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

Discussion in 'Investment Strategy' started by Henndigo, 5th Sep, 2017.

Join Australia's most dynamic and respected property investment community
  1. chylld

    chylld Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    1,701
    Location:
    Sydney
    Ditto, maybe a bit more than 1/3 liquid investments, although some of them (e.g. Cromwell) have property as the underlying asset anyway.

    Strictly my property portion would be more than 2/3 but recyling property debt for liquid investments skews the numbers a bit.
     
  2. bookworm

    bookworm Well-Known Member

    Joined:
    3rd Jun, 2017
    Posts:
    388
    Location:
    Sydney
    To clarify here the managed fund structure itself is not inherently risky.

    The Vanguard Cash Plus Fund is hardly risky and probably safer than money in the bank... particularly for account balances over $250K (no govt guarantee...), because it is basically a managed fund full of bank accounts/bank bills. In the same way, BlackRock's iShares Core Cash ETF (ASX:BILL) is the same... an ETF fund crammed full of term deposits, bank bills, commercial paper.

    On the other hand, a double leveraged, high conviction (concentrated, low stock count) unhedged, frontier markets international shares micro cap managed fund is definitely not something for the faint hearted (if such a fund exists) ...

    I personally believe that managed funds serve a purpose alongside property. For example, some of the managed funds I personally hold invest in commercial buildings tenanted to the NSW government for 10+ year leases, with built in rental increases - I wouldn't be able to hold an asset like that outside of a managed fund structure, because I would need to stump up close to $200 million dollars to buy a building like that... who has that type of money, let alone for a single asset?

    Or for international shares, managed funds/etfs are great because it is a pain in the ass dealing with currency, selecting individual stocks, monitoring etc. It also means you can access industries that are not readily available (if at all) in Australia, such as aerospace and defence.

    In my view, a multi asset managed fund with a growth focus, commercial property funds with blue chip tenants are probably not a bad proposition to consider in a portfolio alongside residential property investment.

    It's definitely the slow burn approach. I am definitely sympathetic to large allocations to property because of the leverage factor (which I believe is an important part of the formula to wealth) and the favourable treatment by banks. The fact that you can also leverage from property into other assets is a win for me.

    Agree - I think that the book deserves credit for making wealth management concepts very accessible for people... much like Rich Dad Poor Dad... as contentious as people may think the author is, there are some good concepts.

    I think this post is absolutely spot on, but I would also add that time horizon is key to consider, for both property and other assets.

    The liquidity and 'live pricing' benefit of market listed assets is an advantage as much as it is a disadvantage for new investors due to natural human emotion. In my industry we call it the 'behaviour gap', that is the difference between reported returns in a quarterly report for example and the actual investor experience due to them chopping and changing strategy at the smallest sign of market volatility, selling at the bottom due to panic and buying at the top due to FOMO.

    My personal view is that unless you can hold shares for at least 5-7 or more years, you shouldn't be buying shares/managed funds of shares. The alternative is to have a bucket approach whereby you have a pool of liquid cash (or redraw etc.) and don't touch your shares and let them compound, because they don't grow in a steady line. Sometimes a few months will do the heavy lifting for the entire year for shares - miss out those months and you miss out significant gains.

    For property, Cromwell is a good example, so is Centuria, CorVal, Charter Hall, Australian Unity (unfortunately their healthcare property fund is now closed for new AND existing investors... due to the popularity, stability and respectable returns).

    I believe some members have been leveraging against property and buying high yield ETFs/LICs to help smash the debt like ppor mortgage with a high fully franked yield. This strategy would have been very successful over the past 5 years. Might be prudent to be mindful of this in 2017 and beyond, because yields have really compressed and multiples are looking stretched in some areas. I think the easy money days of post GFC era global interest rate cuts and money printing are behind us.
     
    Last edited: 8th Sep, 2017
    The Y-man likes this.
  3. The Y-man

    The Y-man Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,440
    Location:
    Melbourne
    Keeping in mind that most REITs are pretty heavily (by commercial prop standards) leveraged internally.

    The Y-man
     
  4. bookworm

    bookworm Well-Known Member

    Joined:
    3rd Jun, 2017
    Posts:
    388
    Location:
    Sydney
    Of course! Very good point - need to be careful of 'double gearing' here. I will note thatthere are groups who limit to 25-35% LVR, which is reasonable, in my view.

    Some syndicates (and listed REITS) for that matter blew up during the GFC for a number of reasons - unsustainable dividends (borrowing to pay) and also maturity mismatching - letting people have daily redemptions from an managed fund underpinned by illiquid assets!!! It's good to know the lessons have appeared to have been implemented, with lock up periods, lower gearing etc.
     
  5. qak

    qak Well-Known Member

    Joined:
    1st Jun, 2017
    Posts:
    1,671
    Location:
    Sydney
    For someone who considers themself conservative, getting "rich" is probably not the prime aim. (how much is "rich" anyway?) Being secure might be more of interest.

    The issue with direct property as an investment is that typically it does need an ongoing commitment of funds (repayments) and you need to have a buffer for vacancy periods, urgent repairs, delinquent tenants and so on. It's also very lumpy (difficult to buy a smaller part of a direct property) and expensive to get into with stamp duty.

    The attractiveness of managed funds (and shares) is in the scalability - you can invest $5000 or $50,000 and not have any further commitment. You can also sell smaller parcels if needed - can't do that with a house.

    Property, managed funds and shares are at the "riskier" end of the risk-return tradeoff.

    I think it quite likely the broker has his own interest in having you sign up for a larger facility.
     

Not all tax advisers are property focussed specialists and DIY errors will always cost you. We know property taxes and will advise and get it right. Even a second opinion. Contact us for an obligation free initial consult (conditions apply).