Ask Paul: What's the best way to invest in property?

Dear Paul,

Is buying an investment property the best way to invest in the property market?

I am also contemplating investing in Australian real estate investment trusts (A-REITs) - are they any good when compared with a physical property? - Dhruv

These funds, basically investment vehicles that hold significant property assets, are certainly one way to invest in the real estate market.

But they are a very different form of investment compared with your own property.

Let's look at this, Dhruv. By investing in an A-REIT, you take far less risk with, in all likelihood, little or no personal gearing.

A good A-REIT will usually be diversified over many commercial, industrial and retail properties and most deliver a nice income stream from the rent they receive. I hold these in my super fund.

In my case, they have huge tenants such as Woolworths and long, secure leases.

This is a useful asset class as I look to diversify risk and generate income to live on. It is also a passive investment. I read the reports, but don't actually do anything.

An investment property is usually a single property, obviously in one location. You research the market, find the property, buy it and, I would suspect, follow it very closely.

You'd probably put down a 20% or so deposit, get tax deductions on any losses from interest on the loan, maintenance, costs and so on.

Because it is a single property in one location, probably bought with the help of debt, it is clearly a riskier strategy than a diversified A-REIT.

If you do your research and buy in a well-located population growth area, this added risk should deliver good returns over the long term.

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