fairy easy to manage and not consume too much time.
I guess you only get out what you put in..
 
there are many ways to derive an income from cash.

1) property.

commercial and industrial style investments traditionally yield the most - that is, their rents payable cover the mortgage, the tenant covers ALL outgoings and repair and there is generally a fair bit of cash left after all expense are paid. in ohter words, it's cashflow positive. commercial and industrial rents are generally long leases (2 years - 20 years) and their rents at the time of signing will be conditional on the current econimc forecasts and situation.

You can also find cashflow positive residential property, but traditionally they are a low growth, high turnover and high return area like regional hubs. that said, there are some great areas out there that are cashflow positive with well performing growth, but you need to look and understand what economic factors affect the prices and rents in these areas - think Mildura, Manjimup, Ipswich...etc. Residential tenancies are short (3 months - 24 months) but also provide better scope for rental increases should demand increase. They are also less affected (but still so!) by economic conditions.

2) leverage your cash and buy quality shares paying solid dividends and write monthly covered calls against the stock.

AMP back in Dec last year was paying 10% dividend. That means for every $50,000 invested, you would get back $5000pa in dividends. That's a PE (price/earnings ratio) of 10, which means after 10 years it's paid itself off and you can take that capital and re-invest. You could also use a "broker's margin" which means for every dollar you put in, your broker will match it. their interest on the dollar would be anywhere between 5% - 8% per annum for a good broker. That would mean you're exposed to $100,000 in the market for your $50,000 savings, and on somethign like AMP would have yield you $10,000pa in dividends - 20% return pa.

You could write calls to increase your cash buffer to limit your downside exposure and pay the interest on that $50,000 broker's money in the meantime. you could get up to 3% a month playing reasonably safe and timing your trades correctly. on a $100,000 position that's another $3000 per calendar month.

3) become a mezzanine financier.

someone needing a $50,000 deposit with no avenue for a loan, generally turn to what's called a "mezzanine" financier. basically, you're taking advantage of someone's need (or desire) to borrow money where they probably shouldn't be and other lenders have shut their doors. you need to make any contract watertight with a LARGE collateral obligation should they default (ie a house, or a car valued at $100k for your $50k of financing etc) or get them to pay an insurer that covers any loss YOU incur (similar to lender's mortgage insurance). you also get to charge an EXORBITANT interest rate - 18% + pa, compounded daily.

it's a risky way to make money, because you're exposed to someone's delusions of granduer, but to those who are just sort of funds and have capacity to repay, it could be a windfall.

4) high interest savings.

well, the interest barely covers inflation plus fees, so really, it's more of a hedge than an investment. that said, i'd rather have a mortgage and put the cash into a 100% offset account.

i don't recommend eithee one of these options over the next, i just posted up to give you a rough explanation in the hope you can make a more informed decision about where you would like to invest.

good luck!
 
Thanks for all the replies.

after paying tax on the interest income & inflation eating away at your principal, then you are not making much at all. :(

Yeah I'm a bit disappointed that I couldn't save more, although my income has risen in the past 2 years. (I'm 22.)

At my current level I can put away about $50k a year after all expenses.

So you just want to throw money at something and have it give you a good return with virtually no involvement? ....not so sure you can get a high return from doing that.

Good point. I need to commit time if I expect to get any decent returns.

At the moment, the whole investment landscape looks very confusing to me. There's a lot of different paths that each seem as good as eachother.

Are there any particular benefits to property, as opposed to say shares?

With the right kind of leverage (i.e. debt) it can do even better.

So when you talk about the right kind of debt, do you mean debt where the interest paid is less than the income generated by owning the asset? Is that possible?

Now if we take the average growth in property over a period of ten years at 10%pa...does this seem like a better option

There are problems with property though, like:
- Extremely high prices throughout Australia; just a 1-bedroom flat in Sydney costs as much money as I could save in 7 years.
- All kinds of incidentals, like plumbing, leaky roof, faulty wiring, etc
- Non-liquid asset

Am I over-estimating the dangers?
 
So when you talk about the right kind of debt, do you mean debt where the interest paid is less than the income generated by owning the asset? Is that possible?
it's be great to buy a house with cash - unfortunately - it's just not possibel to 99% of us.

therefore "good debt" is deductible debt (business car, property etc)

bad debt is CCs, GE Money PLasma debt etc - non deductible.
 
Am I over-estimating the dangers?

Not at all, given your current position. The way I see it, is that the only difference between investing and gambling, is how much you know.

So, at the moment, buying property is something of a gamble for you.

Researching it and learning how it could generate wealth for you, is a good start towards making the concept more like an investment. (This forum is a great place to start doing that, and taking that step already by asking those questions is pretty cool).

Likewise with shares or anything else that captures your attention. Once you understand how it works, why it works and where your profit is coming from, then you're in a much better - and less risky, per se - position to move forward from.
 
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