Is property a good short term investment?

Under current law in Australia there is no stamp duty associated with purchasing shares, so the acquisition cost of a stock is likely to only have a small brokerage fee tacked on to it.

This is not the case with property which attracts stamp duty, mortgage transfer fees, legal fees and sometimes Lenders Mortgage Insurance and other costs too.

For example, suppose you buy a unit in Sydney for a purchase price of $500,000, your acquisition costs might be something like this:

Property cost
$500,000
NSW Stamp duty*
$17,990
Mortgage registration fee
$100
Transfer fee
$200
Solicitors fees
$2,000
Lenders Mortgage Insurance (est.)**
$7,500
Pest inspection
$300
Total
$528,090

 

*there may be stamp duty exemptions available if you are a first home buyer and the property is to live in rather than an investment.

**If you put down a deposit of lower than 20% of the purchase price, you will also have to factor in a charge for Lenders Mortgage Insurance (LMI).  Costs vary depending on the lender.

(LMI is insurance that compensates the lender – not you – for the risk associated with your low deposit.  If you took on an 80% or lower Loan to Value Ratio, the LMI charge could be negated).

Most quality property investment stock in Australia will incur holding costs too, as the rental yields of prime location properties tend to be lower than current mortgage lending rates.

Then there are also costs associated with selling property: agent fees and capital gains tax where you sell for a profit.

Therefore, unless you are confident of making a quick 20% capital growth return (in today’s markets, this is perhaps unlikely) the answer is that property is generally not a good short term investment.

I should note here that experienced renovators can and sometimes do make 20% capital growth returns.

However property is a great long term investment because of the combined effect of leverage (using the bank’s money) and compound growth.

Consider this table of an asset compounding at 10% growth per annum:

Year
Value
0
$1,000,000
1
$1,100,000
2
$1,210,000
3
$1,331,000
4
$1,464,100
5
$1,610,510
6
$1,771,561
7
$1,948,717

 

Note how the growth in year 1 is $100,000 but the growth in year 7 is more than $177,000.

Each increase is 100% tax-deferred and is greater than its preceding equivalent, and this is why compound growth makes property such an effective asset class for the long term.

So what is a good short term investment?

The long answer would be slightly convoluted – the abridged answer is: the shorter your time horizon for investing in a growth asset class, the greater the risk of capital loss.

We humans like to believe that we can predict the short term future but countless examples have demonstrated that we are generally hopeless at predictions.

We are better at recognising long term trends and building an investment strategy around the identified trends.

Therefore, if you are investing for the short term, consider assets with a near-guaranteed yield (e.g. investment grade notes or at least a decent income return (for example, stocks that pay an attractive dividend yield – such as the major banks)

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Is property a good short term investment?' have 1 comment

  1. April 14, 2013 @ 7:51 am Bob the builder

    You have captured the very essence of what it is that makes property investing so good. The other things I like are the fact that the mortgage is gradually diminished by inflation i.e. the longer you have it the less it is to pay back in today’s money and the fact that you can use the equity gain over time to obtain your next property with no input of your own money. Compounding OPM left largely untouched by the ATO – it’s a beautiful thing – until you sell !

    Reply


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