If you are low income - property investment or managed funds?

Hi all,

This is my first post here.

I would love to know if there are people with low income here doing property investment. I'm soon to be divorced, disabled but with a great, stable part time job. I'm in the process of buying a home with my equity for the kids and I and have already been told by two brokers that this is doable. However, one of them has suggested structuring the loan for future property investment as well, as he feels even with my income numbers this is doable, though for a house in another state to NSW. This broker came recommended. I also have another contact who is a very successful investment property finder.

I'm however quite conservative and risk averse. My original strategy was to diversify into managed funds as I save very hard for future emergencies and like the ability to liquidify these funds in case of emergency.

Any thoughts? Is property investment too risky for someone in my situation?

 

I don't know about property investment being too risky - but I would have thought managed funds were the riskier option out of the two...

Who told you to go managed funds?

 

The Barefoot investor book.

 

Without knowing your budget it's really difficult to say. One thing I do know is that you need to plan ahead how you're going to manage risk - on a low income this is super important.

• Do you have a cash buffer?
• How much are you saving every month?
• How long can you last if you have no tenants?
• Do you have income protection insurance?
• Can you afford to pay P&I?
• What's the end game?

If your broker isn't asking you these questions make sure you're asking them and answering them yourself.

 

This is ringing alarm bells.

While you are able to liquidate shares, it should still be a long term investment decision to put it in. If you put in a lot of money into shares that you may need to cash out at a later date due to an emergency, the market could have halved (as it did do exactly that 9 years ago) and you are losing half your money when you pull out at a time that you should be adding to it (when it is low you want to put more in, not take it out).

You should have a cash buffer in place that is not in the stock market. If you do end up buying a property, then an offset will be the perfect place to stash this and get a good return on a risk-free investment that also doubles as a buffer.

Once your buffer is there, you can consider putting further money into stocks if you wish and if you plan to not need to take it out until the market dictates that it is a reasonable time to do so, but you sure better be careful if you think that just because you can liquidate stocks overnight that it should be used as a buffer in emergencies.

 

Surprised Pape advocates managed funds given that after fees, 80% of them underperform directly investing in a simple index tracker.

If you need cash for a potential emergency, you might be better off saving into the offset. As mentioned, ensure you have a decent buffer first before investing.

 

Property doesn't have to be risky, you need to ensure you have sufficient emergency funds/buffers, as with life.

What are you hoping to achieve by investing in property or managed funds?

Remember it doesn't need to be one of the other, you can do both.

 

Plenty of people on low incomes are investing. Like any investment have a cash buffer, knowledge of the market you are buying in and have a team of professionals behind you.

The thing I love about property investing compared to shares is that it is an asset that can be improved upon through renovation, subdivision and granny flats.

But as @Hodor said you could always look to do both.

 

I think Pape is a big advocate of managed funds that are index funds.

His message is fantastic.

 

Scott's advice is very general in nature and won't suit everyone but I think for his target market it is great. There must be a reason his book is a number one seller, his advice is practical and easy to implement. There will be a lot of people who will be much better off having read his book.

 

Is that message going to get you rich, tho? Amd are there better ways?

 

Work on this. You might be conservative out of ignorance. Which makes you think 'liquid' is lower risk. Understand how the options work first.

 

I'd go property any day of the week. But that's me. You gotta work out whats best for you to get the best possible returns. Even if I was on a low income, I'd still go property because I know I would be willing to do whatever it takes to find the best strategy possible to get the best assets possible as quick as I could. We're all different.

 

If you pay no penalty in structuring your loan for future investment now (e.g. if you never invest, you're not worst off), no harm right?

You have a good opportunity to learn more about shares, property and other options.

On risk, assess the risks of action and inaction.

@Anthony Brew makes a good point - having your cash buffer in the share market makes it susceptible to big value fluctuations. Much lower risk IMO to keep cash in offset against your PPOR (at least, keep the amount you need as a buffer in offset, and invest the rest).

 

Not that big a fan of Barefoot anymore. Lately his content has been quite thin and the whole "inner circle" palaver is all just there to please his large (beginner-heavy) customer base.

That said I gave it a bit of a shot and have over $150k invested in his recommendations. So far those investments are returning only 2.9%/yr. Quite a far way behind my own choice of managed funds which are returning a weighted average of 13.1%/yr.

 

I think Scott's book is aimed at the masses, not the few who are motivated and capable of doing more. It serves a good foundation, which you can then build from if you so desire.

 

To become rich you will need to run a great business. A well run property portfolio with development upside, with a lot of effort and risk, is also a business.

 

I am a fan of both as I (or anyone) cannot pick which is a winner - although I do lean more towards property.

There are + & - for both even with liquidity has positive and negatives, with the positives being if you need the money today you can sell today with shares and have the money right away where as with property you are typically looking at 30 days to sell and another 30 days to settle and this is in a good market in a down market it could be 6 months+ to sell - What if you need the money in that time?

But it is also a negative - Share price drops or some unfavourable news was published and the market can dive quite sharply as people can easily offload them and at very little cost. Where as with property it is a slower process and also costs significantly more money (marketing, REA fees, solicitor fees etc).

Australian Shares have had a bit of a hammer recently with my top performer 17.64% in the last 12 months which is spectacular but at the same time my worst performing stock reducing by 31.05% this is what can happen with direct shares - However from a managed fund prospected it has return was 10.68% (VAS) - but typically they don't get the huge highs and huge lows.

So both can be good and bad as property some grow or boom whilst other decline and bust. To me diversification is the key and it is easier to diversify with shares than property especially since you already have/will have one.

Another reason why I like shares is you can sell 1/2 of it if need be but you cannot sell 1/2 the house (typically).

By no means am I saying go shares but both have risks and I am like 90% weighted towards property in total assets value (due to leverage) but from a capital point of view I would be 2/3 Property 1/3 Shares.