{"id":184217,"date":"2024-09-07T19:19:28","date_gmt":"2024-09-07T09:19:28","guid":{"rendered":"https:\/\/propertyupdate.com.au\/?p=184217"},"modified":"2024-09-06T15:45:02","modified_gmt":"2024-09-06T05:45:02","slug":"6-reasons-to-not-invest-in-property","status":"publish","type":"post","link":"https:\/\/propertyupdate.com.au\/6-reasons-to-not-invest-in-property\/","title":{"rendered":"6 reasons to not invest in property!"},"content":{"rendered":"

Every asset class comes with its own set of advantages and disadvantages, and property investment is no exception.<\/p>\n

I often highlight the many benefits of investing in property and offer strategies to become a successful property investor.<\/p>\n

However, it\u2019s equally crucial to recognise the downsides that come with property investment and think about how to minimise their impact.<\/p>\n

It is important to note that you won\u2019t be able to eliminate these drawbacks in full, which is why I believe most investors should invest in a variety of asset classes.<\/p>\n

1. You may need to wait 30 years to be happy with the returns<\/span><\/h2>\n

Fully understanding the concept of compounding returns is crucial.<\/p>\n

For instance, if you invest $100 and achieve a 7.5% after-tax return, your investment will double approximately every 10 years.<\/p>\n

What\u2019s remarkable is how the dollar value grows exponentially over time due to compounding.<\/p>\n

By the third decade, the return will be 4.5 times higher than what it was in the first decade, as illustrated in the chart below.<\/p>\n

Compounding rewards patient investors.<\/p>\n

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\"opening<\/figure>\n<\/div>\n

If you happen to invest in a property just before a flat cycle, you will need to hold onto the property for an extended period to see satisfactory growth.<\/p>\n

I previously wrote about the importance of considering property market cycles a few months ago\u00a0here<\/a>.<\/p>\n

Whilst all asset classes benefit from compounding returns, this effect is particularly important for investment-grade property as most of your overall return comes from capital growth, with relatively less from rental income after expenses. Therefore, holding onto property for 30 years or more is essential to fully capture the substantial benefits of compounding capital growth.<\/p>\n

Mitigant<\/em><\/strong>: make sure you have other investments such as shares and super that you can rely on to fund the initial period of retirement, allowing you to retain your investment property\/s for an additional decade or more.<\/p>\n

2. It can be a hands-on investment<\/span><\/h2>\n

I don\u2019t want to exaggerate the amount of time that it takes to manage a property investment, but it is important to realise that is does take some time.<\/p>\n

In contrast, other asset classes such as shares require very little time.<\/p>\n

You might worry about wasting hours of your time dealing with nightmare tenants.<\/p>\n

However, in my experience, this is very rare if you (1) invest in investment-grade properties that attract quality tenants and (2) hire an effective and experienced property manager.<\/p>\n

However, there are times when you\u2019ll need to invest your time in tasks like renovations or repairs.<\/p>\n

Based on my personal and professional experience, these situations arise sporadically, perhaps every 5 years.<\/p>\n

It\u2019s important to anticipate these occurrences and be prepared to dedicate a few hours each year to managing your investment.<\/p>\n

Property is not a completely hands-off investment.<\/p>\n

Mitigant<\/em><\/strong>: selecting the\u00a0right<\/em>\u00a0property and the\u00a0right<\/em>\u00a0property manager should greatly reduce the amount of time you need to spend managing your investment.<\/p>\n

\"Investor2\"<\/a><\/p>\n

3. Low and potentially unreliable income in retirement<\/span><\/h2>\n

Typically, investment property yields vary from 2% to 5% depending on location and the type of dwelling.<\/p>\n

However, as I recently discussed\u00a0here<\/a>, associated costs often amount to about 35% of gross rental income.<\/p>\n

Therefore, annual net rental yields after expenses typically range from 1.3% to 3.3% of a property\u2019s value.\r\n\r\n

<\/div><\/p>\n

Additionally, land tax further reduces your investment returns.<\/p>\n

As such, residential property is a comparatively lazy asset from an income perspective.<\/p>\n

Moreover, spasmodic, and unforeseen, once-off repair expenses can arise from time to time, making rental income somewhat unpredictable.<\/p>\n

In contrast, historically, the ASX200 has reliably yielded over 6% per annum, including imputation credits.<\/p>\n

Mitigant<\/em><\/strong>: invest in property almost exclusively for growth. Do not place too much reliance on its income. As such, you must have other assets such as shares and super.<\/p>\n

4. It\u2019s illiquid<\/span><\/h2>\n

With property, it\u2019s all or nothing.<\/p>\n

Unlike other assets like shares and bonds that can be sold gradually, selling an investment property doesn\u2019t offer much flexibility to minimise your Capital Gains Tax (CGT) liability.<\/p>\n

In addition, it may be faced with the challenging decision of how to reinvest a large amount of cash proceeds.<\/p>\n

Mitigant<\/em><\/strong>: rather than repaying associated loans, consider accumulating cash in a linked offset account.<\/p>\n

This approach not only helps minimise interest expenses but also provides access to funds in case of emergencies.<\/p>\n

Additionally, if your investment strategy involves potentially selling a property in the future, carefully consider its ownership structure.<\/p>\n

Choose a structure that optimises your tax position, including minimising CGT.<\/p>\n

\"Investors\"<\/a><\/p>\n

5.\u00a0 Subject to legislation and tax changes<\/span><\/h2>\n

While all investments involve legislative risk, property is notably vulnerable to changes in taxation and law because some states derive nearly\u00a0half of their tax revenue<\/a>\u00a0from it.<\/p>\n

For example, in recent years, most states have tightened tenancy laws and imposed new and increased taxes on landlords. In contrast, other asset classes typically don\u2019t subject investors to similar risks.<\/p>\n

In the long term, state and federal governments depend on private investors to supply an adequate amount of rental accommodation.

<\/div><\/p>\n

Without it, economies cannot thrive.<\/p>\n

Therefore, although governments may implement short-term changes that negatively impact landlords, ultimately, they have a vested interest in ensuring they foster a healthy private rental accommodation market for long-term economic prosperity.<\/p>\n

Mitigant<\/em><\/strong>: there\u2019s little investors can do to directly mitigate their investment risk. Of course, you can\u00a0help advocate<\/a>\u00a0for sensible and balanced legislation.<\/p>\n

6. It is a very large financial commitment<\/span><\/h2>\n

To buy a blue-chip, investment-grade property in Australia, investors typically need a financial budget exceeding $1 million.<\/p>\n

That means would-be investors need to make friends with borrowing a lot of money and agreeing to the substantial ongoing commitment of servicing that loan i.e., covering the cash flow gap between the property\u2019s net income and loan obligations.<\/p>\n

Such a significant financial commitment does have its advantages.<\/p>\n

It compels investors to invest a substantial amount upfront.<\/p>\n

Assuming they choose the\u00a0right<\/em>\u00a0property and hold onto it for many decades, they will benefit from compounding growth and accumulate considerable equity.<\/p>\n

However, the reality is that investing in property entails a fixed and substantial financial commitment.<\/p>\n

Other than selling the property, there are limited options to adjust this commitment if an investor\u2019s circumstances change.<\/p>\n

Mitigant<\/em><\/strong>: other than being conservative with your borrowing capacity, the only way to mitigate this downside is by reducing your budget, but I wouldn\u2019t recommend doing so if it means investing in a poor-quality asset.<\/p>\n

\"Investors\"<\/a><\/p>\n

The solution is to invest in property and shares<\/span><\/h2>\n

While this blog has highlighted the drawbacks associated with investing in residential property, it\u2019s important to note that there are plenty of positives, such as\u00a0the power of leverage<\/a>.<\/p>\n

Many Australians have built substantial wealth through property, as evidenced by a quick look at the\u00a0AFR Rich List<\/a>.<\/p>\n

Every investment carries risk.<\/p>\n

Diversifying across asset classes, including property and shares, can help mitigate some of the negatives discussed above.<\/p>\n

However, it\u2019s impossible to eliminate risk entirely, so understanding and accepting an investment\u2019s potential shortcomings is essential.<\/p>\n