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It is at times like these, when shares are so attractive that every expert, including the galah at the local pet shop, is screaming that we’re looking at the buying opportunity of a lifetime, that I know why I love investing in property.

The fact that I am a property fan, does not mean I don’t like shares, it’s just that property is a better asset for normal people.

When people ask me for advice for nothing — normal people won’t easily pay for advice, and that is a big issue in itself — I profile the inquisitor.

If they receive the “normal” tag — risk averse and a very casual, nearly disinterested party when it comes to shares and the underlying companies — my advice is simple.

Buy a house and pay it off quickly. Your principal property can be a great investment — it’s capital gains tax-free and you can live in it, saving you rent.

I recall a retired, relatively young priest, who left the church without any super and needed a wealth-building plan. With a lateral thinking adviser’s help, his plan was to buy a cheap home, live in it, renovate it, sell it and trade up.

On retirement he traded back and ended up with over half-a-million, which he rolled into super. Being handy was handy for him.

The next wealth-building recommendation for the nervous Nellie normal investor is salary sacrifice into super. This is another tax effective option for the careful wealth builder.

The final leg of my trifecta of money makers is to buy an investment property using the benefits of negative gearing. This can work well for those with big tax bills and with an eye for a great rental property.

Property selection is critical here and there are lots of traps for young players.

Margaret Lomas, the author of The Truth About Positive Cash Flow says so many landlords or property investors simply don’t claim all of the tax deductions that they are entitled to.

Behind this mistake, I believe, is an unwillingness to pay for tax deductible advice from an expert such as a quantity surveyor who can list all of the allowable expenses. Good accountants can be an alternative but they generally won’t go on site to identify potential claimable expenses.

The Australia Tax Office website actually lists all the allowable deductions for landlords, and Lomas says many property investors can turn a negatively geared property into a positive cash flow investment by simply getting their deductions right.

When it comes to returns a few years back, Rob Cornish from Macquarie Bank conducted some objective analysis on shares versus property and the summary was that they returned around 12 per cent on a 5, 10,15 and 20 years basis. Sometimes property beat shares and vice versa.

Two years ago, Vanguard showed the return on Aussie shares between 1986 and 2006 was 11.9 per cent. Around the same time, the ASX Russell Long Term Investing Report 2006 showed residential property returned 11.7 per cent.

Sure, different property has had a different return track record, but this should be the benchmark that property investors should be shooting for. Groups such as Residex will provide smart investors with historical records of price movements and these should be a good guide to where you should spend your real estate dollars.

These outfits will also give you reports on how good an area is for rental properties and these should be a part of a sensible foray into property investment.

Building reports need to be performed to ensure you know what else has to be spent on a property and the expenses of using real estate agents should also go into the business plan that goes with the investment.

And this is the important take home message — though the tax office does not totally treat the property investor as a business when it comes to the likes of GST refunds, this investment must be conducted with the professionalism that business demands.

The exercise should include the likely scenario for interest rates and whether a fixed and interest only loan product should be used. The name of the game is to maximize the capital gain and the tax deductions while ensuring the cash flow is strong. It’s the same story for business.

If the investor is prepared to play the game professionally, they can cash in on the one really big plus of property over shares — what you can borrow. Banks are more likely to trust a young couple with half a million dollars for a home in a well sought after area than they would on a blue chip stock portfolio.

Real estate gives the investor more leverage as banks are prepared to lend more on the asset and do you know why? It’s simple, banks know property is a better asset and there is one other positive — you don’t really know how much money you have lost on a home unless you have to sell it.

If property is so good, why don’t a lot of financial planners recommend it? That’s simple, it is harder to get commissions and fees off property.

Published on: Friday, November 14, 2008

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