By David Jackson
2 September 2010

The Property versus Shares debate is a bit like Holden versus Ford, with strong advocates for both, But I think Property has the edge. You see property ownership is the Great Aussie Dream and Australians have an affinity for property that they will never have for shares. It’s fair to say that we think investment in property is one of the best investments you can make. In fact, everyone at Great Aussie Dream has investments in property. But what is it that makes property investing so good?

In this article I’ll share with you some of the advantages of investing in property and why I’m so passionate about it.

Price Doesn’t Always Equal Value

Unlike other asset classes such as shares where the price is the price, the asking price for property doesn’t necessarily reflect its value. Now this is a twin edged sword, but one that you can work to your advantage if you’re prepared to do your homework. For investors willing to put in the hard yards and negotiate hare it is possible to purchase property well below fair market value. But beware if you take shortcuts or get “sold” into a property without doing the research.

Capital Growth

Everybody loves capital growth. It’s one of the main attractions for property investors with the common phrase “property doubles in value every 7 to 10 year” ringing in their ears. Whilst there is some historic data to support this, it would be foolish to assume that any property in any location will achieve this. The property market is a complex animal. Some properties will fall well below this level of growth, while other will achieve this and in some cases much more.

Rental Income 

Another advantage of investment property is that you can start to receive an income almost immediately. Again, rental markets vary according to location and the individual property, so researching this market is crucial in achieving the rental returns that you are after.

Adding Value

Walking into the corporate headquarters of Telstra or Woolworths and freshening it up with a coat of paint and perhaps some new carpet isn’t going to increase the value of your shares or give you a bigger dividend, but making these types of improvements to an investment property can increase the value and increase your rent.

In fact in my view, adding value to your property is one of the best ways of increasing your returns in both capital growth and rental income. However, you need to be discerning about the types of improvements that you make. For example, installing a $1,500 split system air conditioner will increase rents in most areas by $10 - $20 dollars per week, paying for itself in 1.5 to 2 years. Whereas replacing door handles to a top of the line chrome lever style will not add $1 to the rent.

Lower Volatility

Another reason that I love property is that it can be less volatile than other investment types. Notwithstanding what has happened in other countries around the world, Australian property is relatively stable compared particularly with the shares. You only need to compare the two throughout the global financial crisis to see that property remained fairly stable while shares dropped southwards of 40% in value in most cases.

Leverage

One of the things that really set property apart from other asset classes is the ability to highly leverage your investment and thereby magnify the returns you receive on the money you put into the investment. Most lenders will lend up to 90% of the value of a property and in some cases up to 95%. Compare this to shares where the maximum loan is generally 70% of the portfolio value. This increased leverage results in greater magnification of capital gains, without the risk of margin calls.

Tax benefits

There are a number of tax benefits available to property investors. Any legitimate expense incurred in running your investment property should be tax deductible. These include travel to inspect your investment property or to collect rent, or fees paid to a property manager to manage your property on your behalf. Fees paid to Buyers Agents commissioned to find you an investment property should also be tax deductable.

The difference between interest charged on you investment loan and the net rent collected should also be tax deductible. Using property (even an owner occupied property) as security to borrow money for an investment property allows you to leverage to a greater extent. One of the tax advantages with this greater leverage is that you can claim a greater tax deduction on the interest charged on the loan.

Depreciation of the building may also be claimed as a tax deduction. Buying brand new or a relatively new property allows for the greatest amount of depreciation. Claiming building depreciation is a clever way to increase your cash flow.

However, you should never buy property just for the tax deductions. Getting a tax benefit should be the “icing on the cake”, not the sole reason for purchasing.

Conclusion

Investors should obviously have a diversified investment portfolio, which includes property, shares and cash, but for me... I just love property! Oh and Holdens Rule!