Is now the time to invest in property?

The much publicised downturn in the property market has taken its toll on investor confidence of late and with prices receding in Sydney and Melbourne in particular, many people are asking is now the time to buy? Accountancy firm Clark & Jacobs is holding a seminar in Sydney on the evening of May 4 to address this and other issues.

"Australians love property," explains Alison Lacey, who services Clark & Jacobs many dentist clients. "It's still every Australian's dream to own a home and it almost seems to be our 'birth right'.

"We also know that it's been a formidable investment class in creating wealth for many of the world's richest people. Yet less than 5% of Australians have an investment property and of these property investors, 87% of them stop after purchasing just one.

"This may be due to the fact that most people are poorly educated in making good investment decisions but equally it's been because quality strategic advice and excellent and consistent research has been very hard to find. In addition, many accountants and financial planners are legally limited in the advice they can give, and this has left many investors hesitant.

"The idea of the seminar we are holding is to provide education and an update on the national property market for dentists and other investors looking for a pathway for wealth creation."

Ms Lacey said it is interesting to note that whilst there is an on-going debate over whether property or shares provide the best returns, history shows that over a 20 year period, there is very little difference in the performance of these classes [See Graph].

"The decision on whether to invest in property must be more about strategy than return and a good accountant or financial planner should be able to help you create that road map to wealth," she said.

Ms Lacey said that when investing in property, there are three key areas that must be understood.

"The first of these is leverage. There is no other asset where the bank gives greater leverage and it is this leverage that excites property enthusiasts. For example, a deposit of $100,000 on a $500,000 property or a deposit of 20%, delivers a 480% return on investment over 10 years. Compare this to borrowing for shares where a deposit of $100,000 on a $200,000 portfolio, or a deposit of 50%, delivers a much lower 190% return over the same period. This is the power of leverage [See Table].

"Establishing a lending or financing strategy is also important if you plan to build a portfolio of properties. Too many people see the financing as a one-off transaction, which limits their ability to maximise their opportunity to leverage."

Getting your research right is another key requirement for successful investing.

"It's crazy to invest in real estate today unless you have access to great research," said industry expert Maurice Goldberg, Chairman of the Ark Group of companies and CEO of research company, Pulse Property. "There are no excuses to make bad buying decisions anymore. The research is available. It's not guesswork, it requires tough-minded investment decisions. When buying property, your mantra should be research, research, research and not location, location, location."

Pulse Property's research model takes a top-down approach, looking initially from a world perspective and then drilling down through country, state, city, suburb - they call this their "value model". Having an empirical research model can reduce your risks in making such a big investment decision.

"Our research identifies the hotspots, the buying opportunities and the markets with growth. This has led us to recommend our clients to stay completely out of the Sydney and Melbourne markets over the last three years, although we are now starting to find opportunity in specific areas of these markets again," Mr Goldberg said.

Finally, as with any investment, it is important to manage your risk.

"You need an investment that will create wealth, but still let you sleep at night," Ms Lacey said. "So it is really important to reduce the risks when you purchase any investment. Access to good cashflow software, choosing property as part of a well thought out financial plan and access to great research are some of the ways you can reduce the risks in such an important decision. Whilst you need to have courage, you also need to find your personal balance between risk and potential return."

There is a staggering $2518 billion (ABS) invested in property in Australia. Of this, 20% is owned by investors. This is approximately the same amount of money as is invested in all the superannuation and managed funds in Australia put together.

"Property is a great way to create long term wealth," Mr Goldberg said, "but guessing your way to riches can be too dangerous a strategy. So what I say is get good advice and rely on great research and your chances of creating great wealth and security will improve significantly."