The pros and cons of investing in property funds

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Chasing yield is now the holy grail of investing. While many residential property investors accept gross rental yields ranging from around 3.3% to 6% in capital cities, there are some real estate investments that target net returns of up to 25% - but, of course, the risks are far greater.

The South Brisbane Single Asset Trust recently offered by specialist high-yield manager HCAP Asset Management is an example. It gave investors with a minimum of $100,000 the chance to invest in a fund providing mezzanine funding (usually high-risk) for a 66-apartment development with a targeted return of 25% net of fees, payable when the project is completed in about 18 months.

This is the fifth such single-asset trust from HCAP. The three projects that have been completed are on the Brisbane CBD fringe and returns ranged from 25% to 28%. Later this year HCAP plans to launch a fund for an 84-apartment residential development in Pymble, on Sydney's north shore.

property funds

These funds differ from the vast majority of property funds, which are open-ended and invest in multiple projects. Because they invest in a single project, their success or failure is tied absolutely to that project, meaning anyone considering such investments should do their due diligence.

Houses and units in country towns and more remote suburbs provide rental yields in the 8% to 13% range, and sometimes higher, but the trade-off is usually lower capital growth than in the cities.

Mortgage funds that survived the GFC generally also offer higher returns. For example, LaTrobe Financials Pooled Mortgage Fund is currently paying 6.15% with the more risky high-yield mortgages option, aimed at experienced investors and offering access to loans returning around 11%.

Investing directly or indirectly in commercial property can also produce superior yields. Last month agent Burgess Rawson sold 17 Sydney and Melbourne commercial properties at auction, including an IGA supermarket in Melbourne's Wantirna South for $3.65 million (yielding 7.37%) and a First Choice Liquor outlet at Erina, on the NSW Central Coast, for $4.57 million (7.67%).

One thing commercial property investors need to ensure is that the tenant is locked in and has the capacity to pay the rent. With far fewer commercial tenants than residential tenants, a vacant office, warehouse or shop can take a lot longer to re-lease than a house or an apartment.

Car parking spaces are low-maintenance investments that can also produce relatively high returns. Late last year self-managed super funds snapped up 157 freehold strata car spaces near Sydney Airport for $57,500 each on a yield of 6.5%.

The spaces were sold with a five-year lease-back to the Park & Fly stations' previous owners, Global Property Group. Sydney CBD car park rental yields can be as low as 4% but in Melbourne city they can be up to 8%.

Australian real estate investment trusts (AREITs), which generally invest in large commercial assets, have performed relatively well, offering an average dividend yield of around 5.4% plus earnings per share growth of 4%.

Generally you buy AREITS on the ASX but another way of getting diversified exposure to the sector with limited cash is through a managed fund. For example, the APN AREIT Fund , which has a minimum investment of $1000, has a current running yield of 7.47%.

Take the time to save

With the new financial year upon us, people who are money savvy may have already started reviewing their spending in preparation for a visit to their accountant. While you are sifting through receipts, you could take the time to evaluate how and where you are spending your hard-earned cents.

Re-evaluating your major costs, like loan repayments, could pay huge dividends. Investigating available home loan options could leave you with a whole lot more in your pocket. Reducing your interest rate by just 0.05% could save you thousands over the life of the loan.

When researching a home loan, consider the products with independent expert endorsement, such as the CANSTAR star ratings, to easily compare the best value in the market.

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Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.