Property prices are something Australians love to talk about. They’re either falling, rising, or hitting the roof. Rarely does a family BBQ, brunch with friends or after work drinks with colleagues come and go without talk of the property market. It’s a national pastime and you’ be hard pressed to find an Aussie that doesn’t want to get their foot in the door.
Property is a popular, possibly even safe, investment because it is tangible. A roof over our heads is something we all need to survive, too. But as of October 2022, property prices are at record highs. Right now, you’d probably find it difficult to come across a one bedroom apartment in inner Sydney or Melbourne that doesn’t edge near the seven figure mark. The price of a five bedroom home – let alone a commercial or industrial space –would probably make your eyes water. If you’re a switched on money mind with cash to invest, you’re probably been questioning if investing in property at this point in time is financially savvy. Whether you’re considering purchasing as an owner occupier or looking to add a property to your investment portfolio, it can all feel a little overwhelming.
You know investing in property is smart – the property market is often considered less volatile than the share market, you can earn income if your property is tenanted and you’re putting your money into something that you see and touch.
But there are drawbacks, too. For one, the upfront costs are enormous. From the deposit to stamp duty, legal fees and agent rates, the out of pocket costs can feel never ending. And if you choose to purchase an investment property, there’s always the risk that the rent won’t cover your mortgage (or you’ll struggle to find renters at all), the property value decreases over time or interest rates rise, leading to higher repayments.
Plus investing all your money into a single asset can be problematic. You can’t exactly sell off part of the kitchen or one of the bathrooms if you need a little extra cash.
Fortunately, there are other means to invest in the property market without directly buying a bricks and water building. This means you can still benefit from the competitive returns and potential capital gains property can offer, but you won’t be caught up in all the logistics or possible risks that come with being a landlord.
In this post, we’re going to provide an overview of a few investment options which will enable you to invest in real estate without actually buying a property yourself.
Property trusts
Property trusts, which can also be called property syndicates, are an investment option that provide you with an opportunity to invest in properties that would most likely be out of reach as a solo investor. This might include commercial or industrial real estate, as well hospitals, specialist buildings and even hotels.
A property trust is managed by a fund manager, who will take all of the administration tasks – such as maintenance and rent collection – off your and your fellow investors hands.
The trust owns the property and you as the investor will purchase ‘units’. The more ‘units’ you own, the more distribution payments you will receive. Property trusts will usually pay their investors distributions in regular intervals, this may be monthly or quarterly. Each trust will have its own rules around this.
In Australia, property trusts are either unlisted – which are considered less volatile but also require a higher upfront investment – or listed property trusts. Listed property trusts are listed on the Australian Securities Exchange (ASX) and the ‘units’ can be bought and sold like shares.
Mortgage trusts
It’s estimated that Australians have more than $15 billion invested in mortgage trusts. So to stay they are a popular investment avenue is almost an understatement.
There are two types of mortgage trusts: pooled and contributory.
If you choose to invest in a pooled mortgage trust, your money will be handled by a professional fund manager and pooled with other investors’ funds, It will then be lent to a borrower while taking a mortgage over the underlying property. The ‘borrower’ is usually a group of property developers looking to finance construction of a new project, but the need can vary.
If you invest in a pooled mortgage trust, you will receive a regular income also knows as a distribution. This payment is calculated by the trust’s cash, as well as interest paid by borrowers and any other investment it holds.
Much like a property trust, you will be allocated a number of ‘units’, which will be based on the amount of money you invest in the trust. Sometimes the amount can be as low as $10,000 but the entry level rate will depend on the particular trust you are investing in.
There is also the option to invest in contributory mortgage trust. This option enables you to invest in a single loan, which gives you more control over who you are lending to. However, contributory montage trusts are considered to carry a higher risk, as your funds a consolidated into a single loan.
It’s always best to speak with a financial adviser to assess the best option for you and your financial future.
Real estate ETFs
The third option you may wish to explore are real estate exchange traded funds (ETFs).
ETFs are managed funds that are traded on the stock exchange. In most instances, a real estate ETF owns shares in multiple real estate companies listed on the ASX.
You can purchase a real estate ETF through a trusted stockbroker or online trading platform and the entry costs are usually much lower than an unlisted property truss. But real estate ETFs are considered far more volatile, as they follow the pattern of the share market. You will also have little (to no) control over the properties that that the real estate ETF invests in.
Unsure if your should invest in property trusts, mortgage trusts or real estate ETFs?
We’d be happy to discuss your options with you and determine the best investment for your portfolio. You can contact our friendly team today by clicking here.