Unit 11d Property disadvantages


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Unit 11d Property disadvantages

  1. 1. GENC3003Personal Financial Planning<br />Andrew Hingstonandrew.hingston@unsw.edu.au<br />Unit 11: Investment property disadvantages<br />
  2. 2. 2<br />Investment propertiesFee & tax problems<br />Buying and then selling a $200,000 share portfolio would cost approx $1300 (0.65% of price)<br />Buying and then selling a $200,000 house would cost approx $17,000 (8.50% of price)<br />People don’t notice these costs during booming markets with 25% price growth.<br />However, during stagnant markets (3% growth) … these costs are terrible!!!<br />This is one reason why I prefer to invest in shares than residential property!<br />
  3. 3. 3<br />Investment propertiesRunning costs problems<br />The ongoing costs of shares is almost zero<br />Small amount of account fees?<br />Ongoing property costs<br />Council and water rates, body corporate fees<br />Insurance, property management fees<br />Maintenance, legal fees, accounting fees<br />Advertising costs for new tenants<br />Another reason why I prefer shares!<br />
  4. 4. 4<br />Investment propertiesDiversification problems<br />It is easy diversify a portfolio of shares with $250,000<br />However, you can only invest in 1 property with $250,000<br />If you are not diversified then you have a lot of extra risk (uncertainty) WITHOUT being rewarded with a higher expected long-term return!<br />Another reason why I prefer shares!<br />
  5. 5. 5<br />Investment propertiesDivisibility problems<br />20% of a share portfolio worth $200,000 can be easily sold because it is made up of thousands of individual shares (each worth a small amount).<br />A property investment has one asset which cannot usually be partly sold.<br />This exposes you to risk if you cannot make the loan repayments … you can be forced to sell the entire property.<br />
  6. 6. 6<br />Investment propertiesLand tax<br />Levied on owners of properties in NSW<br />Principal place of residence is generally exempt if you have dwelled in it for the whole year.<br />Except if owned by trust or company<br />Based on assessed value of “land”<br />Which is usually less than the value of land + building.<br />Land tax free threshold $368,000 (2009)<br />1.6% + $100 of combined land value above threshold<br />Avoid or reduce by investing in one property in each state<br />
  7. 7. Advantages of shares over property<br />Shares have similar long-term past returns<br />Share prices  dividends  12%<br />Property prices  rent  12% (incl. size   renovations)<br />Shares have lower risk from diversification<br />Single investment property has very high uncertainty<br />Share portfolio has lower uncertainty than single property<br />Shares have more reliable future returns<br />Share prices driven by economic growth<br />House prices driven by supply and tax factors*<br />Shares are more flexible with lower fees<br />* Nigel Stapledon (2007) “Long Term Housing Prices in Australia and Some Economic Perspectives” PhD with Australian School of Business<br />7<br />
  8. 8. Stop and read<br />Now read:<br />Chapter 14<br />Investing in property<br />8<br />