I’m single, 44, and finally at a point where I have a bit of extra money to invest. My friends are jumping into investment properties, but I’m hesitant – the costs with my home feel high, and the property is a constant hassle.
I have been steadily building an investment portfolio through a couple of ETFs, which has worked well for me over the last 6 years. But that requires me to have extra cash on hand ready to invest. Property lets you leverage, but outside my principal residence, is it really worth it? If I want to build wealth without going down the property path, what realistic alternatives should I consider?
Adding an investment property to your portfolio is not an easy ride.Credit: Simon Letch
Thanks for your question. It sounds like what you’re after is a way to be more aggressive with your investing. However, your current plan of regularly adding to an investment portfolio is a completely reasonable and effective way to build wealth.
Indeed, this is what’s happening with your superannuation. As a starting point therefore, I would highlight that one pathway open to you is just to keep doing what you’re doing.
Risk and reward are opposite sides of the same coin. If your goal is to generate higher returns, then you need to take on more risk. One way to increase risk is to borrow to invest – leverage. Borrowing enables you to magnify your investment exposure.
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You are quite right to identify that the primary benefit of property investment is the ease with which it can be leveraged. As you have observed, however, the downside is the high level of costs (at least for residential property investment), such as maintenance, rates, insurance, and land tax, plus the transaction costs to buy and sell, of which state government stamp duty is the most significant.
I would add that there’s also the issue of concentration risk. You are reliant on a single tenant, and a single asset. On a spectrum of low risk to high risk, a leveraged investment property would be at the high-risk end. As a consequence, if it goes well, the rewards can be excellent. But you need to be awake to the risk being taken. Despite the marketing spin, properties don’t always increase in value.
A middle ground risk wise would be to leverage into an investment portfolio where you could hold a mix of Australian and international shares, and perhaps also listed property and infrastructure. You may be able to use your existing investment portfolio as security, or alternatively you could draw some of the equity in your home.