Why Real Estate?

[wealthyjay]

Since this is a real estate forum I guess this is a perfect place to ask the question. Who amongst us use real estate as their main vehicle for investments, and why did this method appeal to you over other streams? Is diversification into other forms of investment such as stocks represent the minority here, or is it a wider practice than I am seeing?

The reason I ask this is because while I have invested in property myself I am not altogether convinced of its absolute appeal to the majority of Australians, and thus my strategy is to maintain a diverse investment portfolio. I would love to hear peoples opinions on the matter.

Thanx

Jay

 

[WillG]

Hi Wealthjay,

Have you read the Somersoft series of books ? I believe the answers to your questions are in them.

What do you define as a 'diverse' investment portfolio ?

I don't invest for 'investment' sake and do not diversify for the sake of 'diversification'. I have clear investment goals that involve property, shares and cash. I guess property is my main form of investment at the moment because I understand how it works and can manage the risks. I am still learning about shares and will probably invest more $$'s when I can manage the risks accordingly.

Cheers

 

[wealthyjay]

Hi Wealthjay,

Have you read the Somersoft series of books ? I believe the answers to your questions are in them.

What do you define as a 'diverse' investment portfolio ?

I don't invest for 'investment' sake and do not diversify for the sake of 'diversification'. I have clear investment goals that involve property, shares and cash. I guess property is my main form of investment at the moment because I understand how it works and can manage the risks. I am still learning about shares and will probably invest more $$'s when I can manage the risks accordingly.

Cheers

No, I haven't read the books, however I have a large library digested already and still going. I was looking more for personal feelings about real estate and what attracts people to specialise in this form of investment over others.

What I mean by diverse is to have a range of investments such as Cash, real estate, bonds, shares etc Rather than become a one pony rider, which I feel intuitively is not the best way to go, but I am ready to be told wrong

I share your feelings in that I don't invest for the sake of investing, its not what my life is. However, my future involves me not having to work

 

[TomL]

For me its pretty simple .. residential property allows the greatest leverage, with the least risk.

Shares and cash also play an important part of my portfolio, but for different reasons.

 

[WillG]

'What attracts people to property'' ?

I can't speak for the general public but I believe the general public see real estate as a less riskier option than shares. The average person on the street will know where good and bad areas are - this is proably not the case with shares. The average person lives in a house thus has more of a 'feeling' for houses.

Diversification

The 'Rich Dad poor Dad' books talk about diversification. They preach 'buy 1 basket of eggs and watch it like crazy' rather than several baskets of eggs and watching all of them.

Diversification can take on may forms in each class of investment. For example, a property 'diversified' portfolio may contain 4 suburban 'high yielding' properties, 2 'high growth' properties, 1 blocks of land near a coastal region and 1 2bed unit in each capital city. A portfolio like this may be classified as 'diversified' for income and growth across many regions.

Diversification may mean several classes of investment or it may mean 1 class of investment vehicle(as above). Whatever form of diversfication you choose, choose it for the right reasons rather than saying 'I am diversifying into shares because I have too much exposure to property'

Cheers

 

[Monopoly]

Passion

Hi Jay,

Your question is a valid one, and I think it is indicative of many people like yourself who aim for diversification in their investment portfolio. This is financially a good move IMO.

Real estate is but one investment vehicle, and it is not for everyone, but it is definitely for me. Why??? For the better part, it is like a long time friend which has been with me since childhood; I remember most kids my age spending their Saturday mornings watching the cartoons or going out to the park with their families, whilst I on the otherhand was being dragged along to numerous OFIs and subsequently spending long hours sitting quietly in REA offices listening to the sales pitches and agent-purchaser negotiations that followed. I remember spotting rising damp and white ant infestation in a property for the first time at the age of 8 and pointing it out to the dumbdounded agent as he escorted my parents through what he described as a "flawless" property!!!

Most kids wanted to play with blocks, I wanted to play with bricks (literally) and longed for the day when I could. Well I'm not a brickie, and I don't build the properties myself; there are others that can (and have done) that for me; I will just sit back and enjoy both the fruits of their labour, and my good sense to recognise a good real estate deal when I see one.

Real estate is but another means to an end; and thankfully for me, what a sweet ending has and continues to be!!! May your success be equally as sweet!!!

Cheers,

Jo

 

[keithj]

Diversification is the way for me.

Who amongst us use real estate as their main vehicle for investments, and why did this method appeal to you over other streams? Is diversification into other forms of investment such as stocks represent the minority here, or is it a wider practice than I am seeing?

Excluding PPOR & passive business interests, I'm about 50:50 in shares & IP on a gross value basis. Most of my funds were directed towards IP 5 yrs ago. I won't be putting any more into IP for a while. Excess funds have been directed towards shares for around 12 months now and it'll continue that way for the short term. However, I won't be actively reducing holdings of either in the short/medium term.

 

[JohnK]

Hi Jay,

Why property? For me personally, I'll give you my 10 or so reasons why I choose to use property as my primary vehicle.

1. The average person can become a millionaire through property in just 10 years. What’s the exceptional news on this? Nobody is average. Half of all property owners earn less than $45,000 a year.

2. Over the past 140 years, Australian residential property prices have doubled on average every 7 to 10 years. In my strategy, I hope to purchase "quality" property and keep it long term.

3. Dont mean to sound bias, but property unlike shares is not subject to extreme fluctuations. There is only 2 types of property that is subject to extreme fluctuations and that is prestige property and OTP.

4. You can add value to property. It is highly unlikely that if you buy in shares in National Australia Bank that you can walk into the board meeting and start telling the company how you can add value to it.

5. The tax benefits ensure that the Australian Tax Office purchase and repay our investment/s. Rental income on average doubles every 9 years. The tax office and the tenant subsidises your investment properties.

6. Equity. Using the equity for deposits in your existing properties to purchase more properties. Using no money down from your pocket. OPM. Other Peoples Money.

7. Property gives tremendous leverage benefits.

8. Far more control. You have full control with property.

9. Low risk (if purchasing quality prop for the long term).

10. Growing rental markets in Australia are increasing.

Im not sure how up to date or accurate this data is, but coming from the Australia Bureau of Statistic tells me that in 1978 73% of people owned their own home. In 1998 only 68% people owned their own home. By the year 2010 only 46% of people in Australia will own their own home.
This is great for investors!

11. You can touch it, drive past it and wave at it.
12. Its easy to understand.

My 2cents worth.

Cheers

 

[markpatric]

I don`t believe it`s possible to be an expert in all the areas needed to do what you ask.
I`ts taken many years to learn the ins and outs of R/E and stocks, bonds etc do not interest me in the slightest as I have no knowledge and no interest in putting in the work needed to be confident in those areas.
I`ve never met anyone who has made a fortune in stocks etc, I`ve met a lot that have been taken for a ride though, too risky imo.

 

[quiggles]

I don`t believe it`s possible to be an expert in all the areas needed to do what you ask.
I`ts taken many years to learn the ins and outs of R/E and stocks, bonds etc do not interest me in the slightest as I have no knowledge and no interest in putting in the work needed to be confident in those areas.
I`ve never met anyone who has made a fortune in stocks etc, I`ve met a lot that have been taken for a ride though, too risky imo.

Speaking as someone who owns virtually no shares, I think your view is very blinkered. I've met a number of people who live off shares and share trading, and very nicely at that.

I'm with Porscha, however. Athough by the sounds of it, I invest in a different market segment (very much blue collar stuff), the issues of control, value adding, leverage and stability are key. Plus the attitude of banks to property as opposed to shares helps (whoever heard of a margin call on a house!).

The fact that I haven't undertaken education on shares makes them risky for me now, but not later when/if I do such a thing.

 

[Aceyducey]

I reckon residential property has been a nice investment for the past few years & it's definitely worth buying at the right times in the market.

However other assets have their place & anyone who sticks to ANY single type of asset in investing is shortchanging their own wealth creation.

You open more doors by picking the right key at the right time.

Cheers,

Aceyducey

 

[Sunfish]

Check the stats in this thread.......

http://www.somersoft.com/forums/showthread.php?p=126719#post126719

You will notice over 1/3rd of respondents run a business full time.

The stats don't tell us whether the biz or the property came first. I suspect the biz, but I could be wrong.

Thommo

 

[markpatric]

Yes Quiggles it is a blinkered veiw, but many times in this world it pays to be, even in R/E, you have heard of the success but not much of the failure why, probably as those that fail don`t want to be seen to fail, but R/E and everything else is full of failures, and everyone thinks they know how to make a million or two.
I`m sure there are many out there that do well in shares, but they would surely be a minority with a wealth of experience, I don`t see why anyone would venture into unsure territory, I simply don`t have the time for it anyhow.

 

[househunter]

Hi All,

I am mainly into property and I guess this is because I don't really understand shares. Property has been good to me over the years and with very little effort or worry I have watched my portfolio grow. I don't have the internal fortitude for the ups and downs of the share market. I have a good friend of mine who lives off the share market and has done so for the last 20 years of his retirement. There is nothing he doesn't know or can't tell me. Even so at times he still loses. Only 5 weeks ago he told me how he lost $8,000 in one day and I said "how do you sleep with that?" He said" you only lose when you have to sell" and I suppose that sums it up.

The interesting thing was that only two weeks later he was bragging about getting his money back and more. If it had of been me I probably would have sold and lost my money. Exactly the same thing applies to real estate. The only argument I have for that is that you can also lose if the company goes bust. At least with property you can drive past and look at it and enjoy the experience. Just my thoughts.

Househunter

 

[likewow]

Property gives great leverage and tax advantages but the illiquidity is a pain for active investors. Whereas shares provide liquidity and isnt as volatile and lacking stabilty as the uninformed would make out.

And theres no margin calls on shares if you gear not more than than 2/3 your portfolio to 70% max.

Heres an example of the liquidity of shares. A few years ago my family and a friends family went on a skiing holiday. He was whinging about the expense and cost and how hard he had to work hard to pay for it blah blah...where i just went through my share portfolio, picked out a stock that i didnt think had much upside left and sold down the profit component of that position and left the value of my original buy amount.

I made about about 5 grand which paid for the skiing holiday in fine style and i didnt tell the friend as he probabaly would have thought - bloody smartarse .....well i would have.

Heres another great eg: A few months ago my wife went to the Colorado store at Birkenhead in Sydney and spent about $600 on clothes in a couple hours So i done some research and saw that the Colorado share price was trending upward nicely over a fair amount of time and the company had excellent fundamentals and bought a parcel of their stock, i sold out when i made $880 profit- that'll teach her Try doing that with a house, not to mention the negligible fees and costs of share transactions compared to property.


The main reason people think shares are volatile is because fluctuating share prices are everywhere every day and its a psychological thing. You dont see property price ticker tapes every day. But if you have a diversified portfolio and are investing not speculating (tho thats fun sometimes) shares are great and i and others have made great money from the market.

So, i believe both are necessary in a portfolio and provide a fantastic synergy to move funds beteween the two at appropriate times (even selling one to fund the other) which have been created from nothing and continue to grow and grow.To ignore shares as risky is as blinkered as people saying RE is too risky and i'll put my money in the bank thanks.

And theres no shortage of people that have lost money in property in the last couple of years. With OTP schemes, 2/3 tier marketing and developers who have mistimed the property slump, and im sure theres lots of others. I actually think its easier to lose a large sum of money with property for the unwary than with a healthy, diversified share portfolio.

My last point is i found educating myself in the stockmarket easier than educating myself in property. For those that have been around longer than the last property boom, that will mean something because making money in property isnt as easy as the last 3 years has demonstrated, thats unless you are a buy/hold/pray property investor than its very easy- as long as you are pos. geared.

Actually, this is my 2 last points, compared to shares and business i find property investing boring and i dont care too much for touching or waving at an investment, i just like touching the money it makes.

 

[DOC]

Hi likewow,

I am a novice invester with some IPs but have been looking at the prospect of investing in shares as I am open to different forms of wealth creation. I have read some books, etc. but I was wondering if you could tell me of a web site similar to somersoft, where people with knowledge, expertise, experience, and enthusiasm share their thoughts on the share market? Would appreciate your advice.


Cheers, DOC.

 

[wealthyjay]

Property gives great leverage and tax advantages but the illiquidity is a pain for active investors. Whereas shares provide liquidity and isnt as volatile and lacking stabilty as the uninformed would make out.

And theres no margin calls on shares if you gear not more than than 2/3 your portfolio to 70% max.

Heres an example of the liquidity of shares. A few years ago my family and a friends family went on a skiing holiday. He was whinging about the expense and cost and how hard he had to work hard to pay for it blah blah...where i just went through my share portfolio, picked out a stock that i didnt think had much upside left and sold down the profit component of that position and left the value of my original buy amount.

I made about about 5 grand which paid for the skiing holiday in fine style and i didnt tell the friend as he probabaly would have thought - bloody smartarse .....well i would have.

Heres another great eg: A few months ago my wife went to the Colorado store at Birkenhead in Sydney and spent about $600 on clothes in a couple hours So i done some research and saw that the Colorado share price was trending upward nicely over a fair amount of time and the company had excellent fundamentals and bought a parcel of their stock, i sold out when i made $880 profit- that'll teach her Try doing that with a house, not to mention the negligible fees and costs of share transactions compared to property.


The main reason people think shares are volatile is because fluctuating share prices are everywhere every day and its a psychological thing. You dont see property price ticker tapes every day. But if you have a diversified portfolio and are investing not speculating (tho thats fun sometimes) shares are great and i and others have made great money from the market.

So, i believe both are necessary in a portfolio and provide a fantastic synergy to move funds beteween the two at appropriate times (even selling one to fund the other) which have been created from nothing and continue to grow and grow.To ignore shares as risky is as blinkered as people saying RE is too risky and i'll put my money in the bank thanks.

And theres no shortage of people that have lost money in property in the last couple of years. With OTP schemes, 2/3 tier marketing and developers who have mistimed the property slump, and im sure theres lots of others. I actually think its easier to lose a large sum of money with property for the unwary than with a healthy, diversified share portfolio.

My last point is i found educating myself in the stockmarket easier than educating myself in property. For those that have been around longer than the last property boom, that will mean something because making money in property isnt as easy as the last 3 years has demonstrated, thats unless you are a buy/hold/pray property investor than its very easy- as long as you are pos. geared.

Actually, this is my 2 last points, compared to shares and business i find property investing boring and i dont care too much for touching or waving at an investment, i just like touching the money it makes.

I think you have summed up how I feel about real estate and investments extremely well. I, like many, was all keen and eager to go buy IP's and settle on that as the years go by. However, on closer examination and research I am not so sure that concentrating on real estate was the most appropriate thing for me to pursue. I feel that if you take a long term view then share fluctuations become negligible and you become more emotionally stable over your investments. An interesting read is the book "The Psychology of Investing" by Pring (I think thats right) which explains why the average return on investments is somewhere around -2%. I also like the liquidity of shares, and I feel that is important for at least a portion of your portfolio.

Correct me if I have this wrong, I see RE as a more labour intensive investment scheme especially as your property numbers climb. How do you guys manage your properties?

 

[Garry K]

Heres another great eg: A few months ago my wife went to the Colorado store at Birkenhead in Sydney and spent about $600 on clothes in a couple hours So i done some research and saw that the Colorado share price was trending upward nicely over a fair amount of time and the company had excellent fundamentals and bought a parcel of their stock, i sold out when i made $880 profit- that'll teach her

Bloody brilliant!

I hope you kept the $880 profit quiet, otherwise I could see another shopping trip coming up.

I agree that shares are more interesting to follow. And challenging in terms of "guessing" what the price will do.

Other than the IP's, we invest (not trade) in speculative resource stocks (gold,cooper etc). It is educational trying to understand drill results etc, but mainly rely on a good broker.

GarryK

 

[Lplate]

I diversify because it makes sense to do so. However I almost resent doing so through concerns about corporate governance. The 'big four' accounting firms are often cited as the consultants and auditors where corporate misappropriations and collapses have occured.

I also doubt the political will of the Liberals to ensure a fair deal for the smaller investor and that the checks and balances are in place and are operating effectively.

Property looks great in a bull run. Many who entered the market in the last several years have never experienced the retreats and plateaus that are natural parts of the cycle and can extend 7-8 years and more.

Diversification keeps more irons in the fire for the rises and the falls, but you have to be conservative and wary where you put your hard-earned $ in the hands of others.

 

[toony]

Why i invest in real estate

Why I invest in Property; (in no particular order)

1. Property better than shares in long term.
2. Its an appreciating asset.
3. Tax benefits for me. I get a good fat refund cheque each year.
4. Making mortgage payment is a savings plan.
5. I can drive by and I feel good. I own that property I say to myself.
6. Provide for future income.
7. My parents friends who are wealthy have all done it via property investing.
8. You can do so much with it - renovate, split, sell a bit - or just do nothing.
9. Let the tenant pay for it.
10. Leverage
11. A 5% return on a $100k property is better than a 15% return on $20,000 worth of shares.
12. In a period of 9 years I have turned $10k into $750k, all with the use of property.
13. Time value of money. A property bought 10 yrs ago at $100k, seems unbelievable now that its worth $300k and your income has increased while the loan is the same.
14. Its easily managed with property managers
15. Immediate Access to Cash – once equity built, get a line of credit. You have access to cash just by walking to bank

I work full time for a US based IT company. I have compulsory superannuation and I have nominated an agressive shares fund. This is my exposure to shares.

I dont know much about shares and when I tried a few years ago I got burnt. I cant see how you can turn $10k into $750k from shares. If it was possible the financial advisor I visited about 4 years ago would not live in the house he lives in now. If I listened to him my net worth would be where it was 4 years ago - $300k.

I am not sure if quoting figures is the done thing or not. But in my mind its the only way I can describe my experiences. I am still a long way from giving up the day job. Sure others have done better than I and will continue to do so. Sure we have just experienced a boom. Sure I did not listen to my financial advisor when I bought two more properties instead of invest $100k in managed funds. Sure I have a modest PPOR in a medium bayside surburb of Melbourne. Sure I have a good stable income to support these properties. Sure I have done this while renovating my PPOR and having two children in the last 5 years. Have I made sacrifices - yes and no. I have been taught as a kid to not waste money but get value for money. We did have a 4 week hoilday to Canada for my wifes sisters wedding. Sure we have done this on one income for the past 5 years.

I am presently sitting on my arse. I sold a property early this year to take a profit before it got gobbled up by interest payments. It was bought in 2002 and sold in 2004 after a small renovation. Now the portfolio is in neutrel mode waiting for the next interest rate rise. Now is a time for consolidation.

Property in my view is the vehicle of choice. There are too many people in the papers with vested interests in this argument. Stock brokers and financial advisors say its shares and managed funds. Real estate agents say its property.

But if you want to accumulate wealth the benefits of leveraging in property is the way to go.