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Key points to think about are the diversification of an investor’s overall investment portfolio; whether a direct property investment is still appropriate for an investor’s changing circumstances; and whether a property investment is still pulling its weight.
Financial planner Matthew Scholten is “certainly supportive” of clients having an investment property as part of their portfolios.
“Time has shown that good properties in the right location have done particularly well,” says Scholten, a practice principal of Godfrey Pembroke in Melbourne.
“[But] I don’t advocate having all of your assets in a single asset class, irrespective of what it is,” he adds.
Scholten says that one of the biggest risks for direct property investors is being overexposed to a single, high-cost and illiquid asset. He stresses to his clients the desirability of having a portfolio that is widely diversified for risk and return.
“I have some new clients who come to me who have a number of properties and not much else.”
From time to time, Scholten advises clients to consider broadening their portfolios by, say, adding more shares to their portfolios – perhaps through superannuation.
Sometimes, he recommends that a client consider whether a direct property is still appropriate given the person’s changing circumstances. Perhaps an investor is nearing retirement and no longer wants the task of looking after an investment property.
“We often suggest to such clients that it might be time to consider selling and putting the assets into a more tax-effective vehicle, such as superannuation.”
The advice will depend on an investor’s personal circumstances. The potential costs of selling a property, including CGT, should be taken into account.
Scholten stresses that the timing of a sale can be important from a tax perspective. For instance, an investor may plan to retire in a year’s time. By delaying the sale until after retirement, less tax may be payable.
Of course, the timing of a sale must make sense from an investment viewpoint.
A crucial consideration for investors is whether a property still deserves a place in their investment portfolio given its potential for capital gains and growth in rental yields.
“It’s not so much how the property has performed in the past, it is the asset’s prospect for future appreciation that is most important,” says Scholten.
“People come to me who have bought properties in, say, holiday or regional areas which have not done a great deal. I might suggest that they may be better off in something else.”
Scholten advises investors not to let negative-gearing tax breaks dictate their decision to invest or remain invested in a property. “Tax concessions won’t compensate for a poor investment.”
“If you buy a property the key is its ability to appreciate over time.”
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