As financial planners, we are able to – and do – discuss property as an asset class. We have chosen not to advise our clients on the merits of a specific or individual property, tending to access property as part of a broader portfolio and in all cases via Real Estate Investment Trusts (REITs).
That said, do we see residential property as an integral component in a clients portfolio? Absolutely.
The correct property, purchased at the right price and held for an appropriate period of time, can add significantly to the overall wealth position of any client. I would be hypocritical if I said property is not a valid option, as I hold residential property in my own portfolio.
Apart from the obvious questions, like is it the right property in the right street in the right suburb at the right price; like all investments, property has characteristics that you need to take into consideration when investing:
LACK OF DIVERSIFICATION
The first and most obvious point is the lack of diversification that large assets like property can inevitably create in an individual portfolio. We talk at length to our clients about risk in the context of asset allocations and how we are always looking to diversify a portfolio. Large assets, like residential property, can create a situation where a significant component of a client’s portfolio is concentrated not only in one asset class, but in one asset. When you add to this that our homes are essentially the same asset class, we quite often find situations where a client can have 85-90% of their wealth concentrated in one asset class spread across a couple of large assets. This presents an unreasonable level of risk that is not conducive to a well-balanced portfolio.
Another area that we discuss at length with our clients is that of liquidity. A residential property, although highly tradable in the right conditions, will take time to liquidate and you can not sell a bathroom if you only need a portion of the value. From the time you decide to sell, and you find a buyer at the price you want, you could be waiting 3 months or more for your value to be realised.
The last point, and depending on your life stage this may not be an immediate issue, but in retirement, the income return on a residential property can be relatively poor. When you consider that you cannot pay for your groceries with unrealised capital gain and can only use the net rent to meet your expenses, property can perform poorly when compared to other assets with comparable risk profiles.
Remember that whilst property can be a very successful asset, it can also be a disaster – just ask the people that invested in the Opal Tower complex. An interesting article on this particular story can be found here.
In summary, property can form part of a strong investment portfolio, and owning your own place of residence can offer other benefits, like peace of mind and emotional attachment to a place, that arent accounted for in property as an investment class. However, we would always encourage anyone to steer away from having all their eggs, or in this case assets, in one basket. Diversity is the key to successful investing.
We would love to discuss how you can buy or invest in property, general investments and anything we can do to help you with your financial future. All you have to do is Get Started or Book an Online Consultation.