A rebound from plummeting occupancy rates during the pandemic has begun, and Australian real estate was recently described as a “massive opportunity” by Goldman Sachs Head of Real Estate Adrian Sheldon.
With property prices rising in Australian capital cities at breakneck pace and FOMO increasing by the day, is buying a brick-and-mortar property still the best choice for an astute investor?
Let’s take a look at 4 different ways you potentially can make money from property in 2021.
Investing in REITs
Also known as A-REITs in Australia (Australian Real Estate Investment Trusts), property funds are a way of exposing your portfolio to the property market. They’re traded on the ASX, and you can invest in them with just a few hundred dollars. All of the liquidity, none of the maintenance.
A-REITs work very similarly to managed funds. They function as pools of investor funds that are allocated across various building types, including offices, commercial parks, apartments and hotels, shopping centres, and industrial property.
Property funds can be a great source of passive income. Some examples of A-REITs include Goodman Group (ASX:GMG), the largest industrial property group on the ASX, Scentre Group (ASX:SCG), which operates Westfield malls across Australia and NZ, and Mirvac Group (ASX:MGR), a designer, developer and property manager with A$24 billion of assets and a further A$28 billion of development projects in the pipeline.
If you’re looking for more diversified exposure, Vanguard’s Australian Property Securities Index (ASX:VAP) holds a portfolio of the 30 biggest REITs from the ASX300, weighted by market cap.
Investing in developments
Rather than paying into a diversified fund, you can choose to invest in specific developments. You might choose this route if you want to invest in something close to home, or in an area you believe to be up and coming.
You’ll need a cash lump sum upfront for this investment option, starting from around A$10,000. Usually, developers will purchase undeveloped land at wholesale price, and carry out staged, large-scale projects with pooled investment funds. Returns are released when the completed units are sold, and targeted return on equity (ROE) is usually in the 20-30% range.
Examples of developers and platforms that offer direct investment include Oliver Hume, Lion Property Group, and Funding.com.au.
Investing in mortgages
Similar to investing in individual developments, mortgage funds allow you to invest in a mortgage held over a particular property or development project. In return you can expect a regular income, typically targeting a return of 7-10% p.a.
There are two types of mortgage funds: contributory and pooled.
In a contributory mortgage fund, your capital and return is tied exclusively to the performance of the specific mortgage in which you invest. In a pooled mortgage fund, your capital and return is tied to the performance of a diversified pool of mortgages.
Mortgage funds are a popular investment choice for income investors seeking higher returns than blue chip dividends or fixed term accounts. In Australia, VentureCrowd, Vertex or La Trobe Financial all offer variations of mortgage investments.
But investors do need to find opportunities that match their risk appetite. Check for investments that are secured by a registered first mortgage over Australian property – in the event of default, the property can usually be sold to recoup at least some of your investment.
Buying a property
If you’re a more hands-on type of investor, you might prefer to buy a bricks-and-mortar property for rental income, as well as potential value increase and resale profit.
Although the commodity is similar, the two investing avenues are very different.
First and foremost, property is regarded as an ‘illiquid’ asset. You can’t buy and sell property quickly and efficiently. Due to the sunk costs involved in buying property (surveys, solicitor fees, stamp duty, mortgage fees), it’s often not cost-efficient to do so.
Owning and managing property is not just an ongoing financial investment (taxes, maintenance, upkeep, property management/agency fees, body corporate/strata fees), but an investment of time. Finding a perfect tenant who stays long term and always pays rent on time is one possible outcome. But there will inevitably be incidences of tenant disputes, void periods, breakages, and major works (e.g. roofing). Hiring an agency eases this burden, but increases expense.
With all of this said, being a professional landlord can be rewarding. You can compound your profits by buying and selling at the right time in the right area, and renovating and/or extending the property.
Profits may be smaller than stock market returns, but steady and stable. After subtracting expenditure, anything over 6% gross rental yield is considered a good return. But even if your costs only break even, after 25 years, a mortgage fully paid off by rental returns is a “free” property.
But which is best?
Although property has historically had a reputation for stability, 2020 saw occupancy rates plummeting, with obvious knock-on consequences for stock values. That said, the S&P/ASX 200 A-REIT (XPJ) is rallying in 2021, and its liquidity enables you to move with the times.
Adrian Sheldon describes the Australian listed real estate market as “significantly under-represented”, adding that “the underlying demand driver for this type of real estate is very strong, it is not going anywhere and people understand it”.
The time, energy, and labour involved in traditional property ownership may not be a deterrent for some. Building a portfolio ‘the old-fashioned way’ can still be highly profitable and even enjoyable. Possessing good DIY knowledge and taking time to find quality tenants helps.
If you want to make money from property, but the landlord life isn’t appealing, then property or mortgage funds might be the asset class for you. Extensive understanding of the stock market isn’t required, and you can often see returns within the space of 12-24 months.
Just remember there’s no getting out of conducting your due diligence, which should be done on every single investment you make.
