Direct property ownership or property trust. Which is for you?

Direct property ownership or property trust. Which is for you?

Direct Property Ownership or Property Trust. Which is for you?

Investing in real estate has always been a popular way for Australians to increase their net worth.

Before taking the plunge, you should do some homework to ensure that the way in which you purchase real estate and manage it will suit you. Have a plan to cover loan payments if interest rates rise, if you are unable to secure a tenant, or you suffer illness or lose your job.

Finding important information

If you decide you want to own property directly, a good place to start is www.realestate.com.au. Here you can look at properties and asking prices in your chosen locality. More importantly, you can purchase information on the actual sale prices rather than the asking price. This is an important difference. A local real estate agent is another good source of information on what properties may suit your financial needs and the likely rental incomes. There are also people you can employ to act as your agent to find you a property which suits your needs and who will negotiate the buying price on your behalf.

Managing your properties

Once the property has been purchased, the next choice is to decide if you want to self-manage the tenants or engage a real estate agent to do the day to day management. This is a personal choice, most likely based on whether or not to have the temperament, time or skills to manage the property yourself.

In my book Map Your Finances, I give a detailed report on my personal experiences as a landlord for more than forty years. For those wanting to self-manage their property, I believe you will find the lessons I have learned over many years very helpful. There are also some helpful tips for buying and selling real estate and property trusts.

Advantages of using trusts

I recently attended the Australian Investors’ Conference on the Gold Coast and was privileged to hear talks from two companies selling property and mortgage trusts. While this is something I had not previously considered for myself, I have now changed my mind. In particular, I believe it is an excellent venue for having a real estate exposure in a SMSF without direct property ownership. As Financial Mappers demonstrates, owning direct property in a SMSF may cause liquidity problems, particularly in the drawdown phase. Direct property ownership may also limit the ability to rebalance a portfolio.

The first speaker at the conference was Gary Connolly from Trilogy Funds. This is a Brisbane based company which is my home town and thus I was quite familiar with the areas in which his company was selling unlisted property and mortgage trusts. Their main focus is on small developments with low debt ratios. The returns quoted were in the vicinity of 8% which seemed quite sound. For additional information go to their web site www.trilogyfunds.com.au.

The second speaker at the conference was Peter Rawle of Cromwell Property Trust. Peter is also the Gold Coast coordinator of the Australian Investors Association and is passionate about assisting investors to avoid making costly mistakes. His talk was entitled Why you should consider investing in an Unlisted Property Trust. According to Peter, the advantages of unlisted property trusts was that they were less volatile than listed products, gave diversification away from equities, gave access to quality real estate which is unaffordable to most, letting you become a part-owner in real estate for as little as $10,000. He said that when considering which property trust to purchase you should consider vacancy rates, weighted average lease expiry, gearing, age and condition of property, taxation, management experience and balance sheet and market conditions. For more information on Cromwell Property Group, which is an ASX300 company, visit their website www.cromwell.com.au.

For unbiased advice on property investing, Money Smart (ASIC) is the best place to start. The site lists both the pros and cons of property investment. This information will ensure you enter the market fully informed.

Be wary of outlandish claims

Finally, a word of warning and a message from ASIC’s Money Smart. Over the years, there has been a long trail of property spruikers who have fleeced millions of dollars from unsuspecting property investors. I urge everyone, thinking of attending a free property seminar to watch their wonderful animated video entitled Getting Rich through Investment Property.

In addition, Money Smart has published video by News Corp reporter Annabel Hennessy, who spent months attending property seminars and she gives a full report on her findings. Again this is a ‘must watch’ video.

Use tools to plan and assess your position

According to the Australian Bureau of Statistics, the average capital growth per year on established houses in the capital cities has been approximately, 7.75%. But like all growth assets, the changes in price will vary from year to year. Financial Mappers provides historical data on property prices since 2000 which lets you back-test your property investments against previous historical time periods.

While past performance has been shown to be an unreliable predictor of future performance, it does give the opportunity to demonstrate the rhythm of the economic cycles. Using long-term averages does not prepare you for risk sequencing. That is the risk of having negative or low returns at the worst possible time. For example, you may be ready to retire, downsize and move to more suitable accommodation. However, property prices fall so you cannot receive the money you were expecting and in really bad times, there may be very few buyers at any price. The Capital Growth Modulator will allow you to explore in more detail the effect of prices changes you nominate for specific years.

You can do it, with a long-term approach

For most people, who use a sensible long-term approach to real estate ownership with moderate levels of debt and good property management rules in place, real estate investments have been a very successful means of increasing wealth over the long term.

Glenis Phillips, F Fin

Disclaimer: Financial Mappers does not have an Australian Financial Services License, does not offer financial planning advice and does not recommend financial products.

I am a founding board member of Plencore Wealth Ltd and Plencore Online Pty Ltd. I am the designer of the product Financial Mappers and Financial Mappers PRO, cloud based modelling software for Personal Finance. This software is sold on the web site www.financialmappers.com.au.I am an educator, investor and expert in both personal finance and mathematical modelling and the author of 'Map Your Finances'.I have both a Graduate Diploma in Applied Finance and Investments and a Diploma in Financial Advising from the Securities Institute of Australia. I also have a Financial Analysis Certificate, by Distance Learning from University of Technology, Sydney. I am a Senior Fellow and Senior Mentor of FINSIA.
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