Beyond bricks & mortar: why diversifying your investable assets is important

Disclaimer
The information contained in this article contains general advice and is provided by Hood Sweeney Securities Pty Ltd [AFSL 220897, ABN 40 081 455 165]. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation, and needs. Any examples provided are for illustrative purposes only. Please refer to our Financial Services Guide for contact information and information about remuneration and associations with product issuers.

Residential property has long been the darling of Australian investors, providing a tangible asset, the lure of consistent returns from rental income and a win if housing prices have risen when it’s time to sell.

It’s ‘safe as houses’ is a well-known catch cry and property has served many investors well in recent years with high demand coupled with extremely low supply escalating property prices at sale across the country. This is supply-demand economics 101 at play.

In this article we reference a common scenario particularly in the South Australian suburban housing market, for illustrative purposes only consider this:

A three-bedroom, two-bathroom property that has a market value of $900,000. This property is rented out for $750 per week, which equates to $39,000 p.a. Considering mandatory expenses and loan repayments on a $700,000 Investment loan, the table below shows the cash flow implications.

Property can be cash flow negative or neutral and unless you are a professional property investor you may not have considered this.

*Assuming a $700,000 loan, 6.70% interest rate, 30-year term, Principle & Interest repayments.

As the financial landscape evolves, let’s outline some compelling reasons to consider diversifying beyond bricks and mortar.

Mitigate risk through diversification:

The adage ‘don't put all your eggs in one basket’ holds true in the investment world. By diversifying your asset portfolio, you spread your exposure to risk across different asset classes, reducing the impact of a poor-performing investment on the overall portfolio. Relying solely on residential property (or for that matter, on any single asset class) increases your exposure to the ups and downs of a single market and its corresponding cycles.

Minimising debt dependency:

While leveraging through debt is common practice in property investment, it brings its own set of risks. Interest rate fluctuations, market downturns, or unplanned personal financial challenges can turn your profitable investment into a financial burden. Diversifying into less- debt-dependent assets, such as stocks, bonds, or managed funds, can provide a cushion against the pitfalls of carrying high debt.

To illustrate further, take the initial example; if a property is rented at $750 per week ($39,000 p.a.) and the property is worth $900,000, that is an income yield of 4.33% p.a.

However, is the real yield actually 4.33% if there is a loan on the property which requires repayments to banks or credit unions charging 5% - 6% interest or higher on the loan (at present)? Holding costs such as insurance and council rates reduce this further.

The answer is no. However, obviously other factors such as tax deductions for the interest etc. are at play, which is conversation for another day.

Liquidity and flexibility:

If repairs need to be made to the property or access to funds is required in an emergency, there’s no option to sell off a few bricks or the garage to raise the funds. The whole property needs to be sold, which can be risky, inconvenient and time consuming.

An exit strategy also needs to be considered: the whole gain needs to be realised, which could add thousands in taxable income, and increase tax payable. With a diversified investment portfolio, part of individual holdings can be sold (a few shares, for example) and realise the total gains over several financial years to reduce total tax payable. Having more liquid assets can allow you to respond more quickly to opportunities or risks.

Commitments

Stamp duty: when buying a residential property stamp duty is payable, this either increases the loan required or needs to be funded from other wealth.

Land tax: depending on how the property is owned, land tax may be payable on the value of the land.

Gearing: this can amplify the gains as the initial amount available to invest is higher, but this is also true if there is a correction, losses would also be amplified.

Capitalising on market opportunities:

Different asset classes respond differently to market cycles. While property markets may experience periods of stagnation, other sectors, such as shares (stocks) or bonds, could present opportunities. A diverse portfolio can allow for agility to take advantage of dynamic markets and changes in the economic outlook.

Every investor’s situation is different, and diversification is one strategy to consider beyond having only property (or relying on any single asset class) in your portfolio. If you would like to explore opportunities beyond bricks and mortar, please get in touch with:

Jackson Harvey

Financial Planner | Strategy & Investments

Representative of Hood Sweeney Securities AFS Licence No. 220897

jackson.harvey@hoodsweeney.com.au

1300 764 200