How to invest in property if you can't afford a deposit
Investing in property can allow for essential diversification within your investment portfolio. But, as with any type of investment, property investment is not something you just jump in to. While many people consider direct investment - buying an investment property - to be the best way to get into property, there are other options.
Direct property investment usually involves getting finance, then finding and buying the right property. Typically held over the long term, the property needs to be maintained and rented out, so that it can provide income, while - all going well - it gains value over the long term.
There are also various ways to invest in property indirectly. Investors may choose to invest in property via a managed fund or trust.
Trust versus direct property
So, what is the difference between direct property investment or investing via a trust?
Investing in direct property
When you invest in property, there is usually a fair amount of background research that goes into the purchase. You need to find the right property in the right neighbourhood, one that is likely to offer steady rental income, while gaining value over time. Of course, there are various tax implications to consider as well, so it can be helpful to talk these over with an accountant and seek advice from a licensed financial adviser before making an investment decision.
An investment property is not a set-and-forget investment. There can be ongoing issues that need to be addressed. While you may engage the services of a property agent to deal with the day-to-day, you will still need to think about ongoing costs, such as rates, property management fees and everyday maintenance costs, not to mention larger costs associated with the repair and replacement of items in or around the property. The increase in value - capital growth - may or may not occur depending on a number of factors including the particular property and the points in the property market cycle it was bought and sold.
Nevertheless, investing in a property can provide a sense of solidity to an investment portfolio. Some investors like the tangible aspect of owning property, as something they can touch and feel. Other investments, such as shares or bonds, don't offer this.
Investing in a property trust
When you invest in a managed fund or trust, you are investing in property, but you are doing so indirectly. A trust provides a unitised investment opportunity, allowing investors to buy units (portions) in the trust - and whatever that trust invests in. Some trusts, such as property trusts or syndicates, combine borrowings and equity to invest directly in property; while others provide loans secured by mortgages over property, these are known as mortgage trusts.
Mortgage trusts typically provide loans to the residential, commercial, industrial, and retail property sectors. It is generally the interest collected on these loans that provides income to investors in the form of regular distributions. Depending on the trust, investors may have to hold their investment for a certain amount of time and meet a specified withdrawal notice period should they decide to dispose of their investment.
Property trusts acquire property by raising funds from investors. This is generally a longer-term option, designed to provide investors with regular income from distributions, plus the opportunity for capital growth over the long term. There may be a minimum investment amount required, and a fixed investment term.
Unlike direct property investment, investing in a trust requires a lower minimum investment and can provide investors with additional portfolio diversification, in some cases increased liquidity, and a more hands-off option, as you will be relying on the skills and experience of professionals to manage the trust. Successful investors still take time to choose the right trust and fund manager, just as they would take time to choose the right property when buying directly.
Choosing between a trust and direct property investment
Creating a portfolio that holds investments that are right for you often involves the advice of a professional. Before deciding on whether investment via a trust or direct property investment the best option for you, it is recommended that you seek the advice of a licensed financial adviser so you can create a financial plan and investment strategy that suits your investment goals.
Learn more about investing in Trilogy's range of mortgage trusts, diversified income funds and property trusts.
This article was prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. Application for investment in the relevant product can only be made on the application form accompanying the Product Disclosure Statement (PDS) available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part of or all your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed adviser to conduct an analysis based on your circumstances. Investments with Trilogy are not bank deposits and are not government guaranteed.