Saturday, 1 September 2007

Unlisted Property Trusts

I have spoken with a friend Ella who has bought a house. She claims that she bought a house last year for $140,000 and according to her, the house's value has gone up by $20,000. To most people who loudly preach about the virtues of property investments (including my dad) simply saying that an investment yields a large amount of money is enough to get them excited. But any good businessman will tell you that running a business isn't about keeping an eye on how much money is going into the cash register. It's also about costs.

Making $20,000 from $140,000 sounds impressive, but that was achieved because the investor has $140,000 in the first place, and she obtained this money from a loan. This means that although the investor has made $20,000, she looses money because she has to pay back more money to the bank. She has to pay off her interest. Borrowing to invest is called "gearing" in the personal finance literature, and with gearing comes another cost, which is added risk.

Making $20,000 from $140,000 is equivalent to making 14.3 per cent. Had this investor borrowed the same amount of money to invest in Australian shares, she would have made more than 20 per cent, or more than $28,000. Some argue that shares are more volatile while property is not. But if you are so worried about volatility, why invest in property? Why not invest in bonds? Furthermore, if the investor is so worried about risk then why borrow to invest, which only increases risk?

All this leads to the issue of unlisted property trusts. If you are comfortable with the risk-return of property, then a way you can get into the property market without having to bother about picking the best house (because how can you know which house is best unless you are a psychic) is to invest in unlisted property trusts. I am worried that listed property trusts may be too volatile.

A Google search of unlisted property trusts is a good way to start.

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